This Article is for you if:
- You are an NRI
- You are selling a Residential property/house in India
- The Residential property is held by you for a period of more than 24 months
- Any you want to save taxes by reinvesting in any other asset
It means we are not considering here sale of commercial property, commercial plot, residential plot, land, mutual funds, gold etc.
Also, if property is sold within 24 months from its date of purchase, then exemption discussed below will not be available. It means assets should be long term capital asset.
We are only talking about individuals. And this article is framed, specifically keeping NRIs sellers in mind.
When NRI sell a house in India, there are chances that he is having huge long term capital gain on which he has to pay tax at the rate of 20% + Surcharge+ Edu Cess.
If he wants to save this capital gain taxes then he has following two options available:
- Investing in another Residential Property (Section 54)
If an NRI seller buys another residential house within a period of one year before or two years after the date of transfer of old house or construct a residential house within a period of three years from the date of transfer of the old house then he can claim exemption of capital gain tax on old house.
To claim full exemption, a seller should invest whole capital gain amount in another house. If amount invested in another residential house is less than capital gain amount than exemption will be given only that extend to which amount is invested.
Earlier exemption was available only in respect of one residential house property purchased /constructed in India. But with effect from A.Y 2021-22, the benefit of exemption is extended in respect of investment made in tworesidentialhouseproperties.
The exemption for investment made, by way of purchase or construction, in tworesidential house properties shall be available if the amount of long-term capital gains does not exceed Rs. 2 crores. This option of buying 2 house is available only once in life time.
Investment in residential plot is not eligible for this exemption, either investment should be done in residential house or a house should be constructedon this plot within 3 years from the sale of old house.
Although time period available is 2 years in case of purchase and 3 years in case of construction of new house butpractically a person usually has only few months to complete the investment. This is because, to claim capital gain exemption on house sold, he has to fill new investment details while filing the tax returns before due date (31st July of assessment year). Keeping above difficulties in mind, income tax department has given an option of investing money in Capital Gain Account Scheme for the time being. Once amount in credited in this specified account, tax payer can file his tax return filling the details invested in Capital Gain Account Scheme and can claim the exemption.
He has to use the funds from this Capital Gain Account only to buy a property within 2 years or construct a property within 3 years of sale of old house.
Whole idea behind providing this exemption is to help genuine taxpayers who wants to sell old house so that they can buy new house. It may bedue to various reasons like shifting, expansion of family etc. To keep a check onmisutilization of this benefit, exemption of section 54 gets reversed if new house bought or constructed is sold within 3 years of acquisition or completion of construction.In means, the new house purchased or constructed shall be held by tax payer at least for 3 years otherwise the amount of capital gain claimed asexempt under section 54 will be deducted from the cost of acquisition of the newhouse.
- Investingin Government Specified Bonds (Section 54EC)
If an NRI sell a residential house after holding it for at least 2 years then to save his capital gain taxes he can invest his capital gain amount in government specified Bonds within 6 months of the date of sale of house.
As of now, two notified bonds available under this scheme are National Highways Authority of India(NHAI) and Rural Electrification Corporation Limited(REC).
These kinds of bondsgenerally have a lock in period of 5 years and offer returns of around 5-6%. And Interest on these bonds is mostly taxable.
Maximum amount which can be invested in these bonds is INR 50 Lakhs which means maximum exemption which can be claimed under this section INR 50 Lakhs.
Not all bank offers these bonds. To purchase these bonds, you have to approach those specified banks which offer this facility.
Other Points NRI seller should keep in mind:
- Above exemptions are available only to reduce capital gain taxes and can be claimed at the time of filing tax return in India. It has nothing to do with TDS which buyer has to deduct while paying sale consideration. You cannot insist buyer to deduct TDS at lower rate as you are investing in another residential property or specified bonds.
- To reduce TDS rate, you can apply for Lower/NIL TDS deduction certificate with your Assessing officer. But don’t expect that AO will issue you the certificate without looking into the proves of above investment claim. This practically impossible situation as you cannot do investment unless you will get the sale proceeds.
- If you are selling a Short-Term Capital Asset than taxes will be applicable as per slab rate and exemption under section 54 and 54EC are not applicable.
- In case of NRI seller, basic exemption limit of INR2.5 lakh cannot be adjusted from Long term capital gain. Which means Long term capital gain on sale of house will be taxable at flat rate of 20%+ Surcharge+ Edu cess.
I wrote this article as this is always a hot issue and when NRI sell their residential property in India, they end up paying huge capital gain taxes as they are not aware of the options available to save taxes. I will write a similar article with the details ofexemptions available at the time of selling of commercial property by NRI sellers.
Disclaimer:This article is just to make you understand about basic concepts. Please take Professional advice in case you have any doubts.
Or You can write to me at info@nricaservices.com or Call/Whatsapp me at +91 9910075924.