For non-resident Indians (NRIs), managing real estate in India can be a maze of unexpected challenges and hidden tax complexities. Imagine selling your property in India, only to realise that a hefty 20% tax is deducted at source, and the key to reducing this tax burden lies in past tax returns, you never knew you were required to file.
This oversight is common among NRIs, and can turn what should be a straightforward transaction into a bureaucratic nightmare. “Not voluntarily filing ITRs is a mistake many NRIs make, especially those who own properties in India,” said Urvil Modi, founder and chief executive, Samriddhi Wealth Management, a Sebi-registered investment advisor.
"The assessment officer (AO) relies on past ITRs to evaluate income and decide the TDS rate. I strongly advise NRIs who have a property in India to voluntarily file ITRs even if they don’t have an income (in India) just to maintain the records,” he added.
Without these records, your chances of reducing the TDS rate diminishes, leaving you with significant capital tied up for almost a year until the refund is processed.
The complications don’t end there. NRIs often struggle to find buyers willing to pay through bank transfers, with cash transactions being prevalent in the Indian real estate sector. Ajay R. Vaswani, founder of Aras and Co. Chartered Accountants, said this can force NRIs to sell at below-market prices.
“Cash in real estate transactions is quite prevalent but an NRI can’t use the cash. For this reason, in many cases, they end up selling the property at a lower price than the market value as finding a buyer becomes difficult,” he added.
Navigating the tax implications, securing the necessary certificates, and ensuring compliance with both Indian and international tax laws require careful planning. From understanding the benefits of the double taxation avoidance agreements (DTAAs) to handling joint ownership issues, NRIs must tread carefully to avoid costly mistakes.
As the real estate market in India evolves, staying informed and prepared is crucial for NRIs to manage their investments and maximise returns.
The 20% TDS on the sale amount of the property could mean locking away significant capital for up to a year. For example, an NRI selling a property for, say, ₹1 crore must set aside ₹20 lakh with the tax department until the refund is processed. However, TDS issues extend beyond this.
Often, buyers may mistakenly deduct 1% TDS, which applies to residents, due to lack of awareness. This error can result in a penalty of 100-300% of the outstanding tax, if any, along with a 1% monthly interest.
While the absence of past ITRs doesn't prevent you from being issued a lower TDS certificate, it reduces the likelihood of the TDS being lowered to the minimal rates of 1-5%. This is a consequence of not filing ITRs, which the law does not explicitly state.
Many NRIs are unaware that the default 20% TDS rate can be lowered by submitting Form 13 online prior to the sale of the property by furnishing documents including PAN, sale agreement, TAN of the buyer, copies of bank statement for proof of funds, and ITR copies of the past 3-4 years.
The AO can take up to five weeks to issue the certificate, so it is advisable to submit the application well in advance, said Vaswani, adding that the online application should be filed in the city where the property is located.
Besides, in cases of capital loss or negligible capital gains, including instances where capital loss from another asset is set off against capital gains on the sale of a property, the AO can issue a 0% TDS certificate.
To remit the sale amount to the country of residence, NRIs must obtain a 15CB certificate from a chartered accountant (CA). This process involves an audit where the CA verifies the transaction's validity and ensures all conditions for remitting the money abroad are met.
If part of the property sale amount is paid in cash, obtaining the certificate can be challenging. “Often, when buyers insist on paying cash to save stamp duty, NRIs accept it and deposit the amount in their NRO accounts separately,” said Vaswani.
"This creates challenges when remitting the money because the CA requires proof of those funds to issue form 15CB. NRIs should avoid accepting cash payments if they intend to remit the entire sale amount," he added.
Similar issues arise when an NRI sells furniture and fixtures separately. Considering sellers don't need to submit bills for furniture and fixtures at the time of sale, NRIs often proceed without original invoices or bank statements supporting the sale. However, the CA requires these invoices to issue certificate 15CB for the amount received separately for furniture and fixtures. NRIs who fail to submit these bills must pay tax on this amount if they want to remit the money.
In countries where capital gains tax is levied on property sale, NRIs should take advantage of the Double Taxation Avoidance Agreement (DTAA) to obtain tax credit. For instance, in the US, long-term capital gains tax on property is 0%, 15%, or 20%, depending on the tax slab. India has signed DTAA with 89 countries.
Therefore, if you make capital gains of ₹10 lakh on a property and have paid ₹2 lakh as tax in India, but in the US, your tax bracket requires 15% capital gains tax ( ₹1.5 lakh), you will get a tax credit of ₹2 lakh for the tax paid in India.
Besides, be informed about the tax sops available on the sale of a property in your country of residence. “One example is the US that allows deduction of $500,000 for a married couple and $250,000 for a single person, if the taxpayer has lived in that house for at least two years in the last five years," said Modi.
“So, for an Indian who has moved to the US, the best time to sell their property in India is within the first five years, if they plan to eventually sell it. Being aware of such perks helps plan better for tax efficiency.”
However, to claim tax credit in your country of residence, you must file an ITR in India. According to Urvil, claiming tax credit in a foreign jurisdiction requires a proper paper trail.
Many Indians jointly purchase property most often with parents, even while paying for the full cost of the property. However, complications arise when one shifts base, and the co-owner becomes incapacitated or passes away.
In such a circumstance, updating ownership records across municipal corporations, city survey offices, and utility boards is essential. "None of these departments communicate effectively and often require affidavits from surviving heirs and a will to relinquish rights," said Modi. "It becomes an ordeal for the NRI."
"So, for those planning to move abroad, I recommend ensuring clear ownership titles for such properties before departure. The ownership can be transferred through a gift deed,” he added. Note, if you transfer a property via a gift deed, NRIs are liable to pay the stamp duty on the transferor's share.
