Tax Implications for NRI : Investment, Sale of Property

Under section 5 of the Income Tax Act, 1961, non-resident person is liable to tax on income which is received or is deemed to be received in India by or on behalf of such person, or income which accrues or arises or is deemed to accrue or arise to him in India. 

Income tax is payable on the total income computed by the Assessing Officer under the provisions of the Income Tax Act 1961, regardless of whether a taxpayer is a resident taxpayer, a non-resident taxpayer, or a non-resident Indian.

Investment in Property :

NRI can purchase any kind of Commercial, Residential  & Real Estate Property in India except Agriculture Land, Plantation & Farm House subject to the provisions of the Foreign exchange Management Act (FEMA).

If Property is purchased from a person resident in India, u/s 194IA of Income Tax act,1961, TDS should be deducted @1% of purchase value at the time of credit of such sum to the account of transferor OR at the time of payment in cash or draft or by any other mode, whichever is earlier if such sum exceeds Rs.50Lakh.

If Property is purchased from a non-resident person, Then, In case the NRI produce a declaration from his AO regarding the details of sale of property then TDS should be deducted by the resident buyer on capital gains and not on sales consideration as per section 195 of Income Tax, act, 1961 however, it the buyer has to deduct the TDS on the sale consideration.

In the case of the Long term, Capital gain property TDS should be deducted at 20% with applicable cess and surcharge.

In the case of the Short term, capital gain property TDS should be deducted as per Income tax slab rates of the seller with applicable rates and surcharge.

No tax is levied on property acquired by way of Inheritance.

Sale of Property :

The proceeds from the NRI sale of the property will be taxed under head capital gains as per the income tax act,1961.

The gain realized from the sale of the property will be categorized as long term capital gain and short term capital gain.

Long Term Capital Gain:

Long term capital gain arises when the property is sold after a period of more than 24 months from the date of its acquisition. Long term capital gain is calculated as per below procedure

PARTICULARS	Rs.
The full value of the consideration (i.e., Sales consideration of asset)	xxx
Less: Expenditure incurred wholly and exclusively in connection  with the transfer of the capital asset (E.g., brokerage, commission,  advertisement expenses, etc.).	xxx
Net sale consideration	XXXX
Less: Indexed cost of acquisition	xxx
Less: Indexed cost of improvement	xxx
Long-Term Capital Gains	XXXX

Indexed Cost of Acquisition is the cost raised by the Inflations in the value of asset calculated using cost inflation index notified by the central government. 

Note: The benefit of Indexation is not available to Short Term Capital Asset.

Short Term Capital Gain:

Short term capital gain arises when the property is sold before a period of 24 months from the date of its acquisition. Short term capital gain is calculated as per below procedure

PARTICULARS	Rs.
The full value of the consideration (i.e., Sales consideration of asset)	xxx
Less: Expenditure incurred wholly and exclusively in connection  with the transfer of the capital asset (E.g., brokerage, commission,  advertisement expenses, etc.).	xxx
Net sale consideration	XXXX
Less: Cost of acquisition	xxx
Less: Cost of improvement	xxx
Short-Term Capital Gains	XXXX

Tax  Savers (How to Save Tax on sale of Long Term Capital Asset):

Income tax act has provided certain exemptions for capital gains arising on sale of long term capital assets.

• Section -54- Exemption for capital gains arising on transfer of residential dwelling/property.
• Section-54EC- Exemption for capital gains arising on transfer of long term capital asset.
• Section-54F- Exemption for capital gains arising on transfer of any long term capital other than a residential building.

A Brief Understanding of Above Sections are discussed below:

Section-54

Sec-54 of Income-tax act,1961, provides an exemption for capital gains arising on transfer of residential house property if such sale proceeds are reinvested in acquiring another residential house property

Points to be noted:

Within a period of 1 year before or 2 years after the date of transfer of the old house, the taxpayer should acquire another residential house or should construct a residential house within a period of 3 years from the date of transfer of the old house. In the case of compulsory acquisition, the period of acquisition or construction will be calculated from the date of receipt of compensation.

The exemption is limited to one residential house property purchased/constructed in India, But, w.e.f from A.Y 2020-21, the Finance Act, 2019 has amended Section 54 to extend the benefit of exemption in respect of investment made in 2 residential house properties.

The exemption from sec-54 available if the amount of long term capital gains does not exceed Rs. 2 crores.

Section-54EC 

Sec-54EC of Income-tax act,1961, provides an exemption for capital gains arising on transfer of any long term capital asset if such long term capital gain is invested in any of the bonds of NHAI, REC, PFCL, IRFCL, and Bonds issued by any other authority notified by Central Government.

Points to be noted:

The capital gain should be invested in bonds within 6 months from the date of transfer of specified long term capital assets.

The lock-in period is 3 years up to A.Y.2018-19, (i.e., Bonds should be redeemed after 3years)

From A.Y. 2019-20 the lock-in period has been increased from 3 years to 5 years.

The investment made by NRI in the specified bonds should not exceed Rs. 50 lakhs.

W.e.f 1st day of April 2019,

The words any long term capital asset is substituted with land or building or both.

w.e.f A.Y.2019-20   period in specified bonds is 5years.

Section-54F

Sec-54F of Income-tax act,1961, provides an exemption for capital gains arising on transfer of long term capital other than residential property if sale proceeds are invested in

Purchase/construction of Residential House Property 

Time limit:

In case of a purchase –within 1 year before or 2 years after the date of transfer of such asset

In case of Construction-with in 3 years after the date of such transfer