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

Further, it must be noted that immovable property which is classified as Rural Agricultural Land as per the provisions of the Act, is not treated as Capital asset and accordingly gains arising from the transfer of same is not chargeable to tax. It is important to note that a land has to meet the  prescribed conditions in the Act to be defined as Rural Agricultural Land.

       Classification of Capital Gains

Capital Gains on sale of an Immovable properties  may be classified into Long Term or Short-Term Capital Asset  based on the period of holding as follows:

* Plus applicable Surcharge, Health and Education cess

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Illustrative Computation of Taxable Capital Gains in case of Sale of Immovable Property is as follows:

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Cost of acquisition generally refers to 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. The cost of acquisition may vary based on several scenarios which are reproduced below:

Property held prior to April 1, 2001:

Where property has been acquired by a person before April 1, 2001, or where the property was acquired through gift or inheritance from the person who acquired the property before April 1, 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 April 1, 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.

Inheritance / Gift:

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

Further, there is a difference of opinion regarding whether the benefit of indexation will be given from date of inheritance/ Gift or from date of acquisition of the person from whom the asset is received.

In our opinion the benefit of indexation may be available from the date of original acquisition by the previous owner.

However, generally we have noted that the lower income-tax authorities may reject our stand and may provide the benefit of indexation from the time the property was received as gift/inheritance.

Indexed Cost of Acquisition / Improvement

In cases where the immovable property being sold before 23.07.2024,was 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.

However, as per recent amendment in law, benefit of Indexation on long term capital asset is removed for transfer/sale of immovable properties on or after July 23, 2024 by Non-resident Individual

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The resident Indian is liable to deduct tax at 30% on STCG or 12.5% without indexation (20% with indexation if property sold/transferred before July 23, 2024) on LTCG, arising to NRI from the consideration payable for purchase of Immovable Property. Failure to deduct tax may attract penalty and interest on the resident Indian.

He may request NRI to arrange for a Tax Exemption Certificate (TEC) from the Tax Officer directing the amount of appropriate tax to be deducted/ withheld from the sale consideration and deposit the same with the Tax Department within the prescribed timelines.

It takes about 3 weeks to 6 weeks to obtain TEC from the Tax Department but that protects the resident Indian from any liability.

Alternatively, any buyer purchasing a property from NRI, can also submit a similar application for lower deduction in the prescribed form electronically, for determination of appropriate rate of tax to be deducted and the net amount payable to NRI after said deduction of tax.

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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:

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).

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NRIs are generally subject to tax being deducted at source (TDS) at the highest rate of tax on sale consideration i.e. 30%* in case STCG or 12.5% without indexation (20% with indexation if property sold/transferred before July 23, 2024) in case of LTCG, depending upon the period of holding of the Immovable Property instead of TDS on Capital Gain amount as per the Act (or no tax in case of Capital Loss).

In such a situation, NRI has two options:

i.    Apply for TEC to Tax officer which directs the Buyer to deduct tax at the amount specified in the TEC, where the Tax officer considers the amount of capital gains arising on the transaction and directs the Buyer to withhold tax only to the extent of Capital Gains.

ii.    The NRI can file ROI and claim refund of excess TDS withheld and deposited with the Tax Department by the said Buyer.

* Plus applicable Surcharge and Health and education cess on Income Tax

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NRI has the following options to claim exemption of LTCG tax on sale of residential house which is held for more than two years.

             i.   Reinvest in a residential house:

a.    NRI can avail exemption if long term capital gains arising on sale of a residential property are re-invested in one residential house property. The Government has extended the said benefit of re-investment to two residential properties, effective from AY 2020-21 i.e. from FY 2019-20 onwards.

b.    The aforesaid benefit can be exercised only when the capital gains on sale of residential property does not exceed Rs. 2 crores. It is pertinent to note that the benefit of this provision can be availed, at the option of the person only once in his lifetime.

