An NRIs Guide to Deal with Tax and Repatriation Issues on Sale of Inherited Property

An NRIs Guide to Deal with Tax and Repatriation Issues on Sale of Inherited Property

If you sell an inherited property after 3 years of purchase it’ll bring capital gains to you at a tax rate of 20%.The holding of the inherited property will be computed from the purchase date of the original owner. But while computing the gains, the cost of the immediate previous owner would be considered as cost of purchase.

Vaibhav Sankla, Director, H&R Block India said that the courts are of the view that the indexation benefits (i.e. benefit provided by income tax) can start from the year in which the previous owner acquired the property.

Index values came into being in 1981-82, therefore, any property purchased before that had to get itself fairly valued as per April 1, 1982.This could be done at the local municipal authority. In case of original price records missing, the property would be valued by the municipal authority of the jurisdiction where the property is situated. An NRI is subject to a TDS of 20% on the long term capital gains. If the property is sold within 3 years of purchase, the owner is liable to short term capital gain tax according to his/her respective tax slab. The difference between the sale value and the cost of purchase equals to the short term capital gain and it will be entitled to a TDS of 30% irrespective of the tax slab.
But the NRI’s can take a breather from paying tax in India and TDS, if they decide to re-invest the capital gains of the property in another property or in tax exempt bonds. In such a case, proofs of reinvestment of capital gains, allotment letter or paying receipts (in case of buying another house), affidavit stating investment of capital gain amount into bonds (in case of buying bonds under section 54EC) have to be shown.

In such a situation the seller must file an application to the income tax department for tax exemption certificate keeping in mind that the application should be made to the same jurisdiction to which his PAN belongs to. The buyer usually keeps the last instalment pending till the time the exemption certificate is allotted to him. In case of bonds, the certificate usually mentions that the buyer can make the complete payment once the money is invested in bonds and receipt of investment is received. There exists a particular time period within which the seller of the property has to reinvest his money. In case of reinvesting in another property the time span is 2 years whereas in case of bonds it is 6 months. But in case of NRI’s they need to complete either of these as soon as possible so as to quicken their transaction procedure.

The buyer is responsible for deducting tax at source and paying it to the government. He must also get a Tax Deduction Account number and issue a TDS certificate in NRI’s name. If the buyer fails to deduct TDS due to any reason or sheer negligence and the NRI too fails to declare the income and pay the tax, then the buyer is responsible to the income tax authorities for the same amount.

Section 54 of the Income Tax Act states that if a residential property is sold after 3 years of purchase and in turn another residential property is bought within 2 years of sale or a residential house is constructed within 3 years from date of sale, the gains of the seller is exempted to the extent of the cost of new property. For example if 30 lakhs is the capital gain and 20 lakhs is the price of the new property then 10 lakhs becomes the long term capital gain. The new property could either be occupied by the buyer or given on rent but it has to be retained for at least 3 years.


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