The Indian diaspora in the foreign might have a score of queries regarding the property selling and their tax implications. Many of them often fail to access accurate information over it.
This blog covers all those pain points and the areas capital gains & exemptions on them after selling the property.
Let’s begin with a very common scenario wherein an Indian is shifted to the U.S.. Although he is living there, he has been managing property in India. While managing that property, he has been generating rental income for a fair four years. In legal terms, it is a long term capital gain for him.
Go through the difference between long term and short term capital gains.
- Long term capital gains- These are the gains that one can get through rental income upon owning the property for the minimum of 2 or more years.
- Short term capital gains-These are similar to long term gain, but the ownership of the property will be less than two years old. The rental income generated during that tenure will be termed as a short term capital gain.
NRIs deduct TDS on the sale of property:
The tax will be deducted according to long or short term capital gains. The cases of inherited property would not be barred from the TDS.
The long term capital gain shall be taxed 20%, whereas the percentage for short term capital gain shall be 30% in India. When the NRI sells that property, the buyer shall have to deduct the TDS.
In the meantime, the non-resident can claim for exemption under Section 54 and Section 54EC. But, this exemption is valid for long term capital gains sourced from the sale of the property in India.
Tips to win exemptions from long term capital gains to save tax on the sale of NRI property:
There are certain terms and conditions drafted regarding the sale proceeds of the property and exemptions. Upon satisfying these conditions, you can win them:
- Invest in the property within one year before the date of transfer or, wait for years after that
- Construct a house within three years after the date of transfer
- The constructed property would remain unsold within three years of purchase
- The new purchased or constructed property shall be located in India
- You do have more than one residential property on the date of transfer
- You do not invest in the new property within a period of two years or construct within a period of three years after such date
Once you satisfy these conditions, no tax on the capital gains would be levied. And, if you invest a part of the sale proceeds, the exemption will be proportionate to the invested amount to the sale price or exemption.
Tax exemption on the sale of NRI property under Section 54EC:
What if you do not want to invest in the property again?
Well, you still have an option to save on tax in such case. You can invest in certain bonds, which are:
- National Highway Authority of India (NHAI)
- Rural Electrification Corporation (REC)
Your investment in these bonds will be redeemable after five years. Simultaneously, you cannot sell them before the lapse of three years from the date of sale of the house property. You will have six months duration upon the sale to invest in these bonds. It is recommended to invest before the return of the filing date. As far as the limit is concerned, you can invest max to max INR 50 lakhs in a financial year in these bonds.
