Capital Gains Tax for NRIs: Selling Immovable Property & Investments in India
Capital Gains Tax for NRIs in India
1. Brief on the topic:
For Non-Resident Indians (NRIs), India has always been a preferred option to invest in real estate and other investments like shares and mutual funds. The reason for that may be high growth potential, future returns or ancestral attachments.
However, the implications of capital gains on sale of such investments in India and its taxation, especially when selling immovable property or shares or mutual funds are often complicated or overlooked. This article aims to elucidate capital gains tax for NRIs by explaining the applicable rules, tax rates, exemptions, and compliance procedures when selling immovable property and shares and mutual funds in India.
2. Tax implications of selling immovable property in India
How to determine capital gains on sale of immovable property:
Capital gains on sale of immovable property will be long-term or short-term depending on whether the immovable property is a long-term capital asset or short-term capital asset, which shall be determined as follows:
Holding Period of Immovable Property
Type of Capital Asset
More than 24 months
Long-Term Capital Asset
24 months or less
Short-Term Capital Asset
An NRI may sell any immovable property in India, like agricultural land, residential or commercial. Such immovable property can be sold to a person who is resident in India or another NRI (Note: agricultural land can only to be sold to another resident in India).
When an NRI sells immovable property in India, capital gains may arise and the tax implications on such capital gains depend on various factors such as the holding period, type of immovable property, cost of acquisition, cost of improvement, mode of acquisition etc. Below are the key points to understand the tax implications:
The capital gain from the sale of immovable property shall be calculated as follows:
Particulars
Amount
Sale Consideration
xxx
Less: Expenditure incurred and exclusively in connection with such transfer (e.g. Transfer, Fees, Brokerage, Commission, etc.)
(-) xx
Net Sale Consideration
xxx
Less: Cost of Acquisition
(-) xx
Less: Cost of Improvement
(-) xx
Capital Gains
Xx
Note: Under the Income-tax Act, 1961, rural agricultural land is not classified as a capital asset, provided it meets specific location and population criteria. Consequently, capital gains from its transfer are not taxable.
In cases of inheritance or gifting, the holding period and cost of acquisition/improvement of the previous owner are considered for capital gains computation. For properties acquired or improved before April 1, 2001, taxpayers may opt for the fair market value (FMV) as on that date, subject to it not exceeding the stamp duty valuation, or use the actual cost—whichever is higher.
Capital Gains Tax and TDS on Sale of Immovable Property :
The tax on capital gains on sale of immovable property may be classified into long-term capital gain or short-term capital gain based on the period of holding of the immovable property.
Further, in the case of sale of immovable property, the buyer is responsible for deducting and remitting the TDS to the government. In case of non-resident Indian, the rate of TDS shall depend on holding period of the immovable property.
Below are the tax rates on capital gains:
Particulars
Short-term
Long-term
(If transferred on or after July 23, 2024)
Tax Rate
As per applicable slab rate – highest slab rate being 30%
12.5%
(without Indexation)
TDS rate
30%
12.5%
Note: The abovementioned tax rate shall be increased by the applicable surcharge, health and education chess.
3. Tax implications on sale of shares and mutual funds
NRIs can also invest in securities like shares and mutual funds.
Capital gain tax and TDS on shares and mutual funds
Any gains on sale of shares and mutual funds earned by NRIs is subject to taxation in India. The tax implications on the sale of shares and mutual funds depend on several factors including period of holding, type of security, debt-equity allocation in a mutual fund, etc.
The tax on capital gains on sale of shares and mutual funds may be classified into long-term capital gain or short-term capital gain based on the period of holding. Further, capital gains earned by non-residents is also subject to withholding tax.