c.    The exemption can be availed if a new residential house was purchased one year before the date of sale of the old residential house (i.e. after September 2, 2023), or purchases a new residential house within a period of two years from the date of sale of the old residential house (i.e. before August 31, 2026), or, construct a new residential house within a period of three years from the date of sale of the old residential house (i.e. on or before August 31, 2027).

d.    The maximum deduction that can be claimed will be restricted to Rs. 10 crores from AY 2024-25 onwards i.e., FY 2023-24 (For e.g. –  If Capital gain amount is Rs.18 crore and the assessee purchases a new house of 16 crore, the amount of exemption will be Rs. 10 crores only)

e.    If NRI has not purchased/constructed the new residential house before July 31, 2025 or September 30, 2025, as applicable (i.e. due-date for filing tax return for the year in which the old residential house is sold), and he would like to claim tax exemption then he has to open a banking a/c under the ‘Capital Gains Account Scheme’ (CGAS) with a Nationalized Bank and deposit the amount of Capital Gains and utilize the said deposits for purchasing/construction of the new residential house within the time lines prescribed above. However, if the amount deposited in CGAS is not utilized wholly or partly in purchasing/construction of the new residential house property within the timelines prescribed in paragraph i(c) above , then such unutilized amount would be subject to LTCG tax in the 3^rd year from the date of transfer of old property.

f.     Having obtained the tax exemption as above he must hold the new residential house for at least a period of 3 years from the date of its purchase/construction as otherwise he may lose the Tax exemption. If the same is sold before 3 years, while computing Capital Gains from sale of the said new residential house, the cost of acquisition of the new residential house shall be reduced by the amount of exemption claimed and thereby resulting into higher capital gains amount subject to taxation.

            ii.   Invest in Specified bonds:

a. NRI can reinvest the amount of LTCG arising on sale of residential house in Tax saving bond issued by:

- National Highways Authority of India (NHAI)

- Rural Electrification Corporation Ltd (REC)

- Bonds as may be notified by the Central Government.

b.    Investment is to be made in the above specified bonds within 6 months from the date of sale of property.

c.    The investment in specified bonds should not exceed Rs. 50 lakhs and NRI is required to hold specified bonds for a period of five years. However, if the same is transferred or converted into money within 5 years then exempted capital gains will be taxable in year of ‘’transfer/conversion’’ of such specified bonds.

d.    Further, any borrowings against security of these bonds shall tantamount to “conversion/transfer’’ of such specified bonds into money.

          iii.   Investment in equity shares of a new eligible Indian company:

a.    NRI will be eligible to claim exemption in proportion of amount reinvested in equity shares of a new eligible Indian company or eligible start-up (as defined in Section 54GB of the Act) to the sales consideration received on sale of residential house.

b.    There are several conditions to be complied with in order to claim this reinvestment exemption.

          iv.   Investment in units of specified fund:

The Government has provided for an additional amount of exemption of Rs. 50 lakhs that may be invested in the units of specified fund. However, no such specified fund has been notified till date.

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        i.        Reinvest in a residential house:

a.    If a NRI sells any Long Term Capital Asset, other than residential house, he is eligible to avail exemption from Capital Gains tax if he purchases a new residential house one year before the date of sale of the old capital asset, or purchases a new residential house within a period of two years from the date of sale of the old capital asset, or, construct a new residential house within a period of three years from the date of sale of the old  capital asset

b.    If NRI has not purchased/constructed the new residential house before July 31 or September 30 (i.e. due-date for filing tax return for the year in which the old residential house is sold), and he would like to claim tax exemption then he has the option to open a banking a/c under the ‘Capital Gains Account Scheme’ (CGAS) with a Nationalized Bank and deposit the amount of net sale consideration and utilize the said deposits for purchasing/construction of the new residential house within the time lines prescribed above. However, if the amount deposited in CGAS is not utilized wholly or partly in purchasing/construction of the new residential house property within the timelines prescribed in paragraph 1(i) above, then such unutilized amount would be subject to LTCG tax in the 3^rd year from the date of transfer of old property.

