Rajesh Mehta, an NRI residing in the United States, is returning to Bengaluru after his five-year H1B visa expires. He owns three properties in the city, next to his child’s school, where he plans to reside; an apartment in the outskirts, which he plans to sell; and a house in Mysore, which he plans to rent out.
When selling, he faces capital gains tax; rental income will be subject to income tax; wealth tax considerations may apply to his total property holdings; stamp duty and registration charges will arise upon new occupancy; and TDS compliance must be managed for rented properties.
Experts said careful planning can optimise his tax liability.
Tax on the sale of property
The tax calculation on the sale of property shall depend on the period of holding of the property in question and the residential status of the seller at the time of sale.
“If the property has been held for over 24 months, then gains shall be treated as long-term and taxed either at the rate of 12.5% flat without indexation or 20% with indexation, whichever is lower (but this option of with indexation is available only to properties bought before 23rd July 24),” says Ritika Nayyar, Partner, Singhania and Co.
“Such gains have to be computed as per the prescribed manner under the Income-tax Act, 1961. In this regard, please note that the residential status of such a taxpayer, including the status of their H1B1 visa, does not impact the above-mentioned tax implications,” said Nayyar.
In other cases, the gains shall be considered as short-term and taxed at the regular slab rates applicable to the NRI. If gains on sale of the property are reinvested in a new residential property as per section 54 or in specified bonds up to ₹50 lakh as per section 54EC, or temporarily in the Capital Gains Account Scheme until eligible reinvestment, then one gets exemption from this long-term capital gains tax, subject to conditions in those sections, experts said.
Also Read: No EMI till possession scheme: 5 reasons why homebuyers should think twice
Tax on rental income
Such rental income shall be taxable under “Income from House Property” and taxed at regular slab rates. One is eligible for a standard deduction of 30% of the annual municipal tax deduction and any interest paid on a home loan for that property.
“In case monthly rent exceeds ₹50,000, the tenant, while remitting rental income to the owner/ landlord, must deduct tax at source at applicable rates either under section 194-IB or section 195, as the case may be, based on the residential status of the owner. The NRI must report the rental income in their Indian tax return and pay tax on it. TDS already deducted can be adjusted with the total tax liability,” said Nayyar.
Tax on self-occupied property
The third home can be treated as “self-occupied property” for tax purposes. The standard deduction is not applicable to this property since there is no rental income; however, one can still claim a deduction for interest on a home loan under Section 24(b).
“One can also claim deduction of the principal repayment part, which is eligible for deduction under Section 80C up to specified limits, if the loan was taken for purchase/construction,” says Nayyar. Please note that these deductions will only be available under the old tax regime.
Claim all allowed deductions, capital gains exemptions, and TDS credits in your return
According to experts, one should determine their residential status (Resident, RNOR, NRI) annually, as this determines the tax scope. The individual should file ITR in India if income exceeds the exemption limit or if any TDS/refund is due.
“One needs to ensure that the buyer deducts TDS on sale and the tenant deducts TDS on rent, with proper Form 16A/27Q certificates. Also, it is important to claim all deductions, capital-gain exemptions, and TDS credits in the ITR,” says Niresh Maheshwari, chartered accountant and director, Wealth Wisdom India, an investment management firm.
“One also needs to maintain compliance for FEMA and repatriation if transferring funds abroad,” Maheshwari said.
Anagh Pal is a personal finance expert who writes on real estate, tax, insurance, mutual funds and other topics.