In this article, I would like to highlight broad income tax implications on transactions in immovable assets in the hands of NRIs and PIOs.

At the time of investment in an immovable property:

While there is no income tax payable on the purchase of property, property received as a gift, whose value exceeds Rs50,000, is taxable in the hands of the receiver, unless it is received from any relative or on occasion of marriage or under a will or inheritance.

Further, a person buying immovable property (other than agricultural land) from an Indian resident (resident as per the domestic tax laws of India) is required to withhold tax at source @ 1% of the sale consideration if it exceeds Rs50 lakh.

Are lease rentals taxable in India?

Under domestic tax laws in India, tax is required to be paid on lease rentals; however after claiming a standard deduction @ 30%, property taxes actually paid and mortgage interest payable during the year. The net amount would be subject to tax as per applicable slab rates on the basis of which individuals are liable to pay taxes in India. If the net result is a loss, then it can be set off against other income earned in the same year to the extent of Rs2 lakh and the balance loss can be carried forward for eight years. However, the carry-forward loss can be set off only against property income and not any other income.

At the time of sale of immovable property:

On sale of immovable property, you would be required to pay capital gains tax in India. The rate of tax would depend on the period for which the property is held by you. Gain/loss arising on a property held for less than 24 months is treated as a short-term capital gain, which is taxable @ slab rates in the hands of the seller. Long-term capital gain is taxable @ 20% (plus applicable surcharge and education cess).

In order to calculate capital gain, purchase cost of the asset, expense incurred on improvement of the asset and any expense directly related to the transfer of asset (example: brokerage expenses) should be reduced from the sale consideration of the asset. In case of a long-term capital asset, the purchase price and cost of improvement can be adjusted by taking the benefit of indexation. Indexation takes into account the inflation during the holding period and, thereby, reduces the tax burden for the seller. For example, a property is purchased in financial year 2005-06 for Rs1,000 and sold in financial year 2017-18 for Rs3,500. Notified cost inflation index for 2005-06 is 117 and for 2017-18 it is 272. Thus, the indexed cost of acquisition in our example would be Rs2,325 and the capital gain would be Rs1,175 (Rs3,500 less Rs2,325).

One important point to be noted here is that if the stamp duty value of the property sold is higher than the sale consideration, then the stamp duty would be regarded as sale consideration of the asset.

How to save tax on capital gains?

Long-term capital gains from the sale of a residential property can be claimed as exempt if they (i.e. capital gains and not sales consideration) are re-invested in the purchase or construction of one residential house located in India, subject to certain conditions. The amount of capital gains not utilized before the due date of filing return of income can be deposited in a capital gains account scheme as notified by the central government.

One can also save tax by investing long-term capital gains in bonds issued by the National Highways Authority of India or by Rural Electrification Corp. Ltd or in any other bond specified by the central government. However, investments in such bonds should not exceed Rs50 lakh and the investment should be made within six months from the date of transfer.

It is important to note that in case the new property is sold within five years or the bonds are sold within three years, the capital gains exemption claimed earlier would be withdrawn and the person would be liable to pay tax in the year of sale of new property.

The above write-up highlights only the income tax implications. Apart from these, the implications under the goods and services tax and stamp duty laws should also be considered.

Frequently asked questions:

I inherited an immovable property from my father in India. I am planning to sell this property. What value can be taken as cost of acquisition of the property?

The cost of acquisition shall be the cost at which your father had acquired the property. Also, the period of holding would be reckoned from the date the property was acquired by your father.

I want to purchase a property in India. Am I required to obtain a permanent account number (PAN) in India?

If you are liable to withhold tax at the time of purchase of property, then you are required to obtain and quote PAN in the challan-cum-statement in Form 26QB that is used for depositing withholding tax. In other cases, you may furnish a declaration in Form No. 60, providing the necessary information.

I acquired a property for Rs80 lakh. Am I required to withhold tax on the entire amount or Rs30 lakh (i.e. amount exceeding Rs50 lakh)?

Tax is required to be withheld on the entire consideration.

CA Nilpa Keval Gosrani contributed to this article.

Vikas Vasal in national leader tax—Grant Thornton India LLP