Capital gains tax guide for NRIs

Even though NRIs need to pay capital gains tax, there are several exemptions that they can avail to reduce their taxes.

Kavya Balaji   /   April 10, 2020
Capital gains tax guide for NRIs

When you sell an asset for a value that is higher than the amount you purchased it for, you incur a capital gain. Assets include equities and property. Non-Resident Indians (NRI) who have assets in India needs to pay taxes on their capital gains. This could be taxes on either Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG). The definition for STCG and LTCG will differ based on the asset.

Property

When a house property is sold by an NRI after a time of 2 years (reduced from 3 years in Budget 2017) from the date it was purchased, it is considered as LTCG. If the asset has been held for less than 2 years, it will be STCG.

Tax implications will be applicable if NRIs inherit properties on account of legacy. In the event that the property has been inherited, make sure to consider the date of acquisition of the first owner for ascertaining whether it’s LTCG or STCG. In such a case the cost of the property will be the cost of the past owner.

LTCG are taxed at 20% and STCG will be taxed at the pertinent personal assessment tax rates for the NRI. This will depend on the absolute income which is assessable in India for the NRI.

At the point when an NRI sells property, the purchaser is subject to Tax Deducted at Source (TDS) of 20%. If the property has been sold before 2 years from the date of purchase, a TDS of 30% will be applicable.

However, NRIs are permitted to claim exceptions under Section 54 and Section 54EC on LTCG from sale of house property in India.

Exemptions

To claim exemption under Section 54, NRIs need to invest the gains in a house property. Unlike popular perception, you neednít reinvest all of the sale proceeds in a house property. You need to only invest the LTCG amount to claim the exemption. Your exemption will be limited to LTCG amount.

Note that NRIs can buy the property possibly one year before the sale or 2 years after the sale of the property. NRIs are also permitted to put the gains in the construction of a property. However, the construction must be finished within 3 years from the date of sale.

The house property purchased should be in India for the NRI to claim the exemption. The exemption will not be applicable for properties purchased or constructed outside India.

If you are able to invest your LTCG by the date of filing of your income tax return for the financial year in which you have sold your property, you can deposit the money in a capital gains account. In your income tax return, by claiming this as an exemption from your capital gains you donít need to pay taxes.

If you can save the tax on LTCG by investing them in certain bonds. These include bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC). These bonds have a tenure of 5 years and must not be sold before that. Note that to claim this exemption, you will have to invest the LTCG in the bonds before the return filing date. NRIs are allowed to invest a maximum of Rs. 50 lakhs in a financial year in these bonds.

Mutual Funds

For tax on equity oriented mutual funds purchase by NRIs, LTCG is for investments that are more than 1 year. LTCG will be taxed at 10% if the gains exceed Rs. 1 lakh. STCG tax is 15%.

For debt funds, LTCG is for investments that are more than 3 years. LTCG is 20% with indexation benefit and STCG is 30% if the NRI belongs to the highest tax bracket.

Tax Exemption Certificate (TEC)

If an NRIís actual tax liability is less than the rate of tax prescribed under the Income Tax Act, the NRI can get a TEC from the income tax department. TEC helps eliminate the need to seek refund and any delays in refund.

NRI will have to write to the Income Tax authorities and the application needs to be sent to the authorities in the same jurisdiction where the NRI holds his/her PAN. If the NRI is purchasing a property to get a tax exemption, the allotment letter has to be submitted to the tax authorities. If there is no allotment letter, NRIs can provide a copy of the payment receipt.  

Here are scenarios where the NRI can apply for TEC:

ScenariosTDS (%)Actual tax liability (%)
STCG/LTCG on sale of property and re-investment in property/bonds20%/30%NIL / Lower than rate applicable
STCG/LTCG on sale of securities15%/30%NIL / Lower
Rental income30%NIL / Lower
Interest Income on NRO Deposits up to basic tax exemption limit30%NIL

The TEC certificate will be binding on the one who is required to deduct tax.

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