How NRIs Can Deal With Tax And Repatriation Issues On Sale Of Inherited Property

In part one of this series, we took you through a step-by-step process to sell inherited property in India. Having zeroed in on a buyer and finalised the agreement, the next thing to look at is tax and repatriation. In this article, we see how NRIs can deal with these two issues.

Tax

If you sell the property after 3 years from the date of purchase, you will be liable for long term capital gains tax of 20%. The gains are calculated as the difference between sale value and indexed cost of purchase. Indexed cost of purchase is nothing but the cost of purchase adjusted to inflation. You can find the indexhere.

In case of inherited property, the date and cost of purchase for purposes of computing the period of holding as well as cost of purchase is taken to be the date and cost to the original owner. "While computing the amount of long term capital gains, the cost to the previous owner (i.e. the person from whom the property is inherited) would be considered as the cost of purchase. Though the plain reading of the law suggests otherwise, the courts have taken a view that the indexation benefit can start from the year in which the previous owner acquired the property," explains Vaibhav Sankla, Director, H&R Block India.

Index values are from financial year 1981-82 onwards. If the property was purchased prior to 1982, you would have to get the fair value of the property assessed as of April 1, 1982. This will be available from the valuation officer at the local municipal authority. In case you do not have records of the cost of purchase of the previous owner, you would have to get the valuation done by the municipal authority of the jurisdiction where the property is situated.

As an NRI, you will be subject to a TDS of 20% on the long term capital gains.

If you sell the property within 3 years of purchase, you will be liable for short term capital gains tax at your respective tax slab. Short term capital gain is calculated as the difference between the sale value and the cost of purchase (no indexation benefit is available). You will be subject to a TDS of 30% irrespective of your tax slab.

But there are certain instances when the NRI can get a waiver of the TDS such as if the NRI is planning to re-invest the capital gains of the property in another property or in tax exempt bonds (discussed below). In such cases, the NRI will be exempt from tax in India and would not like to have TDS deducted.

"In such cases, the seller can apply to the income tax authorities for a tax exemption certificate. Remember that he must make this application in the same jurisdiction that his PAN belongs to. He will have to showproof of reinvestment of capital gains. If he is planning to buy another house, he would have to show the allotment letter or payment receipt. If he is planning to invest in capital gains bonds under section 54EC, he would need to submit an affidavit stating that he would invest the capital gain amount in to bonds. Usually, the buyer holds back the last installment of payment until this certificate of exemption is furnished to him by the seller. In case of bonds, the certificate usually mentions that the buyer can make the complete payment once the money is invested in bonds and receipt of investment is received," explains Amar Shah, Co-Founder of Golden Abodes.

Usually, a seller of property has up to 2 years from the date of sale to invest in another property or up to 6 months to invest in bonds. In case of NRIs however, if they would like to complete the transaction as soon as possible, they would need to complete either of these as early as possible.

The payer of the sale proceeds; even if he is an individual will be responsible for deducting tax at source and paying it to the Government. He must get a Tax Deduction Account number (TAN) and issue a TDS certificate for the same. What if the payer/buyer does not go through this process and fails to deduct tax? The onus of deducting tax is on the payer. So in case the individual does not deduct tax and the NRI too fails to declare the income and pay the tax, the income tax authorities can hold the payer responsible.

Tax exemptions

Section 54

According to section 54 of the Income Tax Act, if you sell a residential property (after 3 years from date of purchase) and purchase a residential house within 2 years from date of sale (or construct a residential house within 3 years from the date of sale), your gains will be exempt to the extent of the cost of new property. Suppose your capital gains is Rs 30 lakh and the new property is for Rs 20 lakh, then Rs 10 lakh will be treated as long term capital gains.

The residential property that you sell may either be a self-occupied property or one that was given on rent. Further, the new property must be held for at least 3 years.

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