Holding on to real estate is not always feasible if one is unable to manage them. This is especially true if the NRIs in question do not visit India frequently and are not open to renting out their properties. They prefer not to burden relatives and friends with the task of paying property tax, maintenance and society dues and see more sense in encashing the capital value of their inherited properties Selling such real estate is usually not the biggest challenge. What can create confusion is the viability - and ways and means - of remitting the resulting funds back into the country of residence. As in the case of resident Indians, NRIs who sell purchased property after three years from the date of purchase will incur long term capital gains tax of 20 percent. The gains are calculated as the difference between sale value and indexed cost of purchase. NRIs are subject to a Tax Deducted at Source (TDS) of 20 percent on the long term capital gains. But there are certain instances when NRI can get a waiver of the TDS. One such case would be if the NRI is planning to re-invest the capital gains of the property in another property or in tax exempt bonds. In such cases, the NRI will be exempt from tax in India, and no TDS will be deducted either. If the NRI sells the property before three years have elapsed since the date of purchase, short term capital gains tax at his or her tax slab is incurred.
Tax Exemptions Section 54 - This section stipulates that if NRI sells a residential property after three years from the date of purchase and reinvest the proceeds into another residential property within two years from the date of sale, the profit generated is exempt to the extent of the cost of new property. To illustrate - if the capital gains is Rs. 10 lakh and the new property costs Rs. 8 lakh, the remaining Rs. 2 lakh are treated as long term capital gains. The sold residential property may be either have been self-occupied property or given on rent. The new property must be held for at least three years. NRIs cannot invest the proceeds on the sale of a property in India in a foreign property and still avail the benefit of Section 54. However, some recent hearings with the appellate authorities have held that exemption can be claimed under Section 54 even if the new house is purchased outside India.
Repatriation General permission is available to NRIs and PIOs to repatriate the sale proceeds of property inherited from an Indian resident, subject to certain conditions. If those conditions are fulfilled, the NRI need not seek the RBI's permission. However, if the NRI has inherited the property from a person residing outside India, he or she must seek specific permission from the RBI. The conditions for repatriation of such funds are not really complicated - the amount per financial year (April-March) should not exceed USD 1 million, and should be done through authorized dealers.
What NRIs must pay attention to is the income tax implications in their country of residence. Many countries tax their residents on their income regardless of where it originates from, while others provide partial or total exemption on capital gains arising on sale of a residential house if certain conditions are met. The most important point to ponder is the income tax liability in the country of residence on the amount of gain, and whether claiming exemption under Sections 54/54F/54EC is really worth it. The NRI may, in fact, be better off claiming only partial or no tax exemption on the capital gains in India.
Taxation on Sale of Property by NRI’s (Non Resident Indians) is bit confusing subject. This confusion is caused due to lack of information and improper explanation.
TDS u/s 195: In case of sale of property by NRI, it is mandatory for buyer to deduct 20.66% TDS on the sale price of the property if capital gain is long term capital gain. In case of short term capital gain, TDS will be 33.99% irrespective of income tax slab of NRI as i mentioned earlier also. Buyer will deposit TDS with Income Tax Department. TDS is applicable even if value of property is less than 50 lakhs. For resident Indian seller TDS of 1% is applicable only if the property value is more than 50 lakhs.
Now anomaly in this rule is that NRI is liable to pay Capital Gain Tax only on the Capital Gain arising out of sale of the property but unfortunately TDS is deducted on the total Sale Value of the property. Therefore in most of the cases there are no GAINS as such from the sale of property and actually NRI incur LOSS from the sale of the property if TDS refund is not claimed. As a result, NRI has to go through the process of claiming TDS refund from Income Tax Department.