NRI CAPITAL GAINS TAXATION

1. Definition

Immovable properties i.e. plot of land, residential flats or house, commercial properties etc. are treated as Capital Assets u/s 2(14) of the Income-tax Act, 1961 (‘the Act’) and accordingly gains arising from the transfer of immovable property is chargeable to income tax.

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.

Classification of Capital Gains

The Capital gains are segregated into long term capital gains and short term capital gains in the following manner:

Period of Holding of immovable property	Type of Gain arising on transfer
For less than or equal to 36 months	Short Term
For more than 36 months	Long Term

2. Computation of Capital Gains

Mode of Computation of Capital Gains in respect of transfer of Immovable property:

Section 48 of the Income-tax Act, 1961 provides for mode of computation of capital gains. This is explained in form of illustration as under:

Capital Gain Computation

Full Value Consideration	9,50,000/-
Stamp Duty Valuation	10,00,000/-
Sales consideration or Stamp Duty valuation as per Sec 50 C, whichever is higher	10,00,000/-
Less: Expenditure incurred wholly and exclusively In connection with such Transfer	(50,000)
Net sales Consideration	9,50,000/-
Less: Cost of Acquisition \ Indexed Cost of Acquisition	(4,50,000)
Less: Cost of Improvement \ Indexed Cost of Improvement	(3,00,000)
Taxable Capital Gains	2,00,000

3. Capital Gains Exemption

NRIs are entitled to claim exemption from the tax if they reinvest long term capital gains /net sale consideration into following assets.

LONG TERM ASSET SOLD	REINVESTMENT IN	CONDITIONS	AMOUNT TO BE INVESTED
All long term capital asset	Tax saving bond issued by a. National Highways Authority of India b. Rural Electrification Corporation Ltd ( REC)	1) Investment is to be made within Six months from the date of transfer of asset. 2) New asset is to be held for a period of 3 years. 3) You cannot borrow against security of these bonds	Amount equivalent to Capital Gains or Rs. 50 lakhs whichever is less.
Urban Agricultural land	An agricultural Land	There are many conditions, which shall be provided at request.	Amount Equivalent to Capital Gains
Any long term capital asset other than residential house	Single residential house in India	There are many conditions, which shall be provided at request.	Amount equivalent to Net Sales consideration
Residential house	Single residential house in India	There are many conditions, which shall be provided at request.	Amount equivalent to Capital Gains
Residential house or plot of land	Equity share of new eligible Indian company	There are many conditions, which shall be provided at request.	Long Term Capital Gains in proportion of amount re-invested over Net Sales consideration

TDS provisions and tax liability on gains from transfer of Immovable property

Type of Gain	Rate of TDS	Rate of Tax
Long Term	20%* on amount of Sales Consideration	20%* on amount of Capital Gains
Short Term	30%* on amount of Sales Consideration	Slab Rate* for amount of capital gains

* Plus applicable surcharge and cess

4. NII/ Low TDS certificate from Tax Authorities

Under the Indian Income tax Act, 1961 (the “Act”) any income or capital gain receivable by the NRI from any Resident or NRI, is liable for withholding taxes/tax deduction at source (TDS) by the Payer at the prescribed rate of tax ranging from 10% to 30%. However, in the majority of the cases of NRIs, the actual tax liability is lower or Nil, than the rate of tax prescribed.

For any NRI, whose TDS is more than his tax liability, such excess tax can be claimed as refund from the Indian Tax Department (ITD) by filing the Return of Income in the particular Financial Year. Such excess TDS results into loss to NRI due to the time interval between the tax deducted and refund of such excess tax, which may take generally 1 to 2 years.

In order to address the above situation, a procedure has been prescribed under the Act, whereby NRI recipient of income can apply online to ITD (in a prescribed format) along with the relevant supporting documents to issue a Tax Exemption Certificate (TEC) authorising the Payer of income (who deducts tax) to deduct tax at a lower rate or Nil rate, as the case may be.

In case of NRIs, whose actual tax liability is lower than the rate of tax prescribed under the Act, it is beneficial to obtain a TEC. Few situations are mentioned below, where the NRI should apply for TEC:

Situations	Prescribed rate of TDS (%)*	Actual Tax Liability (%)*
Short Term/Long Term Caption Gain on sale of property and intention for claiming exemption by re-investment in property/bonds	20%/30%	NIL / Lower than rate applicable
Short Term/Long Term Capital Gains on sale of securities/and other transactions	15%/30%	NIL / Lower than rate applicable
Rental income	30%	NIL / Lower than rate applicable
Interest Income on NRO Deposits up to basic exemption limit – Rs.2,50,000 for AY 2019	30%	NIL Rate

*Plus applicable surcharge and Health and Education Cess on income tax

In the aforesaid situation, the NRI may therefore be saved from the process of seeking refund of income-tax and delays in obtaining the refund of tax.

The NRIs (the recipient of income) should estimate their total income, tax liability and likely TDS and then apply for Nil or lower rate for TEC. Such certificate would be binding on the Payer of the income who is required to deduct tax in accordance with the directions in the TEC.

Filing Return of Income: NRI who has obtained the TEC has to compulsorily file his Return of Income in India for that Financial Year.