Owning and maintaining an immovable property (land or building or both) in India can burn a hole in an individual’s pocket, especially if he is living outside India and not using the property for residence or generating any rental income
With no plans to return to India in the foreseeable future, the thought of selling the property may be a plausible option. However, the tax implications and compliance requirements that follow on sale of immovable property in India are not that straightforward in the case of a Non-Resident (NR) (in the year of sale/transfer of immovable property).
Therefore, all individual taxpayers must first determine their residential status in India by referring to Section 6 of the Income-tax Act, 1961 (Act) which lays down the principles of determining the residential status. This assessment is important to correctly determine the scope of taxability, rate of applicable tax, and type of tax return form to be used for filing the Income-tax Return (ITR) in India.
For individuals who are not in the business of constructing and/ or selling immovable properties, any gain/ loss arising on the sale/ transfer of immovable property is categorized as ‘income under the head capital gains’ since an immovable property qualifies as a ‘capital asset’. Depending on the period of holding, a capital asset may be divided into two categories – (i) long-term capital asset if the capital asset is sold after 24 months from the date of purchase; or (ii) short-term capital asset if the capital asset is sold within 24 months from the date of purchase
Therefore, long-term capital gains (i.e., gains on the sale of a long-term capital asset) enjoy a fixed tax rate of 20% and get the advantage of indexation to give the taxpayer the benefit of inflation. However, the benefit of tax slabs and deductions for tax saving investments made in India is not available.
For example, if the NR has long term capital gains of INR 60,00,000 from sale of a residential property, his tax liability would be INR 13,72,800 (INR 60,00,000 * 20% + surcharge at 10% + cess at 4% on sum of tax and surcharge) without giving tax slab benefit and without allowing deduction for any tax saving investments made in India. On the other hand, if the NR has short term capital gains of INR 60,00,000 from sale of residential property, his tax liability would be INR 18,44,700 (as per applicable slab rates + surcharge at 10% + cess at 4% on sum of tax and surcharge). Thus, tax outflow is likely to be lower if the immovable property is sold after holding the same for more than 24 months.