If you are a resident alien in the US and selling property in India, then you need to deal with both US and Indian tax implications. Additionally, foreign exchange regulations also apply to you.
This blog consists of all the information that you need to know financially, legally, and practically to sell property in India while following the US tax laws. So, read on and gather all the details.
Key Takeaways
- US tax residents are liable to pay tax in both India and the USA if they sell property in India.
- On selling a property, capital gains and TDS are imposed on the net consideration.
- Under sections 54, 54EC, and 54F, a US tax resident can reduce their tax liability by claiming tax exemptions.
- For fund repatriation overseas, it is vital to fill out Form 15CA and 15CB.
- Under the DTAA signed between India and the USA, a US tax resident can claim a foreign tax credit and avoid paying taxes twice on the same income.
What Kind of Property Do NRI & US Tax Residents Sell in India?
In India, NRIs and OCIs are allowed to sell almost every type of real estate property. It includes inherited or purchased residential, commercial property, and inherited agricultural land. However, in the case of selling inherited agricultural land, you need to face several restrictions.
Further, in all the scenarios, you need to have proper documentation by your side with up-to-date details. Additionally, you also need to submit legal proof of property ownership with clearance from local or municipal officials.
So, these are the kind of properties that NRIs and US tax residents can sell in India. Moving ahead, let's know the tax obligations imposed in India after the sale of property.
Taxation on Property Sale for NRI and US Tax Resident
Selling a property in India while being an NRI and a US tax resident creates tax implications on the capital gains. Considering this, before selling the property, you need to know about the following things:
Capital Gains
Capital gain tax is imposed on the property you sell in India. Here, the tax liability depends on the holding period of the asset, i.e., long-term or short-term capital gains. If you sold the property within 24 months (2 years) of acquisition, it will be treated as a short-term gain. Considering this, on that, tax will be imposed as per your Indian income tax bracket. However, if you held the property in India for more than 24 months, it is categorized as long-term capital gain.
- The long-term capital gain tax rate is 12.5% without indexation for property sold on or after July 23, 2024.
- If the property was purchased before July 23, 2024, you have two options to pay long-term capital gain tax. First, under the old regime, paying 20% tax with indexation. Additionally, second, under the new regime, paying 12.5% capital gain tax without.
TDS Obligations
TDS is applied when an NRI or a tax resident in the US sells property in India. Considering this, the buyer of the property, before transferring the complete payment, needs to deduct the TDS. Further, this TDS is submitted to the tax officials of India. Moving further, here is a detailed look at how it works:
Here, the TDS is applied to the total sale amount, not only on the capital gain. This further results in a higher tax deduction that is more than your actual tax liability.
Considering this, under section 197 of the Income Tax Act, NRIs can apply for a lower or nil TDS deduction certificate. If it gets approved, then NRI is eligible to pay tax on capital gains only. Further, if the excess TDS amount is deducted at the time of your ITR return, you can claim a refund with supporting documents.
This was all about how tax is imposed on the property sale in India on NRIs and US tax residents. Moving further, let's know how you can reduce your tax burden while selling the property in India.
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How Can US Citizens Reduce Tax Burden When Selling Property in India?
Do you know if you reinvested the property selling amount under specific conditions and within certain timelines, you can get tax exemptions on capital gains? Yes, the Indian tax law allows tax exemption on capital gains if you reinvest the amount gained in India in property. Combining these tax exemptions effectively can provide your complete or significant tax relief.
Section 54: Reinvestment in Residential Property
This section applies when you earn long-term capital gain from the sale of residential property. To claim the tax exemption within two years of sale, you need to reinvest the amount in another Indian residential property. Additionally, within three years, you can also construct a new house. Further, up to one year before the residential property sale, you can purchase a new home. For instance, tax exemption is capped at INR 10 crore, which is effective from AY 2024-25.
Section 54F: Broader Asset Sales
Section 54F applies to the long-term capital gains generated from the sale of any capital asset. Under this, you need to reinvest the entire net sale consideration in one residential property in India. However, if you opt for partial investment, it outcomes in proportionate tax exemption.
Further, unlike section 54, under this section, you can reinvest the amount in commercial spaces, sales of plots, or other non-residential properties. However, you still need to invest some amount in residential property. In this also, the tax exemption is capped at INR 10 crore, which comes into effect from AY 2024-25.
Section 54EC: Bonds Exemption
If you do not want to reinvest your capital gain amount in a property, under section 54EC, you can invest it in government-specified bonds. Under this, in NHAI or REC bonds, you can invest up to INR 50,00,000 within six months from the sale of your asset. These bonds come with a lock-in period of five years. Additionally, they are considered low-risk investments.
This is how, by reinvesting the capital gain amount under these sections, you can reduce your tax liability in India. Moving ahead, the repatriation of sale proceeds in the US.
How Repatriation of Sale Proceeds in the US?
Once you fulfill the Indian tax requirements, you may need to transfer the remaining amount from the sale to the country you reside in, i.e., the US. For making such transactions, the Reserve Bank of India (RBI) governs the use of FEMA (Foreign Exchange Management Act).
Considering this, being a US tax resident, you can repatriate up to $1 million per financial year from India. The repatriation amount limitation applies on a per-person basis. Additionally, in this specific case, compliance steps are followed. If you purchase property through your NRE/ FCNR funds, repatriation is limited. In this, the repartition is limited to the sale of two residential properties.
During the purchase, the property should be acquired in accordance with foreign exchange regulations. In case the property is purchased using the NRE account funds, for repatriation, the amount is directly transferred to your NRE account. In case funds of the NRE account are not used to transfer funds, then the amount is first transferred to the NRO then NRE account.
So, this is how repartition of funds is done in the US. Moving ahead, let's know the US tax implications in relation to the Indian property sale.
US Tax Implications in Relation to Indian Property Sale
As a US citizen selling property in India, you are required to mention this in your global income. Considering this, you need to mention the capital gain from the Indian property sale in your US tax return. For this, use Schedule D (Form 1040) and Form 8949 to provide detailed information on the transactions. Additionally, the amounts should be mentioned in USD.
Further, by using Form 1116, you can claim a foreign tax credit on the taxes you paid in India. Additionally, if the amount received is more than $10,000 under FBAR (FinCEN Form 114), you need to report the sale. However, if the total foreign assets surpass the basic threshold limit, use Form 8938 (FATCA).
Apart from this, under the Double Tax Avoidance Agreement (DTAA) signed between India and the US, a tax resident in the US selling property in India gets tax benefits. It assists them in avoiding paying taxes on the same income twice. However, to claim it, you need to fill out specific forms.
Further, this was all about the US tax implications in relation to the sale of Indian property.
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Final Thoughts
Lastly, it is vital to understand the tax rules for selling property in India as an NRI & US tax resident. Since you are liable to pay taxes in both countries. In case you fail to do so, you face unnecessary fines and audits.
Further, Savetaxs can guide you throughout the process and can help fulfill your tax obligations in both countries. We have a team of professionals who know what forms are needed to be filled out and when, and who handle all the things on your behalf. So, connect with us and sell your property in India without any tax complications.
Note: This guide is for informational purposes only. The views expressed in this guide are personal and do not constitute the views of Savetaxs. Savetaxs or the author will not be responsible for any direct or indirect loss incurred by the reader for taking any decision based on the information or the contents. It is advisable to consult either a CA, CS, CPA, or a professional tax expert from the Savetaxs team, as they are familiar with the current regulations and help you make accurate decisions and maintain accuracy throughout the whole process.
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