Tax rules for NRIs on sale of properties located in India

The Income Tax (IT) Act, 1961 provides for taxation on income arising from sale/transfer of capital assets (i.e., capital gains), including shares, securities, immovable property, jewellery, etc., while certain categories such as stock-in Trade, movable property, specified bonds, etc., do not qualify as capital assets.

Tax on capital gains is determined based on the period for which the asset is held. As a thumb rule, assets held for more than 36 months are not short-term assets. However, there are some exceptions (see table above). The capital gain is calculated by subtracting the cost of acquisition (COA) of the asset and the cost of transfer of the asset from the sale consideration. In some cases, the IT Act also allows adjustments in the COA in line with inflation/fluctuation in exchange.

Capital gains computed for non-residents are taxed at specified rates depending on the nature of the asset (see table above). In addition to the above, a surcharge and health and education cess will be levied at applicable rates and the effective tax rate may be up to 42.74%. However, in case of capital gains on sale of listed shares, the surcharge is limited to 15%. In the Union Budget 2022, it has been proposed that the 15% surcharge cap will be increased to all long-term capital gains (LTCGs) from the financial year 2022-23.

The IT Act has special provisions on investment income earned by NRIs from investments in specified assets (shares, debentures, deposits in an Indian company, etc.) acquired in convertible foreign currency and taxation on LTCG. Further, individuals have to pay advance tax on capital gains earned by them only from the quarter in which the capital gain is generated.

Non-residents should also look into the taxation of capital gains under double taxation avoidance agreements or tax treaties that India has entered into with various countries. India’s tax treaties with the US and UK require capital gains to be taxed in accordance with the domestic tax laws of the respective countries, while treaties with Singapore and Mauritius have specific provisions regarding the right to taxation based on the nature of capital assets Huh. In the case of immovable property, the right of taxation is given to the country where the property is located.

Note that the benefits of the Treaty are available only to persons who are residents of at least one of the States Parties to the Tax Treaty. Also, some of these treaties provide that the person shall not be eligible to receive the benefit if the person has arranged his affairs for the main purpose of availing the benefit of the treaty. In view of the above, NRIs should carefully evaluate every sale transaction of their property located in India to determine taxability and maintain proper documentation to ensure proper tax compliance.

Amarpal S Chadha is Partner and India Mobility Leader, People Advisory Services, EY.