Sale of ancestral land/Property - NRIs – Tax Implication - TDS
Invariably, it has been seems that Non-Resident Indians (NRIs) inherited land/property situated in India either on occasion of division of their family or by way of gift/WILL of near and dear relatives.
The rules for taxation are the same as for a resident taxpayer. However, NRI is prohibited for transfer of agricultural land inherited by him to any other person who is not Indian Citizen permanently residing in India. Otherwise, there is no such restriction on sale of land/property by NRI to another NRI or to resident in India. Meaning thereby NRI can sell his property even to another NRI who is not permanent citizen of India.
Tax implication of sale of such property will depend upon the period of holding of property by the NRI . If a property is sold by the NRI after holding it for more than two years, in that case the income so arised on sale of such property will be taxed as long term capital gain. The rate of taxation of LTCC is at present is 20% + surcharge +CESS depending upon the quantum of gain.
An assessee including NRI are allowed to claim exemption on LTCG by investing LTCC in another residential property, land or prescribed bonds as per the Rules of Section 54, 54EB, 54F of Income Tax Act, 1961.
However, while calculating the gain so arised on sale/transfer of the property, the NRI is allowed to set off cost of such property. Interestingly, in the case of inheritance of the property, the cost incurred by the previous owner (normally parents) (subject to cost indexation at pre-prescribed ratio under Indian applicable Rules & Regulations) is allowed to be set off out of gross sale consideration as may be received by the NRI.
For Example - Suppose Mrs. A (mother of NRI assesee) purchased a plot of land in the year of 1970 for Rs 2,00,000/- vide registered sale deed dated 01/04/1970. Later on, the said Mrs. A constructed a residential building on the said plot of land for total cost of Rs 3,00,000 in the year of 1995.Now suppose Mrs. A died in the year of 2007, leaving behind her last Will dated 01.04.1999, where she devised and bequeathed the Said Property in favour of her son (NRI)absolutely forever.
The son, sold the property during the FY 2022-23for Rs. 1 Cr .
Now, the question arises what will be tax liability of the assesse on account of long term capital gain being arised on sale of property?
As per provisions of Income Tax Act 1961, the capital gain on sale of inherited property will be taxable in the hands of NRI son. However, he will be allowed to set of cost as incurred by the previous owner i.e. his mother as per Section 49(1) of the Income Tax Act on account of purchase of land and construction of house. Since the land was purchased in the year of 1970 and construction thereon took place during 1995, the assesse is allowed to take fair market value (FMV) as on 01.04.2001 as cost of acquisition of the property for the purpose of calculation of long term capital gain being arised. Apart from such facility, the Act further provides that the cost as on 01.04.2001 as certified by the registered Govt. Valuer, further augmented by way of indexing as per the cost of index notified by the Government for the year of the sale divided by 100 as cost of acquisition of the property by the assessee. Suppose the valuer certified FMV as on 01.04.2001 Rs 10,00,000/-, in that case applying indexation formula, the cost of the property for the purpose of calculation of tax liability will be Rs. 10,00,000 x 331/100 = 33,10,000. In lieu of Rs 5,00,000/- ( Rs 2,00,000/- land cost and Rs 3,00,000 construction cost). Accordingly, long term capital gain liability will be Rs. 13,38,000 ( 1,00,00,000 – 33,10,000 = 66,90,000 x 20%)+ surcharge.
Inspite of benefit available of cost of acquisition and exemption etc. as prescribed under Income Tax Act as stated above, gross sale consideration of the property in the case an NRI assesse remain subject to 20% TDS (withholding tax) u/s 195 of the Income Tax Act or in other words, even if, its net tax liability after deduction of indexed cost of acquisition and exemptions as may be availed by an NRI assesse is NIL or a negligible amount, the buyer of the property is under legal obligation to deduct TDS @ 20% out of gross sale consideration of the property before making payment to the seller (NRI) . In such circumstances, net take off of sale consideration of the property may reduce to a very small amount of money. No doubt an assesse can claim refund of excess tax paid by way of TDS after filing of his ITR u/s 139(1) of the Act, but it cost to an assessee in term of time and money as his money will stuck with the Income Tax Department till the time the department releases refund.
If we continue with the figures as given in the above example, though the tax liability of the NRI son on the capital gain income of the property comes at Rs. 13,38,000 + surcharge however, he will get sale consideration of Rs. 80,00,000 in place of Rs. 1,00,00,000/- after deduction of Rs. 20,00,000 as TDS at the time of sale of property. Thereafter, he will be eligible for refund of Rs. 6,62,000 (20,00,000 -13,38,000) at the time of filing of ITR only which he will get after processing of return by Income Tax Department which can take further time.
In such scenario, a facility has been provided under Income Tax Act itself to NRI assessee u/s 195. An NRI assessee can approach to the Income Tax Department through online and can file an application for Non/Lower Deduction of TDS Certificate. The department invariably after verifying various documents related to the assesse tax profile/agreement to sale and estimated tax liability being arised on sale of property issue certificate advising the buyer to deduct tax either at NIL rate or lower rate of tax in comparison to 20% being prescribed in the Act.