Update Date : 17-Dec-2024

Created Date : 06-Nov-2022

Reference : The Economic Times

Owning and maintaining an immovable property (land or building or both) in India can burn a hole in an individual’s pocket, especially if he is living outside India and not using the property for residence or generating any rental income.
 
With no plans to return to India in the foreseeable future, the thought of selling the property may be a plausible option. However, the tax implications and compliance requirements that follow on sale of immovable property in India are not that straightforward in the case of a Non-Resident (NR) (in the year of sale/transfer of immovable property).
 
Therefore, all individual taxpayers must first determine their residential status in India by referring to Section 6 of the Income-tax Act, 1961 (Act) which lays down the principles of determining the residential status. This assessment is important to correctly determine the scope of taxability, rate of applicable tax, and type of tax return form to be used for filing the Income-tax Return (ITR) in India.
 
For individuals who are not in the business of constructing and/ or selling immovable properties, any gain/ loss arising on the sale/ transfer of immovable property is categorized as ‘income under the head capital gains’ since an immovable property qualifies as a ‘capital asset’. Depending on the period of holding, a capital asset may be divided into two categories – (i) long-term capital asset if the capital asset is sold after 24 months from the date of purchase; or (ii) short-term capital asset if the capital asset is sold within 24 months from the date of purchase.
 
The above classification is important since differential tax treatment is applicable to the sale of long-term capital assets and short-term capital assets. A table showing the summary of tax rates and other aspects of the sale of immovable property for the NR is as below:
 
 
Therefore, long-term capital gains (i.e., gains on the sale of a long-term capital asset) enjoy a fixed tax rate of 20% and get the advantage of indexation to give the taxpayer the benefit of inflation. However, the benefit of tax slabs and deductions for tax-saving investments made in India is not available.
 
For example, if the NR has long-term capital gains of INR 60,00,000 from the sale of a residential property, his tax liability would be INR 13,72,800 (INR 60,00,000 * 20% + surcharge at 10% + cess at 4% on the sum of tax and surcharge) without giving tax slab benefit and without allowing a deduction for any tax saving investments made in India. On the other hand, if the NR has short-term capital gains of INR 60,00,000 from the sale of residential property, his tax liability would be INR 18,44,700 (as per applicable slab rates + surcharge at 10% + cess at 4% on the sum of tax and surcharge). Thus, tax outflow is likely to be lower if the immovable property is sold after holding the same for more than 24 months.
 
Further, similar to Resident taxpayers, NR taxpayers can also claim exemption of capital gains income if they make the investment in one residential house property in India within 1 year prior or within 2 years after the date of sale/ transfer of the original residential property or within a period of 3 years constructed one residential house property in India in which case the amount of long term capital gains or cost of new residential property, whichever is lower, shall be exempt from tax provided other conditions specified in the Act are satisfied (Section 54 of the Act in this case).
 
Similarly, under Section 54EC of the Act, investment up to INR 50,00,000 can also be made in certain bonds of the National Highways Authority of India or Rural Electrification Corporation within 6 months from the sale/ transfer of immovable property and such amount of investment or long-term capital gains, whichever is lower, shall be exempt from tax provided other conditions specified in the section are satisfied.
 
Thus, the NR may check the exemptions available which may help him optimize the tax outflow on capital gains income. Further, one may also refer to the double taxation avoidance agreement (DTAA)/ tax treaty between India and the country of which the individual is a Resident to see if any beneficial tax provision is applicable on the sale/ transfer of immovable property if the NR is also taxable on capital gains income in the country where he qualifies as a Resident.
 
A practical challenge that arises on the sale of immovable property by the NR is that the buyer of such property is required to withhold TDS as per provisions of Section 195 of the Act. In the case of a long-term capital asset, TDS is deducted at 20% (plus applicable surcharge and cess) and in the case of short-term capital asset, TDS is deducted at 30% (plus applicable surcharge and cess), even though the ultimate tax liability of the NR may be lower than the TDS required to be deducted by the buyer.
 
Under such a scenario, the NR can either claim a refund of excess TDS deducted from his ITR or he can make an online application in Form 13 to the jurisdictional tax officer for the issue of a lower withholding certificate. Once the lower withholding certificate is obtained from the income tax authorities, the same can be submitted to the buyer of the immovable property who can then deduct TDS at a lower rate as mentioned in the certificate.
 
 
 
DISCLOSURE IN ITR FORM
 
To ensure that the correct amount of income and taxes are computed by the ITR filing utility, it is of utmost importance to disclose correct details with respect to the sale of an immovable property which includes, inter alia, details in respect of:
• date of purchase/ acquisition
• date of sale/ transfer
• cost of acquisition
• cost of improvement
• year of improvement
• sale consideration
• expenses incurred on transfer
• exemption claimed under the Act if any
Once the requisite details are correctly entered, the ITR filing utility will calculate the correct amount of capital gains/ losses and corresponding tax liability.
 
 
THINGS TO NOTE
 
1. The new Annual Information Statement (AIS) and Taxpayer Information Summary (TIS) capture the details of certain financial transactions, including the sale price of immovable property, in one place making it easier for both the taxpayer and income tax authorities to have a visibility on the source and quantum of income during a financial year.
 
Thus, one must reconcile the information reported in AIS and TIS statements prior to filing the ITR, failing which, there is an increased risk of receiving a notice from the income tax authorities to explain the omission or variance in such statements vis-à-vis details reported in the ITR and the consequent impact of paying interest and penalty along with additional taxes on such income not disclosed earlier.
 
2. Selection of the correct type of ITR form is necessary to ensure administrative compliance.
A Non Resident taxpayer should therefore analyze all the implications before selling the immovable property in India and keep all the relevant documents to ensure there is no rough sailing in the future in case any notice is issued by the income tax authorities with respect to the sale of immovable property. In a nutshell, the below points may be kept in mind:
• determine the residential status in the year of sale/ transfer of an immovable property
• keep the documents ready to substantiate the necessary details required in the ITR utility
• determine if there is a need to apply for a lower withholding certificate
• determine if any exemption is to be claimed in respect of capital gains income
• choose the correct type of ITR form and ensure the timely discharge of taxes
• Akshay Sharma, Manager, People Advisory Services, EY India contributed to this article.

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