When selling property in India, Non-Resident Indians (NRIs) can significantly reduce their tax burden on capital gains by utilizing specific exemptions under the Income Tax Act. Here’s how NRIs can save on taxes by leveraging Section 54, Section 54EC, and Section 54F.
Exemption Under Section 54: Reinvest in Residential Property
Eligibility and Applicability:
Section 54 provides an exemption from long-term capital gains tax on the sale of a residential property, available to both residents and NRIs. This exemption applies if the property has been held for at least 24 months.
Reinvestment Requirements:
To claim this exemption, the NRI must reinvest the proceeds into another residential property within India. The reinvestment must occur within one year before or two years after the sale, or within three years if constructing a new property.
Conditions:
- The exemption is valid for only one residential property.
- The new property must be located in India.
- If the new property is sold within three years, the exemption will be revoked.
Exemption Amount:
The exemption amount is the lesser of the long-term capital gains or the cost of the new residential property.
Exemption Under Section 54EC: Invest in Specified Bonds
Eligibility and Applicability:
Section 54EC allows an exemption from long-term capital gains tax if the gains are invested in specified bonds. This exemption is available to both residents and NRIs and applies to the sale of any asset, whether residential or non-residential.
Investment in Bonds:
NRIs can invest the capital gains in bonds issued by the National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC) within six months from the sale date.
Conditions:
- The maximum investment limit is INR 50 lakhs in a financial year.
- The bonds have a lock-in period of five years.
Exemption Amount:
The exemption is equivalent to the investment amount, subject to the INR 50 lakh limit.
Exemption Under Section 54F: Reinvest in Residential Property (Non-Residential Assets)
Eligibility and Applicability:
Section 54F offers an exemption on capital gains from the sale of any asset other than a residential property, provided the proceeds are reinvested in a residential property. This exemption is available to individuals, Hindu Undivided Families (HUFs), and NRIs.
Reinvestment Requirements:
The NRI must reinvest the net sale proceeds in a residential property in India. The purchase must be completed within one year before or two years after the sale, or within three years if constructing a new property.
Conditions:
- The taxpayer should not own more than one residential property (excluding the new one) at the time of the original asset sale.
- The new property must be held for at least three years; otherwise, the exemption will be revoked.
Exemption Amount:
The exemption is based on the proportion of the investment in the new residential property compared to the net sale proceeds. If the entire proceeds are reinvested, the capital gains are fully exempt. If only part is reinvested, the exemption is proportional.
Important Note: Repatriation of Sale Proceeds
NRIs wishing to repatriate the sale proceeds must submit Form 15CA and 15CB, signed by a chartered accountant. This step is crucial to comply with tax regulations and ensure smooth repatriation.
NRIs can effectively save on capital gains taxes by utilizing these exemptions under the Income Tax Act. By understanding and applying the rules under Sections 54, 54EC, and 54F, NRIs can make informed decisions when selling property in India.
