Many NRIs who cashed in on the Indian property market boom and value appreciation, resulting in substantial capital gains, are getting caught in the local tax net.
Those who repatriated the sale proceeds without notifying the tax authorities or fulfilling their tax obligations are being served with notices to explain or face prosecution.
Many recipients panicked when they were handed these notices and have approached tax lawyers to take up their cases with the appellate authorities.
“These NRIs have been under the impression that they are exempted from all taxes in India as they enjoy NRI status. Ignorance of law is not an excuse and now they have to face the music,” said Ashumol P Kumar, a lawyer at Bombay High Court, who handles tax evasion cases at the tax tribunal forums.
As per Indian tax laws, property sellers are required to pay short-term or long-term CGT. Capital gains from the sale of a property in India are taxable in the country irrespective of the status of the property owner, whether resident or non-resident.
“Those who are landed in trouble are the ones who failed to notify the income tax department and repatriated the money abroad,” Kumar said.
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Capital gains tax
The tax department defines capital gains as profit from the sale of an asset, whether land and property, stocks or other securities, which are taxable income.
As per the amendments in 2020, the capital gains tax rates are either 15% or 20% for most assets held for more than a year. If the property is sold within two years of its purchase, the capital gain is short term, and if it is more than that period it is long-term capital gain.
Long-term capital gains are taxed at 20% and short-term gains are taxed at the applicable income tax slab rates for NRIs based on the total income which is taxable in India.
When an NRI sells property, the buyer is liable to deduct tax (or tax deducted at source – TDS) at 20% of the transaction amount to be remitted to the government. Where a property is sold less than two years after purchase, the applicable rate is 30%.
The NRI can claim a refund of the remitted tax after assessing his liabilities when filing his income tax return.
Exemption routes
“There are many ways NRIs can get exemption from capital gains tax. NRI are allowed to claim exemption on capital gains tax when the sale proceeds are invested for purchasing or constructing a new house property,” Kumar explained.
The condition is that the new property must be purchased either one year before or two years after the date of transfer. In case of a constructed property, it should be constructed within three years from the date of transfer.
It is not that property investments will always accrue gains. If the investor incurred losses on the sale of a property, he can set off the capital gains or profits from an earlier sale against the capital losses on the sale of another property within a specified period, thus can save tax on overall capital gains.
“It means he can set off all capital gains or profits against the capital losses he incurred earlier. Capital losses that exceed capital gains in a financial year may be used to offset or set-off ordinary taxable income. Only long-term capital gains can be used to offset capital losses,” she explained.
Invest in bonds to save tax
Investment experts suggest another option to save taxes on capital gains.
“If you are not planning to buy another property or construct a house with the sale proceeds, there are investment options in specified financial assets with tax exemption schemes,” said Ajay Mehta, director, Vision Venture International FZE, Sharjah, UAE.
NRIs can invest their capital gains in specified bonds within six months of the transfer of the sum and realization of gains. The funds are required to be invested in these bonds for a minimum of three years as a lock-in period.
The investor is banned from assigning the bonds to any other party or contract, and from trading them.
Beyond the lock-in period of three years, the investor is not eligible for any interest and the redemption of the capital gains bonds will become automatic.
Ideal scheme CGAS
The government has introduced another scheme, Capital Gains Account Scheme (CGAS), to save capital gains tax on property sales.
This scheme is ideal for individuals who cannot invest in a new property before filing their income tax return.
An investor can put his capital gains in the CGAS scheme for three years, and during this period he can utilise the capital gains for buying or building a residential house on his property.
It is stipulated that the deposit in the CGAS account must be made before filling or registering an income tax return.
The only condition is that investment in the CGAS must be specified in the income tax return, Mehta said.
