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NRI Selling Property in India

Guide to the tax implications relating to NRI selling property in India. In order to understand the tax implications, under the article, it has been assumed that the person based in the USA has sold out his property in India.

Double Taxation Avoidance Agreement (DTAA)

The DTAA, in general terms, is a tax treaty which is being signed between two countries so that the taxpayers can avoid paying double taxes on their income. Since the person selling the property in India is based in the USA, we are looking at the provisions of DTAA between India and USA.

The United States of America and Government of India, for the avoidance of double taxation and for the prevention of the fiscal evasion with respect to the taxes on income has entered into double taxation avoidance agreement i.e. DTAA and the taxes to which the agreement applies are explained hereinbelow –

• The United States

The Federal income taxes imposed by the Internal Revenue Code and the exercise taxes imposed on insurance premium paid to foreign insurers and with respect to private foundations.

• India

The income tax including any surcharge thereon and surtax. However, the same does not apply to the income tax on the undistributed income of companies, imposed under the Income Tax Act.

Interpreting Article 6 of the DTAA Agreement

Article 6, under the agreement for avoidance of double taxation of Income with the USA, deals with the income derived from the immovable property (real property).

The said article 6 clearly states that Income derived by a resident of contracting states from immovable property (real property) situated in the other contracting states may be taxed in that other state. The income so referred includes income from agriculture or forestry.

Understanding the Same in Simple Terms, Article 6 States that in the Case of Income Derived from the Immovable Property being Situated in India, the Said Income Should be Taxable in India.

It is important to note here that the income derived from immovable property includes any income from the direct use, letting or use in any other form of the immovable property.

Concluding thereby that any Income Arising on the Sale of Property in India would be Taxable in India as Article 6 of DTAA Entered into Between India and USA.

Tax Implication

There is no difference between tax calculation in case of capital gain arising in case of sale of property by the resident or a Non-resident person in India. The capital gain provisions are explained hereunder –

Capital Gain

Long term capital gain – asset held for more than 2 years – tax 20% plus cess and surcharge

Short term capital gain – asset sold within 2 years – tax as per income tax slab applicable to NRI

Tax Deduction at Source (TDS)

Section 195 of the Income Tax Act, 1961 binds the person, to deduct TDS, who is responsible for paying to a Non-resident, at the time of credit of such income to the account of the Non-resident or at the time of payment thereof in cash or cheque or any other mode, whichever is earlier.

Thus when the Non-Resident Person Sales Property in India, the Purchaser is Required to Deduct TDS @20% in Case the Property has been Sold within a Period of 2 Years of its Acquisition and TDS @30% in Case the Property has been Sold after 2 Years of its Acquisition.

Nil or Lower Tax Deduction

As since above, section 195 requires deduction of TDS, however, the Non-resident person has two options through which either he can apply for lower TDS or nil TDS deduction and the same is being briefed out in below paras.

Option 1 – Section 195 (3)

The Non-resident person Indian who is entitled to receive any income on which TDS needs to be deducted as per provisions of section 195 can make an application to the assessing officer for the grant of a certificate authorizing him to receive such income without deduction of TDS.

Conditions for Making an Application for No Deduction under Section 195 (3)

1. The person concerned has been duly assessed to income tax in India and the person has furnished the income tax return for all the assessment years.
2. The person concerned is not in default or deemed to be in default in respect of any tax, interest, penalty, fine or any other sum payable under the Act.
3. The person concerned has been carrying on the business/profession in India for a period of not less than 5 years immediately preceding the date of the application. Further, the value of the fixed assets in India of such business/profession for the previous year immediately preceding the date of application exceeds INR 50 Lakhs.

Relevant Application Form

1. Form No. 15C – Application by a banking company.
2. Form No. 15D – Application by any other person.

Option 2 – Section 197

The Non-resident Indian who is entitled to receive any income on which TDS needs to be deducted as per provisions of section 195 can make an application to the Assessing officer, under section 197, and if the Assessing officer is satisfied that the total income of the Non-resident justifies lower TDS or nil TDS, then, the Assessing Officer may, accordingly, issue the certificate for lower deduction or no deduction.

Form 13

The applicant needs to file an application for the grant of a certificate for lower deduction or no deduction in Form no. 13. The application in form 13 needs to be submitted electronically using either a digital signature or through EVC (electronic verification code).