Capital Gains on Sale of Immovable Property in India generally refers to the difference between the sale consideration received and purchase price paid for acquisition of the property (subject to other conditions and exemptions available). Capital Gains may be classified as ‘Short Term Capital Gains’ or ‘Long Term Capital Gains’ based on the provisions of the Income-tax Act, 1961 (the ‘Act’).

 

The following is a detailed write-up on:

1.    Capital Gains on Sale of Immovable Property

2.    Tax Deducted at Source (‘TDS’ or Withholding Tax Liability) and Tax Exemption Certificate (‘TEC’)

3.    Capital Gains tax exemption options

4.    Repatriation of proceeds from Sale of Immovable Property

 

1.    CAPITAL GAINS ON SALE OF IMMOVABLE PROPERTY:

 

A.   Classification of Capital Gains

Capital Gains on sale of an asset may be classified into Long Term and Short Term Capital Gains based on the period of holding as follows:

 

Capital Asset	Short Term	Long Term
Immovable property being land or building or both	If held for a period not exceeding 24 months from the date of acquisition.	If held for a period exceeding 24 months
Tax Rates applicable	As per applicable slab rates – Highest slab being. 30%*	20%*
Tax to be deducted at source by the Buyer, where seller is Non- Resident Indian (NRI)	30%*	20%*

*Plus applicable Surcharge, Health and Education Cess.

B.   Manner of Computation of Capital Gains

Illustrative computation of taxable Capital Gains in case of sale of immovable property is as follows (kindly also refer to the notes below):

Particulars	Amount (in Rs.)	Amount (in Rs.)
Full value of sale consideration		100
Less: Expenditure incurred wholly and exclusively in connection with            such  transfer           (e.g. Transfer    Fees, Brokerage, Commission, etc		(5)
Net Sale Consideration		95
Less: Cost of Acquisition/ Indexed Cost of Acquisition	35
Less: Cost of Improvement/ Indexed Cost of Improvement   (E.g. Renovation, painting, addition of floor, etc.)	15	(50)
Capital Gains		45
Less: Exemptions under Capital Gains (if any)		(10)
Taxable Capital Gains		35

C.    Notes:

(i) Cost of Acquisition / Improvement:

Cost of acquisition generally refers to the consideration paid for purchase of property. Cost of improvement generally refers to any capital expenditure incurred in making any additions or alterations to the immovable property.

 

(ii) Indexed Cost of Acquisition / Improvement:

In cases where the immovable property is held for more than 24 months (i.e. in case of Long Term Capital Asset), you shall get the benefit of indexation and such a cost is referred to as ‘Indexed cost of acquisition / Indexed cost of improvement’.

 

The Indexed Cost of Acquisition / Improvement is a concept which grants deduction of a larger amount than actual Cost of Acquisition / Improvement considering the prevalent inflation index for the prescribed year as issued by the Government of India.

Indexation: is a process by which the cost of acquisition/ improvement of a capital asset is adjusted against inflationary rise in the value of asset.

 

(iii) Inheritance / Gift:

In case of inheritance / gift, the aforesaid cost of acquisition / improvement shall be the actual cost of the acquisition / improvement of the person from whom the asset is received. The period of holding will be considered from the Date of Original Acquisition till the date of sale.

 

However, there is difference of opinion regarding whether the benefit of Indexation will be given from the date of Inheritance/ Gift or from the Date of Acquisition of the person from whom the asset is received. The said proposition is litigative in India and is pending before the Court of Law.

 

(iv) Property held prior to 1.4.2001:

Where the property has been acquired by the person before 1.4.2001 or where the property was acquired through gift or inheritance from the person who acquired the property before 1.4.2001, then the cost of acquisition is the higher of:

                      

a.    Actual cost of acquisition of the property or;

b.    Fair market value as on 1.4.2001

However, as per recent amendment in law, the fair market value as on April 1, 2001, has been capped as not exceeding the “stamp duty value’’ of the property as on April 01, 2001. Further, the term “stamp duty value’’ has been defined to mean the value adopted or assessed or assessable by any authority of the Central Government or a State Government for the purpose of payment of stamp duty in respect of an immovable property.

