Selling properties in India is becoming an increasing trend among Non-Resident Indians (NRIs). However, many NRIs may not be fully aware of how the Indian tax system works for them, particularly in ways that could safeguard and maximize the profits from their sales proceeds. Additionally, they can sell Indian properties without the hassle of traveling.
Taxation for NRIs vs. Resident Indians
For Resident Indians, the buyer deducts 1% TDS (Tax Deducted at Source) on the total sale proceeds. In contrast, NRIs face a significantly higher deduction rate. They face a very heavy TDS implication, in the case of Long-Term Capital Gains (LTCG), going up to 23.92%.
The Role of Form 13
Form 13 plays a crucial role in ensuring that NRIs are taxed fairly on their real estate transactions in India. Here’s how:
- Understanding TDS Deductions: Typically, NRIs are subjected to the highest slab rate of TDS deductions due to lack of knowledge. Many believe that TDS is applied to the total sale proceeds rather than the actual capital gains.
- Capital Gains vs. Sale Proceeds: The key point to remember is that the TDS should technically be applied only on the capital gains and not the total sales proceeds. This becomes possible when you submit Form 13, which is a Nil/Low TDS certificate, to the buyer. This certificate informs the buyer of the exact percentage of TDS to be deducted, based on actual capital gains.
- Validity and Approval: Form 13 must be issued by an Income Tax Assessment Officer. Without this form, buyers default to deducting TDS at the highest rate, as per standard practice.
The Calculation Advantage
Consider a scenario where you’re selling a property for 95 Lacs in current year; which was originally bought for 75 Lacs. The capital gain is not simply the difference (20 Lacs) but is calculated based on the inflation-adjusted cost, using the Cost Inflation Index (CII). Suppose the adjusted cost is found to be 90 Lacs; the actual capital gain would then be only 5 Lacs.
Further Exemptions
NRIs can seek further exemptions on capital gains by accounting for expenses related to the acquisition and improvement of the property, such as:
- Stamp duty
- Brokerage fees
- Costs of any contractor work
These expenses, with proper invoices and receipts, can reduce the taxable capital gain further when their current values are calculated using the CII.
Actionable Advice
- Apply for Form 13: It’s advisable for all NRIs selling property in India to apply for Form 13 early in the sale process.
- Document Expenses: Keep a detailed record of all expenses related to the purchase and improvement of the property to avail of the maximum allowable deductions.
- Consult a Tax Professional: Given the complexities of the tax laws, consulting with a tax professional familiar with NRI property sales can provide tailored advice and help navigate the process more smoothly.
Form 13 Benefits
By understanding and utilizing Form 13, NRIs can significantly reduce their tax liabilities and maximize their returns from property sales in India.