Non-resident Indians (NRIs) prefer an investment of real estate in India as the value of properties always tend to be increasing day by day. NRIs invests in various properties in India, however they find it difficult in case of sale of property as they don’t know the how the proceeds of these get taxed.
Click here to know about Capital Asset and Capital Gain.
Capital gain arises when any taxpayer, whether resident or non-resident Indian (NRI), sells any property in India. Income-tax on such capital gain depends upon the period for which property is held by the taxpayer. The holding period is bifurcated as short term and long term as follows-
| Short term | Long term |
| Property sold within 3 years of purchase. | Property sold after holding for more than 3 years. |
| Taxable at normal slab rate | Taxable at 20% of the capital gain |
Note- In case of long term capital gain, indexation benefit will be available to the taxpayer.
E.g.:- Mr. Girish is staying in UK since 5 years for employment. He was having in his investments land at Mumbai costing Rs. 50,00,000/- 2000-01
His investments for the financial year 2014-15 were as follows-
| Particulars | Property at Mumbai | Property at Chennai |
| Nature of property | Residential house | Non-agricultural Land |
| Year of purchase | 2000-01 | 2013-14 |
| Cost | Rs. 5,00,000/- | Rs. 35,75,000/- |
| Year of sale | 2014-15 | 2014-15 |
| Sale consideration | Rs. 28,50,000/- | Rs. 40,00,000/- |
How much capital gain and taxes thereon will arise in case of Mr. Girish?
Ans.:-
- The residential house at Mumbai was acquired in 2000-01 and sold in 2014-15 i.e. after holding for more than 3 years. Hence, the capital gain will be long term capital gain. Indexation will also be available in this case.
- Whereas in case of land at Chennai, holding period was less than 3 years since the land is sold at the next year. Hence, the gain is short term capital gain.
Capital gain will be as follows-
| Particulars | Property at Mumbai | Property at Chennai |
| Sale consideration | Rs. 28,50,000/- | Rs. 40,00,000/- |
| Nature of gain | Long term | Short term |
| Indexed cost of acquisition | Rs. 12,61,084/- | Rs. 35,75,000/- |
| (Rs. 5,00,000*1024/406) | (No indexation for short term capital gain) | |
| Capital gain | Rs. 15,88,916/- | Rs. 4,25,000/- |
| Tax rate | 20% | 30% |
| Capital gain tax | Rs. 317,783/- | Rs. 1,27,500/- |
*It is assumed that Mr. Girish is in 30% tax bracket.
How’d the capital gain taxes be minimized?
The Capital gain taxes cannot be avoided however it could be minimized with the help of proper tax planning. This could be done through capital gain exemptions.
Click here to know about Capital Gains Exemptions.
E.g.:- In the above-mentioned example of Mr. Girish, if Mr. Girish invests in the RECL Bonds for Rs. 18,00,000/- within the date of filing of return.
How much exemption Mr. Girish could avail?
Ans.:- If the taxpayer invests in bonds of RECL or NHAI within the due date of filing of return, he can claim the exemption under section 54EC.
In this case, the rate of tax in case of short term capital gain is higher; the exemption of RECL bonds shall first be applied to capital gain on sale of land at Chennai. Hence, Rs. 18,00,000/- shall be apportioned first towards short term capital gain of Rs. 4,25,000/- and the balance amount of Rs. 13,75,000/- shall be apportioned for long term capital gain. Balance long term capital gain of Rs. 2,13,916/- is taxable at 20%.
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