Sale of immovable property in India owned by a Non-resident (NR) individual is a more tedious affair as compared to sale/ transfer made by a resident of India because of the compliances and tax implications attached to the sale. As a first step, the individual must correctly determine his/ her residential status in India with the help of the rules laid down in Section 6 of the Income-tax Act, 1961 (Act).
Residential status is determined afresh for each financial year and hence, the individual must analyse the same for the financial year in which he/ she intends to sell the immovable property in India. This determination of residential status plays an important part to further determine the scope of income taxability, rate of applicable tax and type of tax return form to be used for filing the Income-tax Return (ITR) in India.
How is the sale of immovable property taxed in India?
An individual who does not trade in sale/ purchase of immovable properties may incur capital gain or capital loss on sale of his/ her immovable property. This gain/ loss needs to be disclosed under the head ‘income from capital gains’ when filing the ITR since the immovable property qualifies as a ‘capital asset’ for such an individual. Such gain is calculated by reducing the cost of acquisition of the immovable property and eligible expenses from the sale consideration receivable on sale/ transfer of such immovable property. In case of long-term gains, benefit of indexation is available which helps to enhance the cost of acquisition by applying government defined cost of inflation index factors which essentially helps to lower the amount of capital gains and thus lower the tax liability for the taxpayer.
Further, where the immovable property is sold after 24 months from date of purchase, gain/ loss on sale will be treated as long-term whereas if the immovable property is sold within 24 months of purchase, gain/ loss will be treated as short-term. As per the Act, long-term gains and short-term gains are taxed at different rates and the rules for computing cost of acquisition and set-off of losses and carry forward of losses to future years are also different. For example, an NR individual will have to pay taxes at 20% (plus applicable surcharge and cess) on his/ her long-term capital gains without allowing the benefit of tax slabs and eligible deductions available under the Act. Whereas, in case of short-term capital gains, taxes will be calculated at applicable slab rates after allowing the benefit of eligible deductions under the Act.
Are there any exemptions available in case of re-investment?
In case of long-term gains, NR individual can save the tax outflow by making eligible investments in one residential house property in India within 1 year prior or within 2 years after the date of sale/ transfer of original residential property or within a period of 3 years by constructing one residential house property in India in which case the amount of long-term capital gains or cost of new residential property, whichever is lower, shall be exempt from tax if other conditions specified in the Act are satisfied (Section 54 of the Act in this case). With effect from 1 April 2024, Capital gains rollover exemption on investment in new residential property in India is now capped to INR 10 crore. Therefore, if the cost of the new property is more than INR 10 crores, the cost of such an asset shall be deemed to be INR 10 crores.
Similarly, under Section 54EC of the Act, investment up to INR 50,00,000 can also be made in certain bonds of National Highways Authority of India or Rural Electrification Corporation within 6 months from sale/ transfer of an immovable property and such amount of investment or long- term capital gains, whichever is lower, shall be exempt from tax if other conditions specified in the section are satisfied. These benefits are not available in case of short-term gains and thus the individual may need to analyse the facts before selling the immovable property to calculate the tax outflow.
What if the capital gains are also taxable in the country of residence for the NR?
In addition to taxability under the Act, the NR may be liable to pay taxes on capital gains in his/ her country of residence as per domestic tax laws of such country which may lead to double taxation in the hands of the NR. To mitigate double taxation, India has entered into double taxation avoidance treaties with multiple countries which may provide different circumstances of taxability in the country of residence or may prescribe a beneficial tax rate on capital gains vis-à-vis the Act. Therefore, NR must also analyse taxability in the country of residency and explore if any benefit can be claimed under the applicable tax treaty before filing the ITR in India and payment of taxes on the capital gains.
Are there any other challenges related to sale of immovable property?
As per the Act, where the NR sells an immovable property in India, the buyer of such property is required to withhold TDS as per provisions of Section 195 of the Act. Such TDS is usually deducted on the sale value of the immovable property and not on the actual capital gains amount. On sale of long- term capital asset, TDS is deducted at 20% (plus applicable surcharge and cess) and in case of short- term capital asset, TDS is deducted at 30% (plus applicable surcharge and cess), even though the final capital gains amount on which taxes are payable may be much lower than the sale value of the property. This leads to higher deduction of taxes from the seller which later needs to be claimed as refund by the NR in his/ her ITR. To mitigate such blockage of funds, the NR may make an online application in Form 13 to the jurisdictional tax officer for issue of lower withholding certificate. If the application is accepted by the tax authorities and certificate is issued, the buyer of the immovable property can deduct TDS as per the lower tax rate which is mentioned in the certificate issued by the tax authorities.
What are the disclosure requirements in the ITR?
The NR should correctly report the year of purchase, cost of acquisition, sale value and expenses incurred on sale in the ITR form to ensure that ITR utility correctly calculates the amount of gain/ loss on sale of immovable property. In addition, the taxpayer is also required to disclose name and PAN/ AADHAAR of the buyer along with complete address of the immovable property which has been sold.
One must also check the Annual Information Statement (AIS) and Taxpayer Information Summary (TIS) to reconcile the sale value reported by the buyer to avoid any queries from the tax authorities which may arise if the value furnished in the ITR is different from the value reported in AIS/ TIS.
Therefore, the tax implications on sale of an immovable property by the NR may seem more tricky as compared to that of a Resident and hence thorough fact checking should be done by the NR whenever the property is intended to be sold. A summary of different implications on short-term and long-term gains for NR individual are summarized below for quick reference:
(The author, Shalini Jain is Tax Partner, People Advisory Services, EY India. Akshay Sharma, Senior Manager, People Advisory Services, EY India contributed to this article. Views expressed are personal. )