Capital gains in sale of property by NRIS in India

Non-resident Indians (NRIs) prefer an investment of real estate in India,but in case of sale they are unaware of how the proceeds get taxed.

Click here to know about Capital Asset and Capital Gain.

Capital gain arises when any taxpayer, whether resident or non-resident Indian (NRI), sells any property in India. Income-tax on such capital gain depends upon the period for which property is held by the taxpayer. The holding period is bifurcated as short term and long term as follows-

Short term Long term
Property sold within 3 years of purchase. Property sold after holding for more than 3 years.
Taxable at normal slab rate Taxable at 20% of the capital gain

Note- In case of long-term capital gain, indexation benefit will be available to the taxpayer.

E.g.:- Mr. Girish is staying in UK. He has invested in a property at Mumbai costing Rs. 5,00,000/-  in 2000-01 and a piece of land in Chennai worth Rs 35,75,000/- in the year 2013-14.

His investments for the financial year 2014-15 were as follows-

Particulars Property at Mumbai Property at Chennai
Nature of property Residential house Non-agricultural Land
Year of purchase 2000-01 2013-14
Cost Rs. 5,00,000/- Rs. 35,75,000/-
Year of sale 2014-15 2014-15
Sale consideration Rs. 28,50,000/- Rs. 40,00,000/-

How much capital gain and taxes thereon will arise in case of Mr. Girish?

Ans.:-

  1. The residential house at Mumbai was acquired in 2000-01 and sold in 2014-15 i.e. after holding for more than 3 years. Hence, the capital gain will be long-term capital gain. Indexation will also be available in this case.
  2. Whereas in case of land at Chennai, holding period was less than 3 years since the land is sold at the next year. Hence, the gain is short term capital gain.

Capital gain will be as follows-

Particulars Property at Mumbai Property at Chennai
Sale consideration Rs. 28,50,000/- Rs. 40,00,000/-
Nature of gain Long term Short term
Indexed cost of acquisition Rs. 12,61,084/- Rs. 35,75,000/-
(Rs. 5,00,000*1024/406) (No indexation for short term capital gain)
Capital gain Rs. 15,88,916/- Rs. 4,25,000/-
Tax rate 20% 30%
Capital gain tax Rs. 317,783/- Rs. 1,27,500/-

*It is assumed that Mr. Girish is in 30% tax bracket.

How can the capital gain tax be minimized?

The Capital gain tax cannot be avoided however it could be minimized with the help of proper tax planning. This could be done through capital gain exemptions.

Click here to know about Capital Gains Exemptions.

E.g.:- In the above mentioned example, if Mr. Girish invests in the RECL Bonds for Rs. 18,00,000/- within the date of filing of return. How much exemption Mr. Girish could avail?

Ans.:- If the taxpayer invests in bonds of RECL or NHAI within the due date of filing of return, he can claim the exemption under section 54EC.

In this case, the rate of tax in case of short-term capital gain is higher; the exemption of RECL bonds shall first be applied to capital gain on sale of land at Chennai. Hence, Rs. 18,00,000/- shall be apportioned first towards short-term capital gain of Rs. 4,25,000/- and the balance amount of Rs. 13,75,000/- shall be apportioned for long-term capital gain. Balance long-term capital gain of Rs. 2,13,916/- is taxable at 20%.

Click here to know more about “Taxation of NRIs”.

Summary
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Capital gains in sale of property by NRIS in India
Description
Capital gain arises when any taxpayer, whether resident or non-resident Indian (NRI), sells any property in India. Income-tax on such capital gain depends upon the period for which property is held by the taxpayer. The holding period is bifurcated as short term and long term as follows- 1) If property held for less than 3 years- Short term Capital gain 2) If property held for more than 3 years- Long term capital gain. THus, taxation of gain on sale of property is different for NRI's
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myITreturn
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