If you’re a Non-Resident Indian (NRIs), Person of Indian origin (PIO) or Overseas Citizens of India (OCI) with immovable assets in India, bought or inherited you may be looking for ways to liquidate those assets and bring the proceeds to where you are currently living, especially if you don’t have plans to go back to India in the near future. In this article, we outline a few key points to consider when selling overseas assets and repatriating the proceeds. For simplicity, we will refer NRI, PIO and OCI as NRI hereafter in the article.
Limits on the repatriation amount:
There are certain restrictions on the amount NRIs can repatriate from the proceeds of the sale of immovable assets in India:
- 1. If you had bought the property using funds from your Non-Resident External (NRE) Account, then you can repatriate funds overseas from your NRE account up to the amount original purchase amount.
- 2. If you had bought the property using funds from your Non-Resident Ordinary (NRO) account, or a resident rupee account or acquired by way of a gift, or inherited from a resident Indian, you may repatriate a maximum of $1 million per financial year (April to March). An NRO account is a form of savings account where you can maintain and manage income earned in India.
- 3. In the case of a residential property, repatriation of sale proceeds is restricted to less than or equal to two properties.
Important considerations before initiating the sale of property in India:
Who can buy or sell property in India?
If you are a NRI, OCI or PIO, you are allowed to sell any commercial or residential property you own in India. The buyer could also be an NRI or an Indian resident. However, in the case of agricultural land or a farmhouse, the buyer cannot be an NRI. These properties can only be sold to an Indian citizen
Is there any tax liability on sale proceeds from a property in India?
Capital gain, if any resulted from Selling of a property in India by an NRI is taxable under section 195 of the Income Tax Act, 1961. It is a difference between the sale price of the property and indexed cost of acquisition.
- • If you are selling your property within 2 years of possession, you will be liable to a short-term capital gains tax at 33.99% irrespective of your tax slab.
- • If you’re selling your property after 2 years, then the sale will attract a long-term capital gains tax at 22.66%.
Tax Deducted at Source (TDS):
TDS has been introduced by the Indian government to collect tax at the source from where an individual’s income is generated. Indian resident sellers are supposed to pay a Tax Deducted at Source (TDS) of 1% of sale proceeds from a property u/s 194IA, but it is not applicable for NRI sellers. However, if a buyer buys a property from an NRI, under section 195, irrespective of the amount, the buyer needs to deduct 20.66% as TDS on the sale price of the property if capital gains is long-term capital gains, or 33.99% in case of short-term capital gains, and deposit the TDS with Income Tax Department. Even though the NRI seller is liable to pay tax only on the capital tax portion of the sale, the TDS will be deducted by the buyer on the sale value of the property. So, the NRI buyer needs to claim the refund of the excess TDS paid, which if not claimed may lead to losses for the NRI seller.
Reducing the TDS on the sale of property in India:
There are different options to consider:
- 1. If your country of residence participates in Double Taxation Avoidance Agreement (DTAA), then you can apply for lower TDS. For e.g., US and UK are part of DTAA. Click here to find if your country participates in DTAA. This requires submission of a tax residency certification from the country of residence, which will certify that you are a tax paying resident in that country and tax on this income is paid in that country.
- 2. If your income in India is less than the basic exemption limit of Rs. 2.5 lakhs, you can apply for a TDS waiver with an Income Tax officer under whose jurisdiction the case will fall.
- 3. If you decide to invest the long-term capital gains in another property or tax-exempt bonds, then you can apply for a Tax Exemption Certificate from the Income Tax Department under section 195 of the Income Tax Act, 1961.
A Chartered Accountant (CA) in India could guide you through the process, help complete the necessary paperwork, and calculate various taxes payable.
The Case Of Mr Agarwal:
Mr Aditya Agarwal* lives in London, UK. He has a property in Pune bought in Jan 2008 for Rs. 25 lakhs, which he wants to sell. He has found a buyer and is planning to sell it in the current financial year 2017-18 for Rs. 50 lakhs. He approaches his Chartered Accountant in Pune who helps him determine his capital gains tax liability.
As the property is more than 24 months old, the capital gains will be long-term capital gains and the capital gains tax rate will be 22.66%. To compute the long-term capital tax liability, the first step is to find the indexed value of the property. To do that, Mr Agarwal’s CA finds out:
- 1. The total purchase price of the flat,
- 2. The year of the purchase,
- 3. Furnishing costs incurred (if any) and the year,
- 4. Additional construction cost incurred (if any) and the year.
Based on this, Mr Agarwal’s CA works out the indexed cost of the property as Rs. 40 lakhs (a hypothetical figure). As Mr Agarwal is selling the property for Rs. 50 lakhs, the capital gains from the sale would be Rs. 10 lakhs, and corresponding long-term Capital gains Tax at 22.66% is Rs. 2.27 lakhs.
If in this case, the buyer decides to deduct TDS at 20.66% (Under Section 195), then TDS will be deducted from the total sale value i.e. Rs. 50 lakhs, which will be Rs. 11.33 lakhs. This is quite high as compared to Mr Agarwal’s long-term capital gain tax liability of Rs. 2.27 lakhs.
Now, Mr Agarwal has two choices – either he is willing to pay capital gains tax or would like to save capital gains tax by reinvesting capital gains.
If Mr Agarwal decides to pay capital gains tax, then based on the capital gains tax calculation Mr Agarwal can apply for a lower tax deduction certificate with the help of his CA. He can then share this original certificate with the buyer for deducting a TDS of only Rs. 2.27 lakhs instead of Rs. 11.33 lakhs
However, Mr Agarwal is looking to save capital gains tax of Rs. 2.27 lakhs by reinvesting the capital gains of Rs.10 lakhs from the sale of his property. So, he needs to apply for a Tax Exemption Certificate with the help of his CA. Based on the assessment by the Income Tax Department, a certificate will be issued to Mr Agarwal. When he shares the original Nil Deduction Certificate with the buyer for his reference, the buyer will not deduct TDS on the sale value, but instead transfer the capital gains amount of Rs. 10 lakhs to Mr Agarwal’s capital gains account and Rs. 40 lakhs to Mr Agarwal’s NRO account.
Now Mr Agarwal can file form 15CA and 15CB online with the help of his CA. After this, the money in his NRO account can be transferred to the UK. He needs to consider that the repatriation of funds during a Financial Year should not exceed $ 1 Mn.
Important Points to Remember:
- • All the aforementioned points are not only applicable to inherited assets but also to assets bought in India when you were an NRI.
- • Assets bought in India as an NRI can be sold as long as they were purchased in accordance with all the foreign exchange laws. However, in such cases, you must note that the amount transferred shouldn’t be more than the amount remitted to India via banking channels.
- • If you had purchased the property on loan, the amount transferred shouldn’t more than the loan repayment amount. Please check Income Tax rules in your country of residence on capital gains out of property sale in India.
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