My NRI friend Deepika has bought a residential property in India because she plans to shift permanently to India by the end of this year. She also has a property in a different state of the country which she would like to sell. She wants to sell the property because she has already bought a new residential property in a metropolitan city and since she’s an NRI it’s difficult for her to manage the property without being physically present and asking relatives to pay the property taxes and maintaining the property on her behalf is over-extending the welcome. In this blog we would venture on the various aspects of selling a property by an NRI.
An NRI can sell his/her residential or commercial property to either a person residing in India, another NRI or a person of Indian origin (PIO). One can also mortgage the property to an authorised real estate dealer or a financial institution dealing with home loans. However, if the property is an agricultural land or farming development, it can only be sold to a resident Indian citizen.
In case the property has been inherited from an Indian resident, no special permission is required from the RBI but on the other hand, if it has been inherited from someone who is not of Indian origin, the NRI will need to seek permission from the Central Bank. Income arising from transfer of property is taxed under Capital Gains and rental income from letting out the property is taxed under the head ‘Income from House Property. The capital gain is calculated as the difference between the sales value and indexed cost of purchase.
The process of selling a property owned by an NRI in India is as follows:
1. Hire a brokerage company to conduct a comprehensive valuation of the property and determine its value.
2. Carry out all the necessary paperwork related to the sale of the property. If one isn’t physically available then a trustworthy person can be granted PoA to do the needful.
3. Understand the tax liabilities. Capital gains are taxable in the year in which the property is transferred, irrespective of whether the sale payment has been received in full or not.
4. The taxation details have been explained in brief below:
a. If one is selling the property within 2 years (changed from 3 years after Budget 2017) of purchase, then short term capital gains tax will be applicable and selling after 2 years makes the long term capital gains tax applicable.
b. Taxes on short term capital gains are based on an individual’s income slab.
c. Taxes on long term capital gains are fixed at 20%.
d. When a resident Indian purchases a property from an NRI, then the buyer is liable to deduct TDS at 20% on long term capital gains (LTCG). In case the property is being sold before 2 years, 30% TDS will be deducted. A TAN (Tax Deduction and Collection Amount Number) needs to be obtained by the buyer before deducting the TDS.
e. In case the property has been inherited, the date of purchase by the original owner is considered for calculating whether it’s a long term or a short term capital gain. In such a case the cost of the property will be the cost that the previous owner incurred on the respective property.
5. TDS is deducted at the time of making the payment to the NRI. All the information regarding the TDS and it’s rate have to be mentioned in the sale deed between the NRI seller and the buyer.
6. The amount can be received only in a FCNR or NRE/NRO account.
7. The NRI would be exempt from tax if he/she re-invests the capital gains of the property in another property or tax exempt bonds.
Documents required by NRI for selling property in India:
1. Passport- It serves as a proof of identity for the person involved in the transaction
2. PAN Card- It is required if one plans to apply for a tax exemption certificate after the sale of the property. NRIs of select countries are given PAN numbers which have their foreign residence address.
3. Tax Returns- If the NRI has been earning money from the property, tax returns for the ownership period should be kept handy.
4. Address Proof- Documents in support of address in India and abroad have to be provided. This includes ration card, telephone bills, electricity bills, life insurance policy statements, aadhar card etc.
5. Sale Deed- Sale deed is a legally binding agreement between the parties who are buying and selling a legally owned property.
6. Documents From The Society- Documents from the society are needed to establish that the seller has no outstanding payments to the society. An occupation certificate states that the flat has been occupied and the allotment letter bestows official authority on the owner of the property or flat.
7. Encumbrance Certificate- An encumbrance certificate is necessary to assure that the property has no dues to any legal authority.
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