 

(v) Stamp Duty valuation:

In case of transfer of an Immovable Property, the Act provides that the actual sale consideration should be compared with the stamp duty value. Stamp duty value is the value assessed at time of registration of the sale of the property with the Registration Authority of the State Government in India. Accordingly, while calculating capital gains, the actual sale consideration is compared with the stamp duty value and higher of the two values should be taken as sale consideration.

 

However, as per recent amendment in law, only if the Stamp Duty Value exceeds the actual sale consideration by more than 110% of the sale consideration, then in such case while calculating Capital Gains, Stamp Duty Value shall be considered as Full Value of consideration for the purpose of computing the Capital Gains.

Illustrative Computation of Full Value of Consideration for the purpose of calculating Capital Gains in case of Sale of Immovable Property is as follows:

 

Particulars	Amount (in Rs.)	Amount (in Rs.)
Sale consideration (A)	100
110% of A (B)	110
Stamp Duty Value as on date of Sale (C)	120
Full Value of Consideration		120
Less: Expenditure incurred wholly and exclusively in connection   with   such   transfer  (e.g. Transfer    Fees, Brokerage, Commission, etc.)		(10)
Net Sale Consideration		110

 

 

 

 

 

 

 

 

 

 

 

 

In the above case, the sale consideration (A) is less than the stamp duty value (C). Further, the stamp duty value (C) also exceeds 110% of the sales consideration (A). Hence, for the purpose of computing Capital Gains, Full Value of consideration shall be stamp duty value as on date of Sale (C).

Particulars	Amount (in Rs.)	Amount (in Rs.)
Sale consideration (A)	100
110% of A (B)	110
Stamp Duty Value as on date of Sale (C)	108
Full Value of Consideration		100
Less: Expenditure incurred wholly and exclusively in connection   with   such   transfer  (e.g. Transfer    Fees, Brokerage, Commission, etc.)		(10)
Net Sale Consideration		90

 

In the above case, the sale consideration (A) is less than the stamp duty value (C). However, the stamp duty value (C) is not more than 110% of sale consideration i.e. (B). Accordingly, for the purpose of calculating Capital gains, full value of consideration shall be sale consideration (A) only.

D.   Taxation in India and country of residence:

Capital Gains on sale of immovable property by a NRI would be taxable in India on account of the immovable property being located in India. However, the said Capital Gains may also be taxable in the country of residence of the NRI as per domestic tax laws of the said country.

 

Accordingly, the NRI may be liable to pay tax on sale of immovable property in India as well as the country of residence. In order to avoid such double taxation of the same income, NRI may avail benefits under the Double Taxation Avoidance Agreement (‘DTAA’), if any, between the two countries. NRI may also be able to avail credit of taxes paid in such other country in case no DTAA exists between the India and the other country.

 

There are certain compliances and procedures in order to avail benefits under DTAA. We shall be happy to advise you on availing of such benefits and the relevant compliances.

 

E.    Set-off against Losses:

The Capital Gain/ Loss incurred on sale of property can be set-off as follows:

 

Type of Capital Gain / Loss	Income / Loss which can be Set-off
1. Capital Gain: -Short Term -Long Term	Against any Loss except Long Term Capital Loss Against any Loss
2. Capital Loss -Short Term -Long Term	Against any Capital Gain Only against Long term Capital Gain

 

Further, if, in a particular Financial Year (FY), amount of loss is not fully set-off against income/ gain due to inadequacy of income/ gain, such loss may be carried forward to subsequent 8 FYs provided Return of Income (ROI) is filed within prescribed time period.

 

2.    TAX DEDUCTION AT SOURCE (‘TDS’ OR WITHHOLDING TAX LIABILITY) AND TAX EXEMPTION CERTIFICATE

 

Under the provisions of the Act, in case of purchase of immovable property from a NRI, the buyer is required to deduct tax at highest prescribed rate of 30% on Short Term Capital Gains or 20% on Long Term Capital Gains (plus applicable Surcharge, CESS) earned by the NRI. If the buyer does not have details of the cost or actual tax liabilities, he may withhold tax at 30% or 20% on the sale consideration, as the case may be. Although the rate prescribed for TDS from NRI’s Indian income is the maximum rate of tax at which relevant income is taxable in India in majority of the cases of NRIs, the actual tax liability is lower than the TDS.