Below is a summary of the tax rates and TDS rates on capital gains on sale of equity shares and mutual funds:
Type of investment
Holding
Long-term
Short-term
Period of holding
Tax rate
TDS rate
Period of holding
Tax rate
TDS rate
Equity Shares
Listed equity shares
(STT paid)
NA
more than 12 months
12.50% over ₹1.25 lakh
12.50%
12 months or less
20%
20%
Unlisted equity shares
NA
more than 24 months
12.50%
12.50%
24 months or less
Slab rate
30%
Mutual Funds
Equity oriented mutual fund
Equity holding: 65% or more
more than 12 months
12.50% over ₹1.25 lakh
12.50%
12 months or less
20%
20%
Specified mutual fund
(acquired after
01-Apr-23)
Debt holding: more than 65%
Deemed Short-term
Slab rate
30%
Deemed Short-term
Slab rate
30%
Other mutual fund
Other than above
more than 24 months
12.50%
12.50%
24 months or less
Slab rate
30%
Note: The abovementioned tax rate shall be increased by the applicable surcharge, health and education ches
4. How to claim exemptions on capital gains
There are several exemptions available under the Act that allow to reduce the tax liability on capital gains. Some key exemptions are tabulated below:
Long-term capital gains on sale of
Investment in
Conditions
Amount of exemption
Residential house
Two residential houses in India
(Refer Note 1)
Purchase of new residential property: within 1 year before or 2 years after the date of sale.
Construction of new residential property: within 3 years from the date of sale.
Lower of:
· Long-term capital gains
· Amount invested in new asset
· ₹ 10 crores
Land or Building or both (one or more)
Tax saving bonds issued by:
· National Highways Authority of India (NHAI)
· Rural Electrification Corporation Ltd. (RECL).
· Any other Bonds as may be notified by the Central Government.
· Investment is to be made within 6 months from the date of sale.
· Bonds are to be held for a period of 5 years.
Lower of:
· Long-term capital gains
· Amount invested in new asset
· ₹ 50 lakhs
Any long-term capital asset other than residential house
(Refer Note 3)
One residential house in India.
Purchase of new residential property: within 1 year before or 2 years after the date of sale.
Construction of new residential property: within 3 years from the date of sale.
Lower of:
· Long-term capital gains
· Long-term capital gains in the same proportion as to the amount invested in new asset bears to Net sale consideration
· ₹ 10 crores.
Note:
From financial year 2020-21, the exemption can be claimed for the purchase or construction of 2 house properties if the amount of long-term capital gains does not exceed ₹ 2 crores. This option can be availed once in a lifetime, i.e. once this option is claimed, it cannot be further availed for the same or any succeeding financial years.
If the new residential property cannot be purchased or constructed before the due date of furnishing of return of income for the year of transfer, one has to hold/deposit with the Bank, the unutilized capital gain proceeds of the old property in Capital Gains Account Scheme. The said amount has to be utilized for purchase of new residential property as per the period mentioned in above table. Any unutilized amount shall be charged as capital gain of the previous year in which the specified period expires.
If the new residential house is sold within 3 years of its date of purchase or constructed, the exemption claimed will be revoked, and the earlier exempted gain will be taxed in the year of sale.
5. How to claim exemption from TDS
An NRI can obtain a Tax Exemption Certificate (‘TEC’) or Lower Deduction Certificate (‘LDC’) from the Jurisdictional Assessing Officer (‘AO’) on application made to him along with the relevant documents as prescribed under the Income-tax Act, 1961 and Income-tax Rules, 1962.
It allows the payer, i.e. buyer of the property or security, to deduct tax at source at a lower or NIL rate (instead of the standard 30% or 12.5%) from amount paid to a non-resident (e.g., sale proceeds from sale of immovable property or sale of shares and mutual funds). It is valid for one financial year (April 1 to March 31), and binding on the payer unless cancelled by the AO.
6. Things to keep in mind for taxation of capital gains on sale of property, shares and mutual funds
Tax Deduction at Source (TDS):
TDS applies to both long-term and short-term capital gains at prevailing rates. Taxpayers may seek exemption or a reduced TDS rate by submitting a Tax Exemption Certificate (TEC) or Lower Deduction Certificate (LDC) from the Income Tax Department.
Carry forward and set-off of capital loss:
Long-term capital loss can be set off only long-term capital gain. However, short-term capital loss can be set off against long-term or short-term capital gain. Unabsorbed losses can be carried forward for up to eight assessment years, subject to filing the return within the due date
If you're liable to pay capital gains tax in both India and your country of residence, check if a DTAA exists between the two countries. DTAA provisions may allow you to claim relief in India and a Foreign Tax Credit (FTC) in your resident country for taxes paid in India.
