Dubai: If you’re a Non-Resident Indian or NRI looking to sell your house property in India, and you’re often confused about tax-related implication, let’s find out how much tax is payable and deductible.
Why am I paying tax in the first place?
NRIs who are selling residential property that is situated in India have to pay tax on the ‘capital gains’. But what are ‘capital gains’?
Capital gains are the profits from the sale of an asset, like a piece of land in this case, and generally are considered taxable income. In 2020, the capital gains tax rates are either 15 per cent or 20 per cent for most assets held for more than a year.
Capital gains from a sale of a property in India are usually always taxable in the country. This is also true for non-resident Indians who own a property in India.
The tax that is payable on the gains an NRI receives from selling a property depends on whether it’s a ‘short term’ or a ‘long term’ capital gain.
In case the property has been inherited, remember to consider the date of purchase of the original owner for calculating whether it’s a long term or a short term capital gain. In such a case the cost of the property shall be the cost to the previous owner.
Long term capital gains are taxed at 20 per cent and short term gains shall be taxed at the applicable income tax slab rates for the NRI based on the total income which is taxable in India for the NRI.
When an NRI sells property, the buyer is liable to deduct tax (TDS or tax deducted at source) at 20 per cent of the transaction amount. In case the property has been sold before 2 years, which is reduced from the date of purchase, a tax of 30 per cent shall be levied.
How do I save money on capital gain tax on the sale of property?
An NRI is also allowed to claim an exemption on capital gains, where these gains are invested for purchasing or constructing a new house property.
An exemption can be claimed to the extent that such gains have been invested. The new property must be purchased either one year before or two years after the date of transfer. In case of a constructed property, it should be constructed within three years from the date of transfer.
As the sale of capital assets like property can be an important source of income or revenue, it is essential to comprehend how to save on capital gain tax on the sale of the property to maximise the money made.
So to help you save capital gain tax on sale on the property, here are a few ways experts widely recommend.
• Put the money you earned into bonds within six months of sale deal
If you have recently traded your property and want to save on tax, you can further invest in specified financial assets. Investment in such financial assets holds power to save your hard earned capital gains as these long term capital gains are exempted under the Indian income tax regulations.
To obtain this tax exemption on your capital gains, you should invest the sum earned in bonds within 6 months of the transfer of the sum and realisation of gains. In addition to this, the funds are required to be invested in these bonds for a minimum of five years as a lock-in period.
If you keep the funds invested in these bonds for a period beyond the lock-in period of five years, you will not gain any interest, and the redemption of these capital gains bonds will become automated.
The other limitations in investing your capital gains on property sale are that you cannot assign these bonds to any other party or contract or trade them.
• NRIs could also invest in CGAS (Capital Gains Account Scheme)
Investing in Capital Gains Account Scheme (CGAS) is another means to save capital gains tax on property sales. This scheme is perfect for individuals who cannot invest in a brand-new property before their income tax return filing, and this scheme provides a huge relief to the taxpayers.
You can invest in this CGAS scheme for three years, and throughout this duration, you can utilise the capital gains for buying or building a residential house on your property. The deposit in this CGAS account must be made before filling or registering an income tax return, and then this investment in the Capital Gain Account Scheme (CGAS) must be specified in the income tax return.
This CGAS account can be opened with your designated bank. However, a regional bank or cooperative bank are not qualified for opening this account. The deposit in this account can either be made through monthly instalments or lump sum to save taxes on capital gains.
• NRIs can also ‘set-off’ any losses made when selling your property
This is again the most suitable way to save tax on capital gains resulting from the sale of your property. It enables you to set off all capital gains or profits against the capital losses you incurred earlier.
When you calculate your capital gains and where the sale receipts from the property asset is less than the money you spent when you bought the property in addition to the expenses on property transfer, you incur a capital loss (instead of a capital gain).
Capital losses that exceed capital gains in a financial year may be used to offset or ‘set-off’ ordinary taxable income.
Only long-term capital gains can be used to offset capital losses. You can offset short-term capital losses against long-term capital gain. You can carry the loss forward for up to 8 years after the year of the assessment. Only income from house property can be adjusted, according to Indian income tax regulations.
So by benefiting from the tax-saving schemes discussed above, you can receive the maximum advantage on your property investment.