Income Tax implication on sale of property by NRI in India

Introduction

NRIs who are selling property which is situated in India have to pay tax on the Capital Gains. The tax that is payable on the gains depends on whether it’s a short term @ 30% or a long term capital gain @ 20%. NRIs can sometimes pay less tax or concessional tax rate, if India has a tax treaty with their country of residence.

Applicability of Withholding Tax

Whenever any property is sold, withholding tax (i.e. TDS) is required to be deducted under the provisions of Section 195 of the Income Tax Act, 1961 (The Act), at the time of making payment. The buyer of the property may be a resident, or a non-resident under the Act. The buyer when paying the amount to the seller will deduct some amount (technically called as TDS) and pay the balance amount to the seller. This amount which has been deducted by the buyer would be required to be deposited with the Income Tax Department.

Withholding tax on Sale of Property by NRI is required to be deducted as per the rates mentioned below:

• Surcharge and Cess would also be levied on the above rate.
• If the NRI obtains a lower withholding tax certificate from the income tax office, the withholding tax will be deducted as per the rate mentioned in that certificate.
• The withholding tax rate is applied on the gross sale consideration of the property. This means that withholding tax is deducted from the total selling price, regardless of whether the actual capital gains are less than the gross amount.

Application for Lower withholding tax / TDS to income tax office

For obtaining the lower withholding tax certificate from Income Tax Department,  seller need to be filed an application in Form 13 along with required documents.

Relief under Double Taxation Avoidance Agreements (DTAA)

The tax rates mentioned above are subject to any beneficial provisions under the applicable Double Taxation Avoidance Agreements (DTAA) between India and the NRI's country of residence.

Exemptions available to Non-resident Indians

Exemption under Section 54:

Section 54 Exemption is available to an NRI when they have long-term capital gains from selling a residential house property, and they purchase another property within 2 years from the sale, subject to certain conditions as specified.

Exemption under Section 54EC:

Section 54EC Exemption is applicable when an NRI earns long-term capital gains from the sale of a residential house and invests the proceeds into specified Bonds issued by NHAI and REC. Similar to Section 54, subject to certain conditions as specified.

MBG can assist in this scenario in following ways:

• Assist to obtaining the Tax registrations (PAN and TAN).
• Assist to computation of Capital Gain on sale of property.
• Advice on the tax implications on property sale, including TDS rates, exemptions, and compliance requirements.
• Representing before Income Tax Authorities for obtaining a lower withholding Tax Certificate.
• Checking the beneficial provision of DTTA and related documents to be maintained for the same ( i.e., tax residence certificate, No PE Letter and form 10F).
• Filing the income tax return in respect of Capital Gain arise on sale of property in India.
• Preparing and submission the withholding Tax return (Form 27Q).