NRI Selling Immovable Property in India: Legal & Tax Insights for a Smooth Transaction
Understanding the legal and tax framework is crucial for a hassle-free transaction. This guide covers key aspects, including FEMA regulations, TAX implications, TDS deductions, repatriation limits, and available exemptions, ensuring compliance and maximizing financial benefits. Whether you’re transferring property to a resident Indian or repatriating sale proceeds, knowing the rules will help streamline the process.
FEMA Perspective
A. Transfer of Property by NRI and OCI
- NRIs or OCIs can transfer property to a resident Indian or to another NRI or OCI.
- Transfer of property to non-residents is allowed only for non-agricultural land, excluding farmhouses and plantations.
B. Repatriation of Sale Proceeds
- As prescribed by RBI, NRIs can transfer up to USD 1 million per financial year into their NRO account.
- In the event of the sale of immovable property other than agricultural land, farmhouse, or plantation property in India by an NRI or an OCI, the authorized dealer may allow repatriation of the sale proceeds outside India with some conditions and submission of documentation.
C. Prohibition on Transfer of Property
- No person being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Hong Kong, Macau, or the Democratic People’s Republic of Korea (DPRK) shall transfer immovable property in India, other than a lease not exceeding five years, without prior permission of the Reserve Bank.
- Provided that this prohibition shall not apply to an OCI.
D. Case-Based Examples
| Example | Condition of Law | Allowed or Not |
|---|---|---|
| Rahul, an NRI in Canada, sells his flat in Chennai to his Indian resident friend, Suresh. | NRIs can sell property to Indian residents, provided it is not agricultural land, farmhouse, or plantation. | Allowed – Rahul can sell his flat to Suresh as it is a residential property. |
| Mira, an OCI from the UK, wants to sell her commercial property in Mumbai to another OCI from the USA. | OCIs can transfer property to other OCIs or NRIs, as long as it is not agricultural land, farmhouse, or plantation. | Allowed – Mira can sell her commercial property to another OCI from the USA. |
| David, an NRI from the USA, wants to sell his farmhouse in Goa to an Indian resident. | The sale of agricultural land, farmhouses, or plantation properties by NRIs is prohibited unless specific permissions are obtained. | Not Allowed – David cannot sell his farmhouse without special permission from the RBI. |
| Nina, an NRI in the UAE, sells her flat in Bangalore to an Indian resident and wishes to repatriate the proceeds. | Repatriation of proceeds from the sale of residential property by an NRI is allowed up to USD 1 million per financial year, subject to conditions. | Allowed – Nina can repatriate the proceeds from the sale of her flat within the specified limits. |
Tax Perspective
A. Sale/Transfer of Immovable Property
NRIs can transfer immovable property to:
- Another NRI being a citizen of India or a person of Indian origin, or
- A person resident in India.
However, they may transfer agricultural land, plantation property, or a farmhouse acquired by way of inheritance only to Indian citizens permanently residing in India.
Where an NRI sells immovable property, it is subject to capital gain tax. The period of holding of such property will classify the gain as short-term or long-term. The capital gains may be explained further as:
1. Short-Term Capital Gains
If the immovable property is held for up to 24 months (up to 2 years), the capital gain on such property is considered short-term capital gain (STCG). STCG is taxed at slab rates. However, for NRIs selling immovable property, the buyer is liable to deduct TDS, as per Section 195 of the Income Tax Act 1961, at a rate of 30%, along with a health and education cess of 4% and any applicable surcharge.
2. Long-Term Capital Gains
If the property is held for more than 24 months (more than 2 years), the capital gain is considered long-term capital gain (LTCG). LTCG is taxed at a flat rate of 12.5%, without any benefit of indexation.
Additionally, non-residents are also eligible for exemptions under Sections 54, 54B, 54EC, and 54F of the Income Tax Act 1961, with certain conditions.
B. Exemptions Available for NRIs on Capital Gain
| Provisions | Section 54 | Section 54F | Section 54EC |
| Transferred Assets | Residential House Property | Any LTCA other than Residential House Property | Any immovable property |
| Asset to be Acquired | One Residential House Property in India | Bonds issued by NHAI, REC, PFCL, IRFCL | |
| Time Limit for Purchase/Construction | Purchase: 1 year before or 2 years after transfer. Construction: Complete within 3 years | Purchase: Within 6 months from transfer date | |
| Amount of Exemption | Lower of: 1) Capital Gain 2) Cost of New Asset/ Deposit Amount | LTCG × Cost of New Asset / Net Consideration | Lower of: 1) Capital Gain 2) Cost of New Asset |
| Maximum Exemption | ₹ 10 Crores | ₹ 50 Lakhs | |
| Locking Period on Transfer of New Asset | If transferred within 3 years, exemption is withdrawn, and capital gain is reduced from the new asset’s cost | If transferred or converted within 5 years, exemption is taxable | |
| Deposit Scheme | Capital Gain Account Scheme (CGAS) applicable | CGAS not applicable | |
| How to Claim Exemption | Satisfy purchase condition or deposit in CGAS before filing return, and use the amount for purchase or construction within the time limit | Purchase bonds within 6 months of transfer, claiming exemption on the lower of capital gain or cost of new asset | |
C. Lower Deduction Certificate
A non-resident can apply for a Lower Deduction Certificate (LDC) under Section 197 of the Income Tax Act, 1961, in a financial year to reduce the tax deduction at source (TDS) rate on income from property sales or rentals. The certificate helps reduce the TDS rate from the standard 30% for NRIs to a lower rate, based on the individual’s actual tax liability. The application requires providing proof of the expected income and details of their foreign income, along with estimated taxes.
D. Filing of Tax Returns
NRIs are required to file tax returns in India to report these earnings and to further claim the benefit of a refund of TDS deducted.
Capital Gains Tax on Sale of Property: The non-resident shall file an ITR for the capital gain earned and pay the applicable tax, if any, with the filing of the return. Further, if TDS is deducted on the sale, the non-resident may also be able to claim a refund while filing the return.
E. Claiming Benefit Under DTAA
Indian payers are required to withhold taxes if the underlying income is subject to tax. As per Indian tax laws, one of the conditions to claim Double Taxation Avoidance Agreement (DTAA) benefits for non-residents is to obtain a Tax Residency Certificate (TRC) issued by tax authorities in their home country.
The Income Tax laws also require information in the prescribed form if the TRC lacks these details (Form 10F). Non-compliance with Form 10F will result in denial of DTAA benefits to the non-resident by the payer while withholding taxes from payments to non-residents.
This is the second article in a series covering various aspects of investments, acquisitions, transfers, gifts, and sales of immovable properties by Non-Resident Indians (NRIs). We will also explore transactions between NRIs and Resident Indians concerning both Indian and overseas properties.
Over the next few weeks, we will cover the following topics:
- Acquisition of immovable properties by NRIs in India
- Sale of immovable properties by NRIs in India
- Gift of Indian immovable properties between NRIs and Resident Indians
- Acquisition of overseas properties by Resident Indians
- Gift of overseas properties between NRIs and Resident Indians
- Tax and other regulatory issues around immovable properties in India
- Remittance of sale proceeds of immovable properties by NRIs out of India
Stay tuned as we delve deeper into these crucial aspects of NRI property transactions.