c.    Having obtained the tax exemption as above he/she must hold the new residential house for at least a period of 3 years from the date of its purchase/construction as otherwise he may lose the Tax exemption. If the same is sold before 3 years, while computing Capital Gains from sale of the said new residential house, the cost of acquisition of the new residential house shall be reduced by the amount of exemption claimed and thereby resulting into higher capital gains amount subject to taxation.

d.    If NRI invests the entire net consideration* from sale of such capital asset, he/she shall get total exemption of Capital Gains tax. However, if he/she invests partial net consideration, then the exemption shall be available in the same proportion as the proportion of amount reinvested in the residential house bears to the sales proceeds received on sale of the old Capital Asset: The same is reiterated for ready reference as below:

Amount of exemption  =  Amount of Capital    X      Amount reinvested in house   

of Capital Gains               Gains on old asset     Net sale consideration of old asset

*Refer answer to FAQ 2. above for meaning of Net Sale Consideration

e.    NRI should not hold more than one residential house (other than the new residential house) on the date of sale of the old capital asset.

f.     NRI should not purchase another residential house within a period of 1 year from the date of sale of old capital asset or construct a residential house within a period of 3 years from the date of sale of old capital asset. If said condition is not satisfied, then capital gains claimed as exempted above on sale of Capital Asset other than residential house property, shall be taxable in year in which such other residential house is purchased/constructed

g.    The maximum amount of deduction will be Rs. 10 crore, applicable from AY 2024-25 onwards i.e., FY 2023-24 onwards. So, any investment over such amount will be ignored.

(For E.g. – The consideration of a plot – Rs. 15 crore, Capital Gain – Rs. 8 crore. Amount invested in new residential house – Rs. 12 crore.  The amount of gain exempt = Rs.  8 crore *Rs. 10 crore/Rs. 15 crore= Rs. 5.33 crore will be exempt. Capital Gain taxable= Rs. 8crore – Rs. 5.33 crore = Rs. 2.67 crore)

      ii.        Invest in Specified bonds:

Similar to exemption mentioned in FAQ 7 (ii) above.

     iii.        Investment in units of specified fund:

Similar to exemption mentioned in FAQ 7 (iv) above.

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Exemptions mentioned in FAQ 7 (i) and 8 (i) above are only available if a new residential house is purchased in India. Hence, in above case, NRI shall not be eligible for claiming exemption from LTCG.

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As stated in FAQ 7 (i), Government has extended the benefit of re-investment to two residential properties with effect from AY 2020-21 i.e. from FY 2019-20 onwards. In this case, as the capital gains amount is less than Rs. 2 crores, the NRI may claim exemption from LTCG. However, such exemption can only be availed, at the option of the person only once in his/her lifetime.

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Yes, NRI has to file ROI for claiming the exemptions.

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Amount which is not invested in the new property would be subject to the LTCG tax in the year in which the specified period of 2years / 3 years expires from the date of sale of old property.

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·        At the time of inheritance:

There shall be no Capital Gains tax in the hands of NRI or his son at the time of inheritance, i.e. on the death of NRI.

·        At the time of Sale by son:

At the time of sale of the inherited house, son shall be subject to Capital Gains tax on such sale. The Capital Gains shall be computed as follows:

Further, since period of holding is more than 24 months, the Capital Asset shall qualify as Long-Term Capital Asset. However, indexed benefit shall not be available since property is sold on or after July 23, 2024.

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Advance money/ earnest money retained on cancellation by NRI received by him on or after April 1, 2014, shall be taxable under the head ‘Income from Other Sources’. NRI shall be required to pay appropriate taxes on the said income.

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Compulsory acquisition of the property by any Government Authority is regarded as ‘transfer’ and/or ‘sale’ and is subject to capital gains as per the provisions of the Act.

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Interest earned on Capital Gains Account is chargeable to tax under the head “Income from Other Sources”. Such interest is taxed in the year it accrues and is credited to the capital gain account scheme.

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