Sale of Property By NRI

NRI Property Taxation: What You Need to Know Now!

The Finance (No. 2) Act, 2024, has introduced significant changes to how Non-Resident Indians (NRIs) are taxed on the sale of immovable property in India. These crucial amendments, particularly impacting capital gains and TDS (Tax Deducted at Source), come into effect from July 23, 2024.

Key Amendments Post-Budget 2024: A Closer Look

Long-Term Capital Gains (LTCG) – Held for more than 24 months

• New Flat Tax Rate: From July 23, 2024, LTCG for NRIs is now taxable at a flat rate of 12.5%, exclusive of surcharge and cess.
• Indexation Benefit REMOVED: This is a critical change! The benefit of indexation, which allowed for adjusting the acquisition cost for inflation, has been removed. This means your taxable gain is now the direct difference between the sale price and the historical purchase price, potentially leading to a significantly higher taxable amount, especially for properties held long-term.
• No Old Regime Option: Unlike resident individuals, NRIs cannot opt for the old regime with indexation, even for properties acquired before the amendment date. The new flat-rate regime is compulsory.
• TDS Impact: While the tax rate is 12.5%, TDS will also be deducted at 12.5% plus surcharge and cess on the full sale value. This can lead to significant excess tax withholding.

Short-Term Capital Gains (STCG) – Held for 24 months or less

• Taxed as per Slab Rates: Gains continue to be taxed as per the NRI’s applicable income tax slab rate.
• Higher TDS: Buyers are still required to deduct TDS at a flat 30% (plus applicable surcharge and cess) on the entire sale consideration, regardless of your actual tax liability. This also results in burdensome cash flow implications.

Understanding TDS Compliance for Buyers (Section 195)

If you are buying property from an NRI, be aware of your obligations:

• Deduct TDS: TDS must be deducted on each payment or installment.
• Rates: 12.5% + surcharge + cess for LTCG, and 30% + surcharge + cess for STCG.
• Gross Sale Consideration: TDS is on the gross sale consideration, not just the gain.
• TAN Mandatory: Obtain a Tax Deduction Account Number (TAN).
• Deposit & File: Deposit TDS with the government by the 7th of the next month and file Form 27Q quarterly.
• Issue Form 16A: Provide Form 16A (TDS Certificate) to the NRI seller.

Reduce Excess TDS: Leverage Section 197 Certificate!

Given the potential for significant excess TDS withholding, NRIs can apply for a Lower or Nil TDS Certificate under Section 197 of the Income Tax Act.

• Benefits: This certificate allows the buyer to deduct TDS only on the estimated actual taxable gain, or not deduct any TDS if an exemption applies. It helps prevent excess TDS and minimizes the need for refunds through tax return filing.
• Buyer-Specific: The certificate is valid only for the specific buyer and transaction. A new certificate is needed for each property sale or buyer.
• Validity: Valid for the specific financial year or until the transaction’s completion, whichever is earlier.
• Application: Submit Form 13 online via TRACES with supporting documents (capital gains computation, deeds). Each co-owner must apply separately.

Pro Tip: Obtaining this certificate in advance of the transaction is crucial for aligning TDS with actual tax liability and improving cash flow.

Practical Advice for NRIs and Buyers

• File ITR: NRIs should file an Income Tax Return (ITR) in India to claim refunds if excess TDS has been deducted.
• Utilize Exemptions: Explore exemptions under Section 54, 54F, or invest in 54EC bonds to reduce your LTCG liability.
• Buyer Compliance: Buyers must ensure full compliance with TDS rules to avoid penalties.
• Seek Professional Advice: It is highly recommended to seek professional advice before executing any property sale or purchase involving an NRI.