 

Illustration: A NRI has income from Capital Gains on sale of immovable property of Rs.50,00,000/-. He has also reinvested the Capital Gains of Rs. 50,00,000/- as per reinvestment options available under the Act (Refer point 3 below). Hence, he may not be liable to Capital Gain tax, but taxes may be deducted by the buyer at 20% from the sale consideration received / Capital Gains earned.

 

As illustrated above, this leads to excessive tax payment by NRI who can avail any of the below options to minimize tax deduction / actual tax liability:

 

A.    Filing ROI and claiming tax refunds of excess taxes withheld

When a NRI has paid excess taxes, he may get the refund of the same by filing his ROI in India for the relevant FY. Excess taxes paid, if any, may be refunded to the assessee after the processing of the ROI. However, this may result in a loss for the NRI due to the time interval between the deduction of tax and the subsequent refund of taxes after filing the ROI at the end of the relevant FY. Further, refund issuance is at the sole discretion of the Income Tax Department.

B.    Obtain TEC from the Income Tax Department u/s 197 of the Act.

In order to address the above situation, the Act has provided a procedure whereby NRI can apply to his Jurisdictional Income Tax Officer (in prescribed form) at the Income Tax Department to issue specific certificate authorizing the buyer i.e., the payer of income (who deducts tax at highest prescribed rate) to deduct tax at a lower rate or nil rate as the case may be. NRI should estimate his income, tax liability and likely TDS and then apply for a TEC. The payer(Buyer of property) is mandatorily required to deduct tax in accordance with the TEC issued by the Income Tax Officer. Such a certificate is binding on the payer.

 

Please note that if a person obtains TEC for any FY, he/she is compulsorily liable to file the ROI in India for the said FY.

3.    CAPITAL GAINS TAX EXEMPTIONS

 

NRIs are entitled to claim exemption from Capital Gains tax if they reinvest Long Term Capital Gains / net sale consideration earned on sale of Long-Term Capital Assets into certain specified assets. These are as follows:

CAPITAL GAINS FROM	REINVESTMENT IN	CONDITIONS	AMOUNT EXEMPTED	RATE OF INTEREST
Long Term Capital Asset Being Residential House	Two Residential Houses in India*.	There are many conditions, which shall be provided on request**.	Minimum of: a.    Amount reinvested. b.    Long Term Capital Gains	Not Applicable.
	Tax Saving Bonds issued by: a.    National Highways Authority of India (NHAI) – (as per recent notification, NHAI bonds have been discontinued from April 1, 2022) b.    Rural Electrification Corporation Ltd. (RECL). c.    Power Finance Corporation Limited d.    Indian Railway Finance Corporation Limited e.    Bonds as may be notified by the Central d.    Government.	a.    Investment is to be made within 6 months from the date of transfer of asset. b.    Bonds are to be held for a period of 5 years.	Maximum exemption cannot be greater than Rs. 50 lakhs by reinvestment in such bonds.	Approx. 6% payable annually on the Tax savings Bonds. The said interest shall be taxable in India
Any Long Term Capital Asset	Units of such funds as may be notified by the Central Government.	a.    Investment is to be made within 6 months from the date of transfer of asset. b.    Units are to be held for a period of 3 years.	Maximum exemption cannot be greater than Rs. 50 lakhs by reinvestment in such units.	To be notified.
Any Long-Term Capital Asset Other Than Residential House	Entire Sale Proceeds in the Residential House in India.	There are many conditions, which shall be evaluated.	Long Term Capital Gains in proportion     of amount re- invested over Net Sale consideration.	Not Applicable.

 

Note: The above conditions have been provided briefly for your easy reference. There may be several additional conditions applicable which shall be provided separately on your request.

             

*  The Finance Act, 2019 has extended the benefit of exemption from levy of capital gains by investing the said capital gains in one residential house to two residential houses in India. So, the Government has extended the said benefit of re-investment to two residential properties, effective from Financial Year 2019-20.

                 

** The benefit of two residential houses can be availed, at the option of the person only once in his lifetime and only when the capital gains amount does not exceed Rs.2 crore. The case study explaining the said amendment is covered in the ensuing paragraph.

