Taxation of Capital Gains on sale of Residential property by NRIs

It has become kind of a trend these days that NRIs who get citizenship in any other country come to India to sell their purchased or inherited residential properties. This mostly happens if the NRIs do not visit India frequently and also don’t want to rent out their properties as they do not want to burden their relatives and friends with the task of paying property tax, maintenance and society dues and find it more prudent to encash the capital value of their properties.

Finding buyer for such properties is not very difficult; what creates difficulty is the confusion regarding the rules and regulations that comes into play while remitting the funds back to the country of residence.

The main aspects that come into play while selling the residential property are:

Taxation of gains arising out of the sale

LTCG arises when a capital asset is sold after 2 years (effective from 1st April 2017) from the date of purchase of the asset. Long-term capital gains are applicable to everyone whether Resident or Non-resident and are taxed at the rate of 20%. LTCG is the difference between sale value and indexed cost of purchase where, Indexed cost of purchase is the cost of purchase adjusted to inflation.
In case of inherited property, the date and cost of purchase for computing the period of holding as well as cost of purchase is taken to be the date and cost to the original owner.

Short-term Capital gain arise when the asset is sold before 2 years from the date of purchase and the buyer is required to deduct a TDS of 30% while making payment to the seller.

In case of LTCG, the buyer is liable to deduct a TDS of 20% while making payments to the NRI.

NRI can get a waiver of the TDS If he re-invests the LTCG 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.

After re-investing the amount of LTCG, NRI has to make application for grant of exemption certificate under section 195 with the proof of re-investment.

Exemptions if any available to NRIs

Two exemptions are available to NRIs for saving the tax on Long-term capital gain which are provided under Section 54 and section 54EC

According to Section 54 If NRI sells a residential property after 2 years from the date of purchase and reinvest the proceeds into another residential property within two years from the date of sale, LTCG will be exempt to the extent of the cost of new property. The new property must be located in India; only then the NRI will be granted the exemption under Section 54.

According to Section 54EC if an NRI sells any long term asset after two years from the date of purchase and invests the amount of LTCG in bonds of NHAI or RECL within six months of the date of sale, he or she will be exempt from capital gains tax. The bonds will remain locked in for a period of three years.
Repatriation of sale proceeds

Generally the NRIs can repatriate the sale proceeds in case the LTCG is not invested to the country of their residence subject to some conditions or in some cases permission is taken from RBI.


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