NRIs selling inherited property in India: Key tax changes to know

For Non-Resident Indians (NRIs), income earned abroad is generally not taxable in India. However, when it comes to profits from selling inherited property, taxes do apply.

If you're considering selling your ancestral home in India, it’s important to stay updated on the tax rules and changes to avoid unexpected tax liabilities.

Taxation on selling inherited property

When selling inherited property, the primary concern is capital gains tax, which is applicable to the profit made from the sale. As per Dubai-based tax advisors, the sale of inherited property is subject to long-term capital gains tax (LTCG) if the property has been held for more than three years.

The profit from such a sale is taxed at a fixed rate of 20%, plus any applicable surcharge and cess. While 'cess' is levied for specific government purposes, the 'surcharge' is an additional tax on higher-income taxpayers.

However, as of July 2024, one major change in the tax landscape is the removal of indexation benefits, which used to adjust the property’s cost for inflation.

Changes in capital gains tax: No more indexation

Previously, when calculating long-term capital gains tax, NRIs were allowed to use indexation, which adjusted the property’s original cost to account for inflation. This adjustment helped reduce the taxable capital gains, making the tax burden lighter.

However, in July 2024, the Indian government removed the indexation benefit for capital gains tax. This means that property owners now must calculate the sale profit without factoring in inflation adjustments, leading to higher taxable gains.

Calculating capital gains without indexation

Without the benefit of indexation, the process of calculating capital gains has become more straightforward but potentially more taxing.

Since inherited property was not purchased by the current owner, the cost of acquisition is determined based on the Fair Market Value (FMV) of the property as of April 1, 2001. This FMV will be the cost for calculating long-term capital gains, even though indexation no longer applies.

This change makes it more crucial for NRIs to obtain an accurate valuation of the property as of April 1, 2001, from a government-registered valuer. This FMV will be used to compute the taxable profit when selling the inherited property.

Tax saving options for NRIs

Despite the removal of indexation, NRIs still have some ways to reduce their tax burden when selling ancestral property. If the capital gains from the sale are less than Rs 20 million (approximately AED 900,000), NRIs can reinvest the gains in up to two residential properties in India to claim tax exemption.

Alternatively, NRIs can also invest in capital gains bonds within six months of the sale to reduce their taxable income. The maximum amount eligible for investment in these bonds is capped at Rs 5 million (about AED 225,000) per year.

Key takeaways

Selling inherited property in India has become slightly more complex for NRIs due to the removal of indexation benefits in 2024. While the process of calculating long-term capital gains tax remains similar, without indexation, the tax burden may be higher.

Understanding the updated tax rules, ensuring accurate property valuation, and exploring tax-saving options like reinvesting in property or capital gains bonds will help minimize your tax liability. Stay informed and consult with tax professionals to make the most of your property sale.