It is quite an interesting trend that, NRIs from Europe and North America sell off their property, purchased or inherited, after they obtain a citizenship in a foreign land. It is a smart move as maintaining and holding on to property in India, while living abroad,is a tough task.
This scenario holds true when an NRI is unable to frequent India and is unwilling to rent out the property. Burdening relatives and friends to look after the property, paying taxes and society dues could be a big ask. Selling off such a property is unburdening and helps one be at peace in a foreign country.
Usually selling off a property is not a big challenge. However, one might be confused about the ways of remitting the funds back to the country of residence. Although this could be a straightforward process, various factors come to play.
If you intend to sell your purchased property after three years of its purchase, the transaction will incur a long-term capital gain (LTCG) tax of 20%. The gains are equal to the difference between the indexed cost price and the selling price. The indexed cost price is the cost of property purchase adjusted to inflation.
If you intend to sell an inherited property, the date and cost to the original owner is calculated by:
(i) The date of purchase of the property (holding period)
(ii) The cost of purchase of property
The LTCG and the cost to original buyer of the property is the total cost of purchase of the property. For an NRI, the TDS of 20% will be applicable on the LTCG. However, in certain cases you can get the TDS waived off. You can do that if you can show that you are planning to reinvest the capital gains in purchase of another property or in tax-exempt bonds.
However, if the property is sold off three years before its date of purchase, tax on short-term capital gains (STCG) incurs. The STCG is the difference between the sale value and the original cost price without the benefit of indexation. Irrespective of the tax slab, you will have to pay a tax of 30%.
Apply for a tax exemption certificate to the tax authorities under section 195 of the IT Act. Apply in your jurisdiction and provide proof for reinvestment of the capital gains.
IT Act Section 54 stipulates that if an NRI sells property after three years of buying it, and reinvests the proceeds in a new residential property in two years’ time, calculating from the date of sale, the profit is tax exempt up to the cost of the new property.
For example, if your capital gains is Rs. 10 lacs and you buy the new property for Rs. 8 lacs; the remaining sum is your LTCG. Your sold property was either self-occupied or let out and the new property held for a minimum of three years after purchase. Interestingly, this exemption does not apply if you reinvest in a foreign property. However, some latest proceedings with the appellate authorities have regarded new house purchased in a foreign land eligible for exemption under this section. This is not explicitly specified under the act and therefore you must consult a tax expert before you invest outside the country with the intent of availing the Section 54 tax exemption benefits.
IT Section 54EC stipulates that the proceeds of property sale after three years of holding the same, if invested in the bonds of REC and NHAI, within six months of the sale, is eligible for tax exemption. The bonds, however, will be locked in for 3 years.
NRI’s and PIO’s have the permission to repatriate the proceeds from a property sale if it is inherited from an Indian resident. However, there are certain conditions applicable too. If the conditions are met, you do not have to seek the permission of the RBI. In case the inherited property is from a person living outside India, then you have to seek the RBI’s permission for repatriation.
The conditions are quite simple. The repatriation funds must not exceed $1 million in a financial year and an authorised dealer must process it. You must be able to provide documentary evidence of property inheritance along with a CA certified document for repatriation.
Word of Caution
It is imperative to understand the tax laws of your country of residence. Various countries tax their residents on income irrespective of its origin. Others offer complete or partial exemption on capital gains that come from the sale of a residential property, although its under certain conditions.
Discuss with your tax consultant whether claiming exemptions under Sections 54, 54F, or 54EC is worth it. Infact, under certain circumstances, it is much better to claim a partial or zero tax exemptions on the capital gains accrued in India.