Understanding Capital Gains Tax for NRIs: A Guide to Property Sales in India

Investing in real estate in India has long been an attractive option for Non-Resident Indians (NRIs). However, selling property in India involves significant tax implications. This blog provides an updated guide on capital gains tax for NRIs selling property in India in light of the 2024 changes in the Income Tax Act.

 

Types of Capital Gains on Property Sales

 

NRIs are subject to capital gains tax when they sell property in India. The tax liability depends on how long the property was held:

1. Short-Term Capital Gains (STCG): If the property is sold within 24 months of acquisition, it falls under STCG. The gains are taxed as per the NRI’s income tax slab rate, which can go up to 30%.
2. Long-Term Capital Gains (LTCG): For properties held for more than 24 months, LTCG applies. Prior to the 2024 changes, LTCG tax was @20% with the benefit of indexation, which adjusts the cost of acquisition for inflation, reducing taxable gains.

 

Changes in Capital Gains Tax Rules for 2024

 

Starting from July 23, 2024, a new tax regime for NRIs has been introduced. Under the new rule, NRIs selling property can no longer claim indexation benefits. The capital gains tax rate for properties registered on or after this date is a flat 12.5%, irrespective of the property value. For more insights on the impact of these budget changes, refer to our Impact of Budget Changes for NRIs blog.

 

Transitional Rule

 

For properties registered before July 23, 2024, NRIs have the option to choose between:

1. 20% with indexation (the earlier rule), or
2. 12.5% without indexation.

This flexibility allows sellers to select the method that results in the lower tax liability.

 

TDS Deduction on Property Sales

 

NRIs are subject to Tax Deducted at Source (TDS), which is deducted by the buyer of the property before registration. The rate of TDS is as follows:

• Properties valued under ₹50 lakh: 20.8% TDS
• Properties between ₹50 lakh and ₹1 crore: 22.88% TDS
• Properties above ₹1 crore: 23.92% TDS

 

How Form 13 Can Help Reduce TDS for NRIs

 

Form 13, filed under Section 197 of the Income Tax Act, is a valuable tool for NRIs selling property in India. By submitting this form, NRIs can request a lower or nil deduction of TDS (Tax Deducted at Source). This helps avoid overpayment of taxes on capital gains during property sales. Upon approval by the Income Tax Department, the TDS deductor will apply the specified lower rate, reducing upfront tax deductions. NRIs can thus prevent large amounts being withheld and avoid waiting for refunds.

For more detailed information, explore how Form 13 reduces TDS in the context of property sales.

 

How to Save Capital Gains Tax

 

NRIs can reduce their tax liabilities by reinvesting their capital gains into certain assets under Section 54 and Section 54EC of the Income Tax Act.

• Section 54 (Residential Property): NRIs can claim exemption by reinvesting the gains from selling a long-term residential property into another residential property in India. This is valid if:
  1. The new property is purchased within one year before the sale.
  2. Purchased within two years of the sale.
  3. Under construction and completed within three years.
• If the new property is not bought within the same financial year, the sale proceeds must be deposited into a Capital Gains Account Scheme. This ensures that the proceeds are not taxed while you wait to reinvest them. Failing to comply with this may lead to tax liabilities.
• Section 54EC (Specified Bonds): Alternatively, NRIs can invest in bonds issued by government-backed entities like National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC). These bonds have a lock-in period of five years and serve as a tax-saving instrument, allowing you to defer or reduce capital gains tax.

Following these strategies can significantly reduce the overall tax burden on property sales for NRIs.

 

Repatriation of Sale Proceeds

 

Once the property is sold and the sale proceeds are deposited in the NRO account. To repatriate up to USD 1 million per financial year, Form 15CA and 15CB must be submitted to the bank. The bank then processes the repatriation, provided all taxes have been paid.  For more details on the repatriation process, you can refer to our NRI Property Sale Repatriation Guide.

 

Conclusion

 

With the 2024 changes to capital gains tax for NRIs selling property in India, NRIs must carefully assess their tax liabilities when selling property. The new flat LTCG rate of 12.5% simplifies the process, but it also removes the benefit of indexation, requiring careful tax planning.

With the right guidance and understanding of selling property in India for NRIs, you can ensure a smooth, compliant transaction. At Brivan Consultants, we specialize in guiding NRIs through the entire process, offering legal, financial, and logistical support. For personalized assistance with the sale of your property, get in touch with Brivan Consultants today!