While you're an NRI, you might be wondering what the tax implications of selling your property in India will be for your situation. However, the good news is that there are several steps you can take to make the process go as smoothly as possible.
To begin, you must first assess your financial situation. Although you aren't currently in India, you may still sell your property there. After that, you'll need to figure out how much money you'll need to pay in federal and state taxes.
Furthermore, there are several rules and regulations that you should be aware of before proceeding.
As a starting point, all of your sale proceeds must be deposited into any Indian bank account, which must be either an NRE (Non-Resident External) or an FCNR (Foreign Currency Non-Resident) account. 2 years after purchasing your first residential property in India, you must ensure that you do not buy another residential property in India.
Did you know?
The Reserve Bank of India (RBI) has clarified that non-resident Indians (NRIs) and overseas citizens of India (OCIs) are not needed to get prior approval before acquiring or selling immovable assets in the country, such as residences.
Strategies to Lower the Tax on NRI Property Sale in India
If you are an NRI and planning to sell your property in India, you should know the various tax planning strategies. The taxation on NRIs is similar to that of non-residents. The government has made the buyer responsible for taxing their property purchases complicated to track.
However, an NRI can invest in a property in a foreign country and still enjoy the tax benefits of NRI ownership. Unlike a resident Indian, the NRI cannot invest in a property in an unfamiliar location.
Here are some strategies to lower the tax on NRIs selling property in India.
- You must pay the 21% tax on the sale amount. After spending the tax, you can claim your refund. But in many cases, it can be cumbersome.
- The taxation on NRIs selling property in India depends on where they live. If you are an Indian resident, you can easily track your NRI seller, but the case is not the same with an NRI. You must deduct TDS for NRI property sales from the deal value. Then, you should file your returns with the Income Tax Department. There are various ways for you to do this.
- The government has made it mandatory for property buyers to deduct TDS on NRI property. While it is not challenging to track resident Indians, tracking NRIs is not so simple. As a result, the property buyer from a resident Indian must deduct 1% of the deal value as TDS and submit it to the Income-tax Department. This tax is deductible in most cases.
- The taxes on the sale of property by NRI in India are calculated differently. Long-term capital gains are taxed at 20%, and short-term gains are taxed at 30%. In the case of inherited properties, the purchase price must be the cost to the previous owner. On the amount received as a capital gain, the buyer must deduct TDS on the sale of property by NRI. The buyer is also liable to pay TDS on the purchase price if it was a gift from an NRI.
- Another strategy to lower the tax on NRIs selling their property in India is to invest the capital gain from the sale into another property in the country. It is possible to reinvest the money in tax-free bonds or other property. By doing so, the NRIs can save on TDS. This way, they can save a considerable amount of money on the TDS they are paying on their sale.
Also Read: What are the Benefits under DTAA for NRIs
Deductible TDS on NRI Property
The form of a deduction for taxable TDS on NRI property differs from that of the NRI selling the property. The NRI selling property in India needs to know the actual date of purchase and valuation of the previous owner's property.
Nevertheless, the NRI should get a TDS certificate before the transaction to avoid higher deductions or even penalties in case of wrong TDS calculation.
- Firstly, the buyer must know that they are responsible for deducting TDS on the sale of an NRI property. Buying a property from an NRI should be done with a clear understanding of TDS rules. An NRI buyer should be familiar with the Indian tax laws. It is relatively easy to track an Indian resident. However, tracking an NRI seller is a difficult task.
- Secondly, an NRI property can be classified as either a Capital Asset or a Short-Term Capital Asset. If the NRI has held the property for 24 months or more, the buyer will have to deduct TDS on that amount. If, however, the NRI has held the property for less than 24 months, the buyer will have to pay Short-Term Capital Gains tax. In either case, the NRI will need to pay the capital gains tax on the sale of the property.
Applicable TDS Rate on NRI Property Sale in India
The applicable TDS rate for NRI selling property in India depends on the type of property sold. For example, if the property is a luxury flat, the buyer must pay 20% in tax.
The buyer must obtain a TAN under section 203A of the Income Tax Act, 1961 before making the purchase.
The buyer must pay TDS in total during the sale, and the TDS rate must be stated in the sale deed.
- The first step of the property transaction with an NRI is to determine the residential status of the seller. The residential status of the seller is essential for calculating the TDS. This status varies from NRI to resident. For example, a person who is an Indian citizen but resides outside India would still be considered a non-resident for Income Tax purposes.
- The applicable TDS rate for NRI selling property in India is 1%. If the property is residential, then it is exempt from TDS.
- If it is a commercial property, the buyer must pay 20% of the purchase price in taxes.
- Furthermore, if the property is an NRI property, he must pay 30% of the cost. After 2 years, the buyer must pay the total amount.
TDS Amount Deducted Under Section 195
In the case of an NRI property sale, the amount of TDS to be deducted is based on the value of the sale. Follow its significant features below -
- The seller must provide the deductee with the TDS certificate in 15 days from the date of the sale.
- A TDS amount is a tax imposed on the sale of a property by an NRI. The buyer must file a form 16A with the seller to receive the proceeds of the sale.
- The TDS on the NRI property rate varies depending on the tax slab and the NRI residency. NRI must file a form 16A when selling their property.
- The buyer must obtain a Tax Deduction and Collection Account Number, or TAN. If the NRI has sold his property for at least 2 years, the buyer must deduct 20% of the total consideration value.
- In the case of fewer than 2 years, the buyer should deduct 30% of the TDS amount. The seller must also pay the health and education cess.
- The finance ministry has recently announced a higher surcharge to properties valued at more than ₹2 crores. This will lead to higher TDS rates for these property transactions.
TDS Payment Return and TAN Number
To file a TDS payment return and TAN number for an NRI, the payer, must first file a TDS payment return for the previous year.
The taxpayer will have to submit the same TDS payment returns for multiple years in most cases. The taxpayer should file a single form for each year in such cases.
- The taxpayer will need to file Form 27Q for non-salary payments made to an NRI. For the payer, this form is necessary since the NRI is an individual who makes payments.
- This is a form that should be filled out and submitted quarterly. The payer should enter the Tax Deduction Account Number (TAN) of the NRI to avoid the higher tax rate.
- The purchaser should also provide his PAN number to pay the higher tax rate.
An NRI account is a straightforward way to send money back to your native country. An NRO account is required for the NRI property sale in India. Your queries regarding the pricing and the tax consequences for NRIs wanting to sell homes in India have been addressed, and we hope you are happy with the answers. If you have any additional queries, please visit the Khatabook website.
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