New Delhi, India – Non-Resident Indians (NRIs) looking to sell property in India are navigating an increasingly complex environment of updated tax laws, stringent banking compliance, and heightened government scrutiny. Recent changes in tax deduction protocols and foreign exchange regulations have created significant challenges, making it essential for sellers to understand the new rules to ensure smooth transactions and avoid financial penalties.
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The process of repatriating sale proceeds abroad is now governed by a multi-layered framework involving the Income Tax Act, the Foreign Exchange Management Act (FEMA), and Double Taxation Avoidance Agreements (DTAA). Failure to comply can result in substantial tax liabilities and delays in transferring funds.
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Understanding High TDS on Property Sales
One of the most significant hurdles for NRIs is the high rate of Tax Deducted at Source (TDS). When an NRI sells a property, the buyer is legally required to deduct TDS on the entire sale amount, not just the capital gains.
- For long-term capital gains (property held for more than 24 months), the TDS rate is 20%, plus applicable surcharge and cess.
- For short-term capital gains (property held for 24 months or less), TDS is deducted at 30%, plus surcharge and cess.
This upfront deduction on the gross sale value can lock up a large portion of the seller’s funds, even if the actual capital gain is small.
The Solution: The Lower TDS Certificate
To address the high upfront tax deduction, NRIs can use a crucial but often underutilized tool: the Lower TDS Certificate under Section 197 of the Income Tax Act. By applying for this certificate, an NRI can get the TDS calculated on the actual estimated capital gains rather than the total sale consideration.
The application is filed online via Form 13. After reviewing the documents, an assessing officer can issue a certificate instructing the buyer to deduct TDS at a lower or even a nil rate. This process typically takes three to six weeks and can save sellers a significant amount of money from being blocked with the tax department.
Navigating Capital Gains Tax Rules
Beyond TDS, NRIs must accurately calculate their capital gains tax liability.
- Long-Term Capital Gains (LTCG): Profits from selling property held for over two years are taxed at 20% (plus surcharge and cess). NRIs are eligible for indexation benefits, which adjust the property’s purchase price for inflation, thereby reducing the taxable gain.
- Short-Term Capital Gains (STCG): Profits from property sold within two years are added to the NRI’s total income and taxed at applicable slab rates, which can go up to 30%.
NRIs can also reduce their tax liability by reinvesting the capital gains in specified assets, such as purchasing another residential property in India (under Section 54) or investing in capital gains bonds (under Section 54EC).
Key Repatriation Limits and Rules
The amount of money an NRI can repatriate depends on how the property was acquired.
- Property Purchased as an NRI: If the property was bought using foreign funds (from an NRE or FCNR account), the entire sale proceeds can be repatriated without a limit. However, this is restricted to a maximum of two residential properties.
- Property Purchased as a Resident or Inherited: For properties purchased while the owner was a resident Indian, or for inherited properties, repatriation is capped at USD 1 million per financial year through an NRO account. Any amount exceeding this limit requires special approval from the Reserve Bank of India (RBI).
Leveraging Double Taxation Avoidance Agreements (DTAA)
NRIs residing in countries that have a DTAA with India can often claim tax benefits to avoid being taxed in both countries. To avail these benefits, an NRI must provide a Tax Residency Certificate (TRC) from their country of residence.
For example, residents of the UAE may face a lower tax burden due to the favorable India-UAE DTAA. Similarly, NRIs in the US or UK can claim a foreign tax credit for the taxes paid in India against their domestic tax liability.
Mandatory Documentation for Repatriation
The repatriation process requires strict documentation to ensure compliance.
- Form 15CA and 15CB: Form 15CA is a declaration submitted online to the Income Tax Department. For remittances exceeding ₹5 lakh in a financial year, it must be accompanied by Form 15CB, a certificate from a chartered accountant verifying the tax liability.
- Source of Funds: Banks are now conducting enhanced due diligence and require a clear paper trail proving the source of funds for the original property purchase.
Special Considerations for Inherited and Jointly Owned Property
- Inherited Property: Repatriating proceeds from inherited property falls under the USD 1 million annual limit. NRIs must provide extensive documentation, including a Legal Heir Certificate, a probated will (if applicable), and property mutation records.
- Joint Ownership: If a property is jointly owned, each NRI co-owner is treated as a separate individual for tax and repatriation purposes. Each owner can repatriate up to their respective share within the USD 1 million limit and must apply for their own Lower TDS Certificate.
Increased Scrutiny and the Need for Professional Advice
Tax authorities and banks have intensified their scrutiny of high-value NRI transactions, using data analytics to detect non-compliance. Given the complexity of the regulations, seeking professional advice from tax consultants and chartered accountants specializing in NRI transactions is highly recommended to ensure a smooth and legally compliant process.