WHENEVER A NON-RESIDENT Indian (NRI) sells a property, the buyer has to deduct tax on the gross sale consideration rather than on the actual taxable gains. However, there’s a way out to ensure that tax is withheld only on the real capital gains arising from the sale and not on the entire transaction value.
For this, an NRI has to make an application to the income tax department before the actual transaction for issue of a lower deduction certificate under Section 197 of the Income-Tax Act, 1961. This application has to be made in Form 13. The department will issue a certificate directing the buyer to deduct tax at source (TDS) only on the taxable portion of the capital gains, or at a reduced rate.
Sandeep Jhunjhunwala, partner, Nangia Andersen, says buyers deduct tax on the gross sale consideration rather than on the actual taxable gains in case of buying a property from an NRI. “This results in significant excess withholding, leading to cash-flow challenges for the seller who can claim refunds only after filing tax returns,” he says. The Lower Deduction Certificate thus makes the excessive tax deduction unnecessary.
Filing returns
An NRI has to mandatorily report capital gains from the transfer of immovable property in India in income-tax return filings in Form ITR-2. Such gains must be disclosed in Schedule CG, with particulars of the transaction including the full value of consideration received, cost of acquisition, details of the transferee (name and PAN), and identification particulars of the property transferred.
Correct and complete disclosure is critical, as the TDS by the purchaser is mapped to the seller’s PAN and reconciled within the tax reporting system.
Calculating capital gains tax
When an NRI sells a residential property in India, the tax implications are determined based on the period for which the property was held. If the property is sold within 24 months of acquisition, the resulting gain is treated as short-term capital gain (STCG) and taxed at the applicable income tax slab rate for the individuals.
For properties held longer than 24 months, the gain qualifies as long-term capital gain (LTCG) and will be taxed at a flat rate of 12.5% plus surcharge and cess, notably without the benefit of indexation.
Tax credit on capital gains
Under most of the Double Taxation Avoidance Agreements (DTAAs), the right to tax capital gains rests with both the source country (India, in this case) and the country of residence. As a result, such gains may be taxed in both jurisdictions.
Sandeep Sehgal, partner, Tax, AKM Global, a tax and consulting firm, says where foreign tax has been paid, NRIs are generally eligible to claim relief in India through Foreign Tax Credit (FTC), by filing Form 67 as and when applicable to them. “Notably, the precise treatment, however, depends on the specific provisions of the DTAA between India and the country of residence,” he says.
Reducing tax liability
There are several provisions that allow NRIs to reduce their tax liability. Under Section 54 (Reinvestment in Residential Property), if an NRI purchases another residential property within two years (or constructs one within three years) from the date of sale of old property, he can claim an exemption on the LTCG up to the amount invested in the new property.
If the reinvestment is pending, the gains may be deposited in a Capital Gains Account Scheme before the due date of filing the ITR. This will allow him to claim the exemption until he finalises the investment. If he sells the newly purchased or constructed property within three years, the exemption claimed will be withdrawn.
They can invest the LTCG in specified bonds issued by the National Highways Authority of India or Rural Electrification Corporation within six months from the date of sale of residential property. The maximum investment limit is `50 lakh, and these bonds have a lock-in period of five years. If the bonds are sold within five years, then the exempted LTCG will be taxable in the year of transfer.
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