Q.858 NRI selling property in

India & reinvesting in new

property - TDS

Question: Dear Sir, I have few questions. I appreciate any guidance you can provide. FACTS: 1. I am the first buyer and bought a property in 2006/2007 for around 51 lakhs and I had spent 5 lakhs in furnishing / closet/kitchen etc. I paid all in US $$ via NRO account. 2. I am now selling the property for approx 99 lakhs in few weeks 3. I already bought another property in april 2015 for 1.71 CR. Property is still under construction and I would have possession of it in 2017 sometime. So I will be taking 99 lakhs and reinvesting the same in this new property. Tax related questions: 1. What would be my tax obligation in INDIA after adjusting for inflation? I would guess "none” as I did a approx. calc based on the following... Do you know any tax obligation in US even if no obligations are in India. This is a very important question for me. see below. to calculate Indexation: http://nriinformation.com/faq3/index.htm Indexation Factor = 1024 / 497 = 2.04 Formula: Indexed Cost of Acquisition = Actual Purchase Price * Indexation Factor = 51 * 2.04 = 104 Formula: Long Term Capital Gain = Sale Price - Indexed Cost of Acquisition LOng Tern Gain = 99 - 104 = - 5 lakhs (<< Negative 5 lakhs) 2. I will be getting money(99 lakhs) in indian rupees. Shall I deposit it in NRO or NRE account . My guess is NRO account as I will be reinvesting it in new property. Also I guess it will be easy to repatriate the money in US$$ inc ase I sell my new property in future. Please let me know your thoughts. I appreciate it. Thanks Praveen [February 23, 2016] Answer: Regarding your questions: Looking at your calculation I only have one comment. The indexing factor that would apply would be for the year 2015-2016 which is 1081 and not for the year 2014-2015 as you have calculated using 1024. However this does not change the end result as you would have no taxable capital gain in India. Kindly note that when property is sold in India where value is over Rupees 50 Lakh, then regardless of whether capital gain tax is payable or not, there is a Tax Deduction at Source (TDS) that applies. This can be from 1% for Indian residents to 20% for non-residents on long term capital gain or as per their tax slab in case of short term capital gains. [More info on this is under question/answer #855 - see ‘TDS Procedure when Property Sold in India by Non-Resident (NRI)’] A sample of the TDS submission Form is available HERE

NIL or Lower Tax Deduction

Certificate

NRIs may be able to apply for a NIL/Lower Tax Deduction certificate when selling their property in India. This is a route to take when perhaps: There is no capital gain on the sale Capital gain tax is less than the TDS that needs to be deducted Seller has bought another property to save capital gain can apply for a tax exemption certificate The tax department when such a request is approved issue a certificate and nil or reduced TDS will be deducted. Regarding your second question as to whether there would be a tax liability in USA on sale of property in India, there are a few points that may be of interest to you and other readers of this page. Article 13 of the India/USA DTAA which states:’ . . . each Contracting State may tax capital gain in accordance with the provisions of its domestic law.' 1. Hence, If a US Citizen or US Green card holder for example, has a capital gain in India, they would pay the appropriate Indian taxes due as per taxation rules in India And 2. Declare the capital gain on their US tax return and calculate taxes due as per taxation rules in USA. Credit for any taxes paid in India would be available when filing US tax. Indexing benefits available in India does not mean that they would also apply in USA. When foreign property is sold by a US resident, for capital gains purposes the property is treated as if it was located in the United States. The same rules apply. Indexing benefits available in India to save capital gains under Indian Tax rules for example under section 54EC, would not apply in USA. Even if no tax is due in India, tax may be applicable in USA. For US taxation, some exemptions are available when foreign property is sold by a US citizen/resident based on what is known as the ownership test and the use test. I would suggest you contact a professional accountant in the United States so as to ensure that you minimize your tax liability in the United States and stay in compliance.

Deposit property sale proceeds in NRE

or NRO account

As per rules, sale proceeds of property by NRIs should be deposited first in an NRO account. Only foreign currency transactions can be made in NRE accounts. Once funds from the sale of property are deposited in NRO account and CA certificate etc. provided to verify all due taxes due have been paid, then the funds can be remitted abroad or transferred into NRE account. You mentioned that you bought my book for which I thank you. The sale of THE NRI GUIDE helps subsidize the cost of running this website and your support and that of many others, is indeed appreciated.