As an NRI, understanding the tax implications of selling your property or any other asset in India can save you significant money. Two sections under the Income Tax Act 1961—Section 54 and Section 54F—offer tax exemption for NRIs on property in the form of exemptions on Long-Term Capital Gains (LTCG) when you reinvest your capital gains into purchasing or constructing a new residential property in India. Let’s delve into the specifics of both these sections and understand how they benefit NRIs.
What Is Section 54 and Section 54F?
Section 54 of the Income Tax Act is applicable to NRIs who sell a residential property in India and reinvest the proceeds to purchase or construct another residential property. This exemption helps NRIs avoid paying capital gains tax on long-term capital gains earned from the sale of residential properties.
Section 54F, on the other hand, applies to NRIs selling non-residential properties (like land, shares, bonds, etc.). If the proceeds from the sale of these assets are reinvested in a new residential property, the NRI can claim an exemption on the LTCG tax.
Key Provisions of Section 54
- Eligibility: The exemption under Section 54 is available to NRIs who have sold long-term residential property held for more than 24 months.
- Timeframe for Reinvestment:
- The property must be purchased within 1 year before or 2 years after the sale of the original property.
- The construction of the new property must be completed within 3 years of the sale date.
- Exemption Revocation: If the newly purchased property is sold within 3 years, the exemption granted under Section 54 will be revoked, and the capital gains will be taxed as short-term capital gains.
- Investment in Two Properties: Section 54 allows NRIs to invest in up to two residential properties, provided the capital gains are less than ₹2 crores.
Key Provisions of Section 54F
- Eligibility: Section 54F applies when NRIs sell non-residential assets (such as shares, bonds, gold, etc.), and the proceeds are reinvested in purchasing or constructing a residential property.
- Timeframe for Reinvestment: Similar to Section 54, the new residential property must be purchased within 1 year before or 2 years after the sale, or constructed within 3 years of the sale.
- Exemption Amount: If the entire sale amount is reinvested, full exemption is available. If only part of the proceeds is reinvested, partial exemption is provided based on the proportion of reinvested funds.
- Restriction on Additional Properties: To claim the exemption under Section 54F, the NRI cannot own more than one residential property (apart from the new one) at the time of the sale.
For more details on TDS for NRIs on property sales in India, check out this blog on Comprehensive Guide to TDS for NRIs on Property Sales in India
Section 54 vs. Section 54F: Key Differences
| Basis | Section 54 | Section 54F |
| Type of Asset on Sale | Residential House Property | Any asset other than Residential House Property |
| Exemption Amount | Exemption on capital gains reinvested | Full or partial exemption depending on reinvestment |
| Additional Property Ownership | No restriction on ownership | Restriction: can own only 1 property other than new one |
| Revocation of Exemption | Exemption revoked if new property is sold within 3 years | Exemption revoked if new property is sold within 3 years |
| Applicable to NRIs | Yes, for residential properties | Yes, for non-residential assets |
Key Similarities Between Section 54 and Section 54F
- Eligibility for exemption: Both Sections apply to NRIs who sell long-term assets.
- Minimum holding period of assets: In both cases, the asset must be held for at least 24 months.
- Time for reinvestment: NRIs must reinvest the capital gains within 1-2 years for purchase and 3 years for construction.
- Minimum holding period for the new asset: The newly acquired property must not be sold within 3 years of purchase or construction.
- Capital Gains Account Scheme (CGAS): This scheme allows NRIs to deposit capital gains from property sales into a designated account and reinvest the funds in a new residential property within the required timeframe.
Benefits of Section 54 for NRIs
- Tax Exemption on LTCG: NRIs can avoid paying taxes on capital gains from selling a residential property in India by reinvesting the gains in a new residential property.
- Reinvestment Flexibility: NRIs have the flexibility to either purchase or construct a new residential property within the stipulated timeframe.
- Reduced Tax Liability: By reinvesting capital gains, NRIs can significantly reduce their tax liabilities arising from the sale of residential properties.
Benefits of Section 54F for NRIs
- Exemption on LTCG from Non-Residential Assets: NRIs can claim tax exemptions on the sale of non-residential assets (such as shares, bonds, etc.), provided the proceeds are reinvested in a residential property.
- Full or Partial Exemption: NRIs can enjoy a full exemption if the entire sale amount is reinvested, or a partial exemption based on the amount reinvested.
- Strategic Tax Management: By reinvesting the proceeds from the sale of long-term capital assets, NRIs can strategically manage their tax liabilities and build their real estate portfolios in India.
How Brivan Consultants Can Help NRIs
At Brivan Consultants, we provide expert guidance and support to NRIs navigating the complexities of capital gains tax exemptions under Section 54 and Section 54F. Whether you’re selling residential property or other long-term assets, we can help you understand the tax implications and assist in reinvestment planning to minimize your tax liabilities.
Our services include:
- Tax consultation and planning
- Filing of tax returns and exemptions
- Assistance with real estate transactions and capital gains
- Optimizing tax savings and financial strategies
In conclusion, selling property in India can be an excellent investment opportunity for NRIs, but ensuring tax exemption for NRIs on property is essential for avoiding tax issues. By accurately reporting your income, claiming credits for Indian taxes, and staying compliant with both federal and state tax laws, you can optimize your tax situation and avoid potential issues. Brivan Consultants offers expert advice to help you navigate the complexities of cross-border taxation and ensure smooth financial management.
Frequently Asked Questions (FAQs)
Q1. What is the difference between Sections 54 and 54F?
Section 54 offers exemptions on capital gains from the sale of residential property, whereas Section 54F provides exemptions for capital gains from the sale of non-residential long-term assets when the proceeds are reinvested in a new residential property.
Q2. Is Section 54F applicable to NRIs?
Yes, Section 54F applies to NRIs selling long-term assets other than residential property, such as land, shares, bonds, etc.
Q3. Is exemption under Section 54 available to NRIs?
Yes, capital gain exemptions under Section 54 of the Income Tax Act are available to Non-Resident Indians when they sell residential property in India and reinvest the proceeds into a new residential property.
Q4.What is the exemption amount under Sections 54 and 54F?
Both Sections 54 and 54F provide exemptions on capital gains up to INR 10 crores when the proceeds are reinvested in a new residential property.
Q5. Do NRIs get tax exemption in India?
NRIs with income from sources like rent, capital gains, or interest earned in India can benefit from the increased basic exemption limit of ₹4 lakh under the new tax regime. However, if their income exceeds ₹4 lakh, they won’t be eligible for the Section 87A rebate.
Q6. How can NRIs save capital gains tax in India?
NRIs can save capital gains tax by availing exemptions under Section 54, where they reinvest proceeds from the sale of a long-term residential property in India to purchase a new residential property.
Q7. How much money can NRIs take out of India?
NRIs can repatriate up to a maximum of USD 1 million per financial year from all their NRO accounts. There is no limit on repatriating funds from NRE or FCNR (B) accounts.