                    

Case Study: A NRI sold his residential house and earned LTCG of Rs. 65 lakhs on such sale. From the said Capital Gains, he purchased two residential houses of Rs. 35 lakhs and Rs. 30 lakhs in Mumbai and Bangalore, respectively. Can he claim exemption from LTCG?

 

As stated above, the Government recently extended the benefit of re-investment to two residential properties with effect from AY 2020-21 relevant to FY 2019-20. In this case, as the capital gains amount is less than Rs. 2 crores, then NRI can claim exemption from LTCG. However, such exemption can only be availed, at the option of the person only once in his lifetime.

 

4.    REPATRIATION OF SALE PROCEEDS OF IMMOVABLE PROPERTY

 

After selling the immovable property, if NRI wishes to transfer such sale proceeds to his Overseas Bank Account or to Non-Resident (External) Account, there are several factors that may have to be considered prior to remitting such funds. The extent to which such proceeds may be repatriated depends upon the source from which the immovable property was originally acquired, i.e., whether through foreign exchange or otherwise. Generally, a NRI is permitted to repatriate up to a maximum of USD One million in one FY.

However, there are certain exceptions to this rule in case of remittance of sale proceeds of immovable property as follows. The various procedures and restrictions are discussed below.

 

A.    Property acquired in foreign exchange:

 

Where property is originally acquired by NRI / Person of Indian Origin (PIO) in foreign exchange, the amount permitted to be repatriated shall not exceed:

 

               i. Amount paid for acquisition of immovable property in foreign exchange received through normal banking channels (i.e. through Non-Resident (Ordinary) (NRO) or Non-Resident (External) (NRE) or Foreign Currency Non-Resident (FCNR) Account);

 

              ii. When foreign funds (foreign inward remittances) are utilized to acquire the immovable property, it can be repatriated freely to Overseas Bank Account or NRE Account, i.e., without utilizing the RBI limit of USD One million. However, for practical purposes Indian Banks may not permit such deposit of sale proceeds directly in the Overseas Account or NRE Account. Accordingly, the sale proceeds will have to be routed through NRO Account and supported by Form 15CA (undertaking by the NRI / PIO remitter) and 15CB (CA certificate).

             

              iii. Repatriation of sale proceeds of residential property purchased by NRI / PIO out of funds raised by them by way of loans from the Indian Banks / housing finance institutions to the extent of such loan being repaid out of foreign inward remittances received through normal banking channels or by debit to their NRE/FCNR (B) Account.

 

              iv. In case if sale proceeds exceed what NRI / PIO is eligible under (i) or (iii) above, repatriation of such excess amount up to USD One million per FY is permissible.

 

B.    Property acquired otherwise than in foreign exchange:

 

NRI / PIO are eligible to repatriate sale proceeds of immovable property acquired by way of purchase when he was in India or from funds held in his NRO Account or received by way of gift or inheritance. It is permissible to remit sale proceeds (net of tax), up to USD One million per FY.

 

C.    Special Permission of RBI:

 

In case an NRI / PIO is not eligible to repatriate under (4.1) or (4.2) above or wishes to repatriate amount exceeding the limit of USD One million in a FY, sale proceeds can be repatriated by obtaining special permission of RBI on the ground of hardship and subject to terms and conditions as specified in the permission.

 

Note: In case of residential property the repatriation of sale proceeds is restricted up to two such properties. However, there is no restriction in respect of commercial properties.

 

D.   Procedure for Repatriation of Funds:

                          

The process to be followed for repatriation of funds from NRO Bank Account to NRE or Overseas Bank Account is fairly simple. The basic documents required for repatriation of funds are Form 15CA (undertaking by the remitter, i.e., NRI/PIO) and Form 15CB (CA certificate) which is to be submitted along with the transfer request and FEMA declaration as per the Bank’s requirement.

 

We can assist the NRI / PIO in such repatriation by issuing the necessary certificates and preparing required documentation to be submitted to the Bank.

 

Disclaimer: We hope the above write-up provides you with a brief overview of the entire sale of immovable property transaction in India. There may be several other aspects to be considered while selling an immovable property in India. While due care has been taken during the compilation to ensure that information is current and accurate to the best of our knowledge and belief, the content is not to be construed in any manner whatsoever as a substitute for professional advice. We shall be happy to discuss the exact facts of your case and your specific requirements to assist you in the best possible manner.

Updated 10/2023