Capital gains taxation in India for NRIs can be intricate, but with the right knowledge and planning, it is entirely manageable. Understanding your tax obligations, claiming eligible exemptions, and ensuring timely compliance are key to maintaining tax-efficient and hassle-free investments. Given the nuances involved—especially in areas like TDS, DTAA benefits, and capital loss adjustments—it is highly advisable to consult a Chartered Accountant (CA) or tax advisor. Professional guidance can help navigate the finer details and ensure your capital gains are handled accurately and optimally.
Success
Failure
1. Brief on the topic:
For Non-Resident Indians (NRIs), India has always been a preferred option to invest in real estate and other investments like shares and mutual funds. The reason for that may be high growth potential, future returns or ancestral attachments.
However, the implications of capital gains on sale of such investments in India and its taxation, especially when selling immovable property or shares or mutual funds are often complicated or overlooked. This article aims to elucidate capital gains tax for NRIs by explaining the applicable rules, tax rates, exemptions, and compliance procedures when selling immovable property and shares and mutual funds in India.
2. Tax implications of selling immovable property in India
Capital gains on sale of immovable property will be long-term or short-term depending on whether the immovable property is a long-term capital asset or short-term capital asset, which shall be determined as follows:
An NRI may sell any immovable property in India, like agricultural land, residential or commercial. Such immovable property can be sold to a person who is resident in India or another NRI (Note: agricultural land can only to be sold to another resident in India).
When an NRI sells immovable property in India, capital gains may arise and the tax implications on such capital gains depend on various factors such as the holding period, type of immovable property, cost of acquisition, cost of improvement, mode of acquisition etc. Below are the key points to understand the tax implications:
The capital gain from the sale of immovable property shall be calculated as follows:
Note: Under the Income-tax Act, 1961, rural agricultural land is not classified as a capital asset, provided it meets specific location and population criteria. Consequently, capital gains from its transfer are not taxable.
In cases of inheritance or gifting, the holding period and cost of acquisition/improvement of the previous owner are considered for capital gains computation. For properties acquired or improved before April 1, 2001, taxpayers may opt for the fair market value (FMV) as on that date, subject to it not exceeding the stamp duty valuation, or use the actual cost—whichever is higher.
Capital Gains Tax and TDS on Sale of Immovable Property :
The tax on capital gains on sale of immovable property may be classified into long-term capital gain or short-term capital gain based on the period of holding of the immovable property.
Further, in the case of sale of immovable property, the buyer is responsible for deducting and remitting the TDS to the government. In case of non-resident Indian, the rate of TDS shall depend on holding period of the immovable property.
Below are the tax rates on capital gains:
(If transferred on or after July 23, 2024)
(without Indexation)
Note: The abovementioned tax rate shall be increased by the applicable surcharge, health and education chess.
3. Tax implications on sale of shares and mutual funds
NRIs can also invest in securities like shares and mutual funds.
Any gains on sale of shares and mutual funds earned by NRIs is subject to taxation in India. The tax implications on the sale of shares and mutual funds depend on several factors including period of holding, type of security, debt-equity allocation in a mutual fund, etc.
The tax on capital gains on sale of shares and mutual funds may be classified into long-term capital gain or short-term capital gain based on the period of holding. Further, capital gains earned by non-residents is also subject to withholding tax.
Below is a summary of the tax rates and TDS rates on capital gains on sale of equity shares and mutual funds:
Type of investment
Holding
Long-term
Short-term
Period of holding
Tax rate
TDS rate
Period of holding
Tax rate
TDS rate
Equity Shares
Listed equity shares
(STT paid)
NA
more than 12 months
12.50% over ₹1.25 lakh
12.50%
12 months or less
20%
20%
Unlisted equity shares
NA
more than 24 months
12.50%
12.50%
24 months or less
Slab rate
30%
Mutual Funds
Equity oriented mutual fund
Equity holding: 65% or more
more than 12 months
12.50% over ₹1.25 lakh
12.50%
12 months or less
20%
20%
Specified mutual fund
(acquired after
01-Apr-23)
Debt holding: more than 65%
Deemed Short-term
Slab rate
30%
Deemed Short-term
Slab rate
30%
Other mutual fund
Other than above
more than 24 months
12.50%
12.50%
24 months or less
Slab rate
30%
Note: The abovementioned tax rate shall be increased by the applicable surcharge, health and education ches
4. How to claim exemptions on capital gains
There are several exemptions available under the Act that allow to reduce the tax liability on capital gains. Some key exemptions are tabulated below:
Long-term capital gains on sale of
Investment in
Conditions
Amount of exemption
Residential house
Two residential houses in India
(Refer Note 1)
Purchase of new residential property: within 1 year before or 2 years after the date of sale.
