NRI Property Sale: Decoding Capital Gains, TDS Obligations under IT Act, and Repatriation Compliance under FEMA

The sale of immovable property in India by a Non-Resident Indian (NRI) triggers a cascade of tax and regulatory compliance requirements, necessitating a careful understanding of the Income Tax Act, 1961, Foreign Exchange Management Act (FEMA), and applicable Double Taxation Avoidance Agreements (DTAA).

Capital Gains Taxation and Withholding in India

An NRI selling property in India is subject to Capital Gains Tax on the profit accrued from the transfer. The classification of the property as a Long-Term Capital Asset (held for more than 24 months for immovable property) dictates the tax rate.

• Long-Term Capital Gains (LTCG): Taxed at a concessional rate of 20% (plus applicable surcharge and cess), with the benefit of cost indexation available to the NRI seller. Indexation adjusts the purchase price for inflation, significantly reducing the taxable gain.
• Short-Term Capital Gains (STCG): Taxed at the NRI's slab rates applicable to a resident individual.

Mandatory Tax Deduction at Source (TDS)

A critical compliance obligation falls upon the buyer of the property, who is required under Section 195 of the Income Tax Act to withhold tax before making payment to the non-resident seller.

Scenario	Statutory TDS Rate on Consideration (Sale Price)
Long-Term Capital Asset	20%
Short-Term Capital Asset	30%

The buyer is required to obtain a Tax Deduction Account Number (TAN) and deposit the withheld tax with the Government. The NRI seller must file an Indian Income Tax Return (ITR) to reconcile the actual tax liability (after indexation) and claim credit for the TDS deducted. If the TDS exceeds the final liability, the NRI can claim a refund.

Role of DTAA in Mitigating Double Taxation

Since most NRIs are taxed on their worldwide income in their country of residence (e.g., USA, UK), the capital gains realized in India must also be reported in that jurisdiction. This raises the risk of double taxation.

The DTAA signed between India and the country of residence (e.g., US, UK, Singapore) plays a crucial role:

1. Taxing Right: Under most DTAAs, the right to tax gains from the sale of immovable property primarily vests with the country where the property is situated (India).
2. Foreign Tax Credit (FTC): The country of residence generally allows the NRI a Foreign Tax Credit for the tax already paid in India. This mechanism ensures that the total global tax burden on the gain is limited to the higher of the two countries' tax rates, effectively eliminating double taxation.

Example: If the Indian rate is 20% and the foreign rate is 15%, the NRI pays 20% in India and owes no further tax abroad. If the foreign rate is 25%, the NRI pays 20% in India and an additional 5% abroad.

Repatriation of Sale Proceeds: FEMA Compliance

The process of sending the net sale proceeds (after payment of taxes) out of India is governed by the Foreign Exchange Management Act (FEMA).

• Repatriation Limit: An NRI is generally permitted to repatriate up to USD 1 million per financial year from the sale of two residential properties in India, subject to compliance with conditions specified by the Reserve Bank of India (RBI). This limit is distinct and higher than the USD 250,000 limit applicable to resident individuals under the Liberalized Remittance Scheme (LRS).

• Essential Documentation (Forms 15CA and 15CB): For outward remittance, banks require stringent documentation to certify that all Indian tax liabilities have been settled. Key compliance documents include:

Form 15CA: An undertaking/declaration by the remitter (the NRI's bank) regarding the remittance.

Form 15CB: A certificate from a Chartered Accountant (CA) confirming the nature of the remittance and certifying that the tax due in India (including TDS) has been duly paid. This CA certificate is crucial for the bank to process the foreign outward remittance.

NRI sellers must ensure the buyer provides a copy of the TDS certificate in a timely manner, as this document is essential for the CA to issue Form 15CB and complete the repatriation formalities.

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