How to handle Capital Tax while selling property as an NRI


Are you an NRI wanting to sell property in India? Here is your guide on how to manage the capital tax. Learn about tax payable and how to save tax on the property sale. Tax exemptions and legal options on property sale of an NRI available to you, are provided here.

If you are selling property in India, you will need to know about the hefty taxes you may have to pay on capital gains. Most people do not factor in the capital tax when they sell a property, but it should be considered. It can be a big tax and make for an unpleasant surprise for NRIs who make the sale without doing adequate research. However, there are exemptions and legal ways to reduce the capital tax that you may otherwise have to pay.

Tax payable and its implications


According to the current rules, you pay 20 percent tax on long-term capital gains made from selling a house held for three years. Short term capital gains taxes (on property held for less than 3 years) are calculated at 10 percent and added to the taxable income.

Taxable capitals gains are calculated by subtracting the costs of acquiring the property and the incidental expenses from the gross proceeds earned during the sale of the property. However, it is possible to save capital tax on selling property in many ways.

How to save tax


Use the cost inflation index to calculate capital tax:


The 20% capital tax can go into lakhs, but you can reduce your tax liability significantly by inflating the cost of the property when you do your calculations. For instance, if there was a rise of the cost inflation index from 500 to 600 in 3 years, then you can increase the real cost of the property from 50 lakhs to 60 lakhs for that time period. If the price also rose proportionately to the inflation, you have not made any profit in the real sense. This means your capital tax liability is less.

Buy or build a house with the gains:


Sections 54 and 54F of the Income Tax Act exempt individuals from capital tax if the proceeds from the sale of a property (residential- 54 or non-residential - 54F) goes into the purchase or construction of a new residential house. There are some conditions:
  • You must buy a new house within 2 years of sale. You can buy it a year before sale. Or construct a house within 3 years of sale.
  • You cannot sell the new house for the next 3 years.
  • Amount of exemption under section 54 is lower of the cost of a new house or capital gains.
  • Amount of exemption under section 54F is calculated in proportion to the purchase price and sale prices.

Section 54C or Capital Gains Bond:


If you already own a residential property in India and cannot benefit from Section 54, you can invest the proceeds of the sale in Capital Gains Bond (within 6 months of sale) by the NHAI. This will exempt you from capital tax, but you must invest for at least 3 years. You will earn an interest of 6% annually, knowing that the bonds are secured and rated AAA.

There is another option for you if you cannot invest in a new property before e-filing your income tax returns. You can invest some money in a Capital Gains Account Scheme for 3 years, during which time you can invest the sale proceeds in new property or build a house. You have to make the deposit before you file your tax returns, and mention the investment in your return. Note that only scheduled banks will let you invest in this scheme; regional and cooperative banks will not.

It can help to consult a professional adviser for more ideas on saving capital tax. Knowing about these avenues can help you save lakhs in capital tax on selling property in India.


Article by Juana
Juana is a freelance writer, with years of experience, creating content for varied online portals. She holds a degree in English Literature and has worked as a teacher and as a soft skill trainer. An avid reader, she writes on a variety of topics ranging from health, travel, education and personality development.

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