Construction of new residential property: within 3 years from the date of sale.
Lower of:
· Long-term capital gains
· Amount invested in new asset
· ₹ 10 crores
Land or Building or both (one or more)
Tax saving bonds issued by:
· National Highways Authority of India (NHAI)
· Rural Electrification Corporation Ltd. (RECL).
· Any other Bonds as may be notified by the Central Government.
· Investment is to be made within 6 months from the date of sale.
· Bonds are to be held for a period of 5 years.
Lower of:
· Long-term capital gains
· Amount invested in new asset
· ₹ 50 lakhs
Any long-term capital asset other than residential house
(Refer Note 3)
One residential house in India.
Purchase of new residential property: within 1 year before or 2 years after the date of sale.
Construction of new residential property: within 3 years from the date of sale.
Lower of:
· Long-term capital gains
· Long-term capital gains in the same proportion as to the amount invested in new asset bears to Net sale consideration
· ₹ 10 crores.
Note:
From financial year 2020-21, the exemption can be claimed for the purchase or construction of 2 house properties if the amount of long-term capital gains does not exceed ₹ 2 crores. This option can be availed once in a lifetime, i.e. once this option is claimed, it cannot be further availed for the same or any succeeding financial years.
If the new residential property cannot be purchased or constructed before the due date of furnishing of return of income for the year of transfer, one has to hold/deposit with the Bank, the unutilized capital gain proceeds of the old property in Capital Gains Account Scheme. The said amount has to be utilized for purchase of new residential property as per the period mentioned in above table. Any unutilized amount shall be charged as capital gain of the previous year in which the specified period expires.
If the new residential house is sold within 3 years of its date of purchase or constructed, the exemption claimed will be revoked, and the earlier exempted gain will be taxed in the year of sale.
5. How to claim exemption from TDS
An NRI can obtain a Tax Exemption Certificate (‘TEC’) or Lower Deduction Certificate (‘LDC’) from the Jurisdictional Assessing Officer (‘AO’) on application made to him along with the relevant documents as prescribed under the Income-tax Act, 1961 and Income-tax Rules, 1962.
It allows the payer, i.e. buyer of the property or security, to deduct tax at source at a lower or NIL rate (instead of the standard 30% or 12.5%) from amount paid to a non-resident (e.g., sale proceeds from sale of immovable property or sale of shares and mutual funds). It is valid for one financial year (April 1 to March 31), and binding on the payer unless cancelled by the AO.
6. Things to keep in mind for taxation of capital gains on sale of property, shares and mutual funds
TDS applies to both long-term and short-term capital gains at prevailing rates. Taxpayers may seek exemption or a reduced TDS rate by submitting a Tax Exemption Certificate (TEC) or Lower Deduction Certificate (LDC) from the Income Tax Department.
Long-term capital loss can be set off only long-term capital gain. However, short-term capital loss can be set off against long-term or short-term capital gain. Unabsorbed losses can be carried forward for up to eight assessment years, subject to filing the return within the due date
If you're liable to pay capital gains tax in both India and your country of residence, check if a DTAA exists between the two countries. DTAA provisions may allow you to claim relief in India and a Foreign Tax Credit (FTC) in your resident country for taxes paid in India.
Please refer our detailed article on DTAA
Conclusion
Capital gains taxation in India for NRIs can be intricate, but with the right knowledge and planning, it is entirely manageable. Understanding your tax obligations, claiming eligible exemptions, and ensuring timely compliance are key to maintaining tax-efficient and hassle-free investments. Given the nuances involved—especially in areas like TDS, DTAA benefits, and capital loss adjustments—it is highly advisable to consult a Chartered Accountant (CA) or tax advisor. Professional guidance can help navigate the finer details and ensure your capital gains are handled accurately and optimally.
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