Aug 24, 2011
Last time , we saw the basic rules and regulations with respect to NRIs buying property in India. This time around, we take a look at what happens when you sell property in India. We will only look at properties purchased by a person either before or after he becomes an NRI. The rules regarding sale of properties acquired as gift or inheritance, will be covered in the next column.
Can an NRI sell property in India?
Yes, an NRI can sell residential or commercial property in India. He can sell to:
- A person resident in India (the definition of resident in this case will be as per FEMA)
- An NRI
- A Person of Indian Origin (PIO)
However, an NRI can sell agricultural or plantation land or a farm house only to a person who is resident in India and a citizen.
In which account must the sales proceeds be credited?
There are two scenarios that may arise here:
1. Sale of property purchased as a resident Indian
The sale proceeds in such cases would have to be credited in the Non Resident Ordinary (NRO) Account.
2. Sale of property purchased as a non-resident Indian
If the property was purchased out of rupee resources, that is, income earned in rupees, or the home loan is repaid by a relative who is a resident of India, the amount must be credited in the NRO account.
In all other cases, there are limits to repatriation that are discussed in the next question.
What are the rules for repatriation of sale proceeds of property sold in India?
If the property was purchased while you were a resident of India, then the sale proceeds must be credited to the NRO account. You can repatriate up to USD 1 million per calendar year from your NRO Account (including all other capital transactions), provided you have paid all taxes due.
Now, if the property was purchased while you were a non-resident, you can repatriate the proceeds outside India provided that you fulfill certain conditions:
1. You should have purchased the property in accordance with the foreign exchange laws prevalent at the time you bought the property
2. The amount to be repatriated will follow these limits:
a. If you purchased by remitting foreign exchange to India through normal banking channels, then the repatriation cannot exceed the amount that you remitted.
b. If you purchased using funds in the Foreign Currency Non Resident (FCNR) Account, then the repatriation cannot exceed the amount paid through this account.
c. If you purchased using funds lying in your Non Resident External (NRE) Account, then the repatriation cannot exceed the foreign exchange equivalent, as on date of purchase, of the amount paid through NRE Account.
d. If you purchased a property by taking a home loan, then repatriation cannot exceed the amount of loan repayment that has been done using foreign inward remittances or debit to NRE/FCNR Accounts.
e. If you purchased the property using balance in your NRO account, then the sale proceeds must be credited to your NRO account and you can repatriate to the extent of USD 1 million (including all other capital account transactions).
In all these cases, the balance sale proceeds can be credited to the NRO account and you will be able to repatriate up to USD 1 million per calendar year (including all other capital account transactions).
Vikas Vasal, Executive Director of KPMG India explains, "This limit of USD 1 million is the limit upto which you can repatriate without any permission from RBI. If you have a genuine need to repatriate above this limit, you can make a specific application to RBI for increasing the repatriation limit."
In all cases, repatriation is restricted to sale of two residential properties.
What is the capital gains tax applicable on sale of properties in India?
Before we move on to this explanation, it is important to understand that for all income tax purposes, the definition of NRI would be the one prescribed in the Income Tax Act. For all repatriation purposes, the definition of NRI would be one under FEMA. While in most cases, a person who qualifies under one would qualify under the other, it is better to review both definitions.
If you sell the property after 3 years from the date of purchase, you will be liable for long term capital gains tax of 20 per cent. The gains are calculated as the difference between sale value and indexed cost of purchase. Indexed cost of purchase is nothing by the cost of purchase adjusted to inflation. You can find the index here .
As an NRI, you will be subject to a TDS of 20 per cent on the capital gains.
If you sell the property within 3 years of purchase, you will be liable for short term capital gains tax at your respective tax slab. Short term capital gain is calculated as the difference between the sale value and the cost of purchase (no indexation benefit is available). You will be subject to a TDS of 30 per cent irrespective of your tax slab.
Now, the question arises as to who will deduct the tax at source. If the property is sold to an individual, does the individual need to deduct tax at source and deposit the same with the Government? Will the individual then issue a TDS certificate to the NRI?
Sandeep Shanbhag, Director of Wonderland Investments explains, "Yes, the payer of the sale proceeds, even if he is an individual will be responsible for deducting tax at source and paying it to the Government. He must get a Tax Deduction Account number (TAN) and issue a TDS certificate for the same."
What if the individual does not go through this process and fails to deduct tax? "The onus of deducting tax is on the payer. So in case the individual does not deduct tax and the NRI too fails to declare the income and pay the tax, the income tax authorities can hold the payer responsible," Shanbhag says.
Can an NRI avail of any capital gain tax exemptions?
Section 54
According to section 54 of the Income Tax Act, if you sell a residential property (after 3 years from date of purchase) and reinvest the proceeds into another residential property (within 2 years from date of sale), your gains will be exempt to the extent of the cost of new property. Suppose your capital gains is Rs 30 lakh and the new property is for Rs 20 lakh, then Rs 5 lakh will be treated as long term capital gains.
The residential property that you sell may either be a self-occupied property or one that was given on rent. Further, the new property must be held for at least 3 years.
Now an important question that NRIs have: Can you invest the proceeds in a foreign property and still avail the benefit of section 54? Vikas Vasal, Executive Director of KPMG India says, "Section 54 does not specify that the property must necessarily in India. So yes, a beneficial view can be taken."
Section 54EC
According to section 54EC of the Income Tax Act, if you sell a long term asset, in this case, the residential property (after 3 years from date of purchase) and invest the amount of capital gains in bonds of NHAI and REC, within six months of date of sale, you will be exempt from paying capital gains tax. Your bonds will remain locked in for a period of 3 years.
