One of the common concerns for a non-resident who intends to sell his / her residential property in India is regarding the tax implications on such sale in India.
The tax implications in case of sale of residential property in India by a non-resident is same as that for a resident individual i.e. capital gain, if any, will attract tax in India.
What differentiates the tax rate is the period for which the property has been held. If the property is held for more than 2 years, it is treated as a long-term capital asset and the gain is considered to be long-term in nature which is taxable at 20% (plus applicable surcharge and cess). If the property is held for up to two years, it becomes a short-term capital asset and the gain is considered to be short-term which is taxable at seller’s applicable tax rates.
The period of holding also determines how the capital gain is to be computed. In case of short-term capital asset, capital gain is computed as the difference of sale consideration (net of expenses incurred wholly and exclusively in connection with transfer of the capital asset); and cost of acquisition & cost of improvement.
While in case of sale of long-term capital asset, the cost of acquisition and improvement are adjusted for inflation using the inflation index as notified by the Central Government (CII) each year and the gain is accordingly determined.
Take an example of Mr. X, who is a Non Resident of India and has taxable income of Rs 75 lakh in India during the FY 2021-22. He is planning to sell his residential property in Delhi which he purchased in 2005 for Rs 1.2 crores. The sale consideration agreed with Mr. Y is Rs 3.4 crores. Assuming the capital gain is Rs 40 lakhs (as the cost is inflated using CII), he will have to pay tax at 22.88% (20% tax rate plus 10% surcharge plus 4% cess) on the said capital gain of Rs 40 lakh.
While the taxability in India is the same for both resident and non-resident, the withholding tax provisions differ for a non-resident. For a non-resident seller, tax is required to be deducted at source at 20% (plus applicable surcharge and cess) in case of sale of long-term property and at 30% (plus applicable surcharge and cess) in case of sale of short-term property.
There may arise a practical challenge for the seller where the tax incidence on capital gain is lower due to availability of carry-forward loss, other current year capital loss etc. In such a case, there is a provision under the Indian tax law where the seller can apply for a lower rate or Nil tax withholding certificate from his / her jurisdictional tax officer online by filing a form, Form 13.
There are also some exemptions available under the Indian tax law in case sale of property results in a long-term capital gain. The tax burden on such long-term gain can be lowered by investing in specified assets like another residential property and / or specified bonds like NHAI, REC etc as per the prescribed conditions and timelines.
On the other hand, if the sale of property results in a capital loss, such loss (short-term / long-term) cannot be offset with other income.
Short-term capital loss can be set off against any other gain (short-term / long-term). On the other hand, long-term capital loss can only be set off only against other long-term capital gains. The balance loss is carried forward to following 8 financial years and can be set-off in the same manner. To claim carry-forward of losses, the tax return must be filed within the prescribed time limits.
So, before making the bittersweet (sometimes) decision of selling their home in India, the non-residents may want to consider the tax implications on such sale and how best to manage that.
(The author is Tax Partner and National Leader – People Advisory Services, EY India. Aanchal S Gupta, Senior tax professional with EY has also contributed to this article. The views expressed are personal)
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