Can an NRI sell property in India?
Yes, an NRI can sell residential or commercial property in India. He can sell to:
- A person resident in India (the definition of resident in this case will be as per FEMA)
- An NRI
- A Person of Indian Origin (PIO)
However, an NRI can sell agricultural or plantation land or a farm house only to a person who is resident in India and a citizen.
In which account must the sales proceeds be credited?
There are two scenarios that may arise here:
1. Sale of property purchased as a resident Indian
The sale proceeds in such cases would have to be credited in the Non Resident Ordinary (NRO) Account.
2. Sale of property purchased as a non-resident Indian
If the property was purchased out of rupee resources, that is, income earned in rupees, or the home loan is repaid by a relative who is a resident of India, the amount must be credited in the NRO account.
In all other cases, there are limits to repatriation that are discussed in the next question.
What are the rules for repatriation of sale proceeds of property sold in India?
If the property was purchased while you were a resident of India, then the sale proceeds must be credited to the NRO account. You can repatriate up to USD 1 million per calendar year from your NRO Account (including all other capital transactions), provided you have paid all taxes due.
Now, if the property was purchased while you were a non-resident, you can repatriate the proceeds outside India provided that you fulfill certain conditions:
1. You should have purchased the property in accordance with the foreign exchange laws prevalent at the time you bought the property
2. The amount to be repatriated will follow these limits:
a. If you purchased by remitting foreign exchange to India through normal banking channels, then the repatriation cannot exceed the amount that you remitted.
b. If you purchased using funds in the Foreign Currency Non Resident (FCNR) Account, then the repatriation cannot exceed the amount paid through this account.
c. If you purchased using funds lying in your Non Resident External (NRE) Account, then the repatriation cannot exceed the foreign exchange equivalent, as on date of purchase, of the amount paid through NRE Account.
d. If you purchased a property by taking a home loan, then repatriation cannot exceed the amount of loan repayment that has been done using foreign inward remittances or debit to NRE/FCNR Accounts.
e. If you purchased the property using balance in your NRO account, then the sale proceeds must be credited to your NRO account and you can repatriate to the extent of USD 1 million (including all other capital account transactions).
In all these cases, the balance sale proceeds can be credited to the NRO account and you will be able to repatriate up to USD 1 million per calendar year (including all other capital account transactions).
Vikas Vasal, Executive Director of KPMG India explains, "This limit of USD 1 million is the limit upto which you can repatriate without any permission from RBI. If you have a genuine need to repatriate above this limit, you can make a specific application to RBI for increasing the repatriation limit."
In all cases, repatriation is restricted to sale of two residential properties.
What is the capital gains tax applicable on sale of properties in India?
Before we move on to this explanation, it is important to understand that for all income tax purposes, the definition of NRI would be the one prescribed in the Income Tax Act. For all repatriation purposes, the definition of NRI would be one under FEMA. While in most cases, a person who qualifies under one would qualify under the other, it is better to review both definitions.
If you sell the property after 3 years from the date of purchase, you will be liable for long term capital gains tax of 20 per cent. The gains are calculated as the difference between sale value and indexed cost of purchase. Indexed cost of purchase is nothing by the cost of purchase adjusted to inflation. You can find the index here .
As an NRI, you will be subject to a TDS of 20 per cent on the capital gains.
If you sell the property within 3 years of purchase, you will be liable for short term capital gains tax at your respective tax slab. Short term capital gain is calculated as the difference between the sale value and the cost of purchase (no indexation benefit is available). You will be subject to a TDS of 30 per cent irrespective of your tax slab.
Now, the question arises as to who will deduct the tax at source. If the property is sold to an individual, does the individual need to deduct tax at source and deposit the same with the Government? Will the individual then issue a TDS certificate to the NRI?
Sandeep Shanbhag, Director of Wonderland Investments explains, "Yes, the payer of the sale proceeds, even if he is an individual will be responsible for deducting tax at source and paying it to the Government. He must get a Tax Deduction Account number (TAN) and issue a TDS certificate for the same."
What if the individual does not go through this process and fails to deduct tax? "The onus of deducting tax is on the payer. So in case the individual does not deduct tax and the NRI too fails to declare the income and pay the tax, the income tax authorities can hold the payer responsible," Shanbhag says.
Can an NRI avail of any capital gain tax exemptions?
Section 54
According to section 54 of the Income Tax Act, if you sell a residential property (after 3 years from date of purchase) and reinvest the proceeds into another residential property (within 2 years from date of sale), your gains will be exempt to the extent of the cost of new property. Suppose your capital gains is Rs 30 lakh and the new property is for Rs 20 lakh, then Rs 5 lakh will be treated as long term capital gains.
The residential property that you sell may either be a self-occupied property or one that was given on rent. Further, the new property must be held for at least 3 years.
Now an important question that NRIs have: Can you invest the proceeds in a foreign property and still avail the benefit of section 54? Vikas Vasal, Executive Director of KPMG India says, "Section 54 does not specify that the property must necessarily in India. So yes, a beneficial view can be taken."
Section 54EC
According to section 54EC of the Income Tax Act, if you sell a long term asset, in this case, the residential property (after 3 years from date of purchase) and invest the amount of capital gains in bonds of NHAI and REC, within six months of date of sale, you will be exempt from paying capital gains tax. Your bonds will remain locked in for a period of 3 years.
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