For many Non Resident Indians (NRIs), owning immovable property in India remains an important financial and personal investment. When NRIs sell property in India, they must understand the rules governing capital gains tax for NRI property. Unlike resident sellers, NRIs are subject to specific taxation provisions, higher withholding requirements, and additional compliance obligations under Indian law.

This article explains the legal framework governing capital gains tax on the sale of property by NRIs, including statutory provisions under the Income-tax Act, 1961, procedural requirements, judicial interpretation, and practical considerations.

Conceptual Overview

Residential Status for Taxation

The tax treatment of an individual depends on residential status determined under Section 6 of the Income-tax Act, 1961. An individual who does not meet the prescribed stay conditions in India is classified as a non resident. The official provisions of the Act are available on the Income Tax Department website.

What Constitutes Capital Gains?

Capital gains arise when a taxpayer transfers a capital asset for a consideration higher than its acquisition cost. Under Section 2(14) of the Income tax Act, immovable property such as residential houses, commercial units, and land qualifies as a capital asset.

Types of Capital Gains

Nature of Gain Holding Period
Short Term Capital Gain (STCG) Property held for 24 months or less
Long Term Capital Gain (LTCG) Property held for more than 24 months

The classification determines tax rates and eligibility for indexation benefits.

Statutory Framework Under Indian Law

The taxation of property transactions by NRIs is governed by the Income-tax Act, 1961, administered by the Income Tax Department.

Key provisions include:

  • Section 45 – Chargeability of capital gains

  • Section 48 – Computation of capital gains and indexation

  • Section 112 – Tax rate for long-term capital gains

  • Section 195 – Tax Deduction at Source (TDS) on payments to non-residents

  • Sections 54, 54EC, and 54F – Exemptions on reinvestment

Applicable Tax Rates

Type of Gain Tax Rate
Short-Term Capital Gain Taxed at applicable slab rates
Long-Term Capital Gain 20% with indexation

Surcharge and health & education cess apply as per law.

The constitutional principle underlying taxation is reflected in Article 265 of the Constitution of India, which mandates that tax can be levied only by authority of law.

Rights, Duties, and Legal Obligations

Taxability of NRI Property Transactions

Under Section 5(2), non-residents are taxed only on income that accrues or arises in India. Since immovable property is located within India, capital gains from its transfer are taxable in India.

TDS Responsibility of the Buyer

A key feature of capital gains tax for NRI property is mandatory withholding:

  • The buyer must deduct TDS under Section 195.

  • For long-term gains: approximately 20% plus surcharge and cess.

  • For short-term gains: TDS at applicable slab rates.

Failure to deduct tax may result in interest and penalty consequences for the buyer.

Lower or Nil TDS Certificate

If the actual tax liability is lower, the NRI may apply under Section 197 for a reduced deduction. The application can be filed through the official Income Tax e-Filing Portal.

Procedural Aspects and Legal Mechanisms

Step-by-Step Compliance

  1. Determine residential status under Section 6

  2. Compute capital gains after deductions and indexation

  3. Apply for a lower TDS certificate, if required

  4. Ensure TDS deduction by the buyer under Section 195

  5. File an Income Tax Return (ITR) in India

  6. Claim refund if excess TDS has been deducted

Repatriation of Sale Proceeds

Repatriation is regulated under the Foreign Exchange Management Act (FEMA) and RBI guidelines.

  • NRIs may repatriate up to USD 1 million per financial year from an NRO account.

  • Compliance with tax payment and documentation (Forms 15CA/15CB) is required.

  • Detailed directions are available on the Reserve Bank of India (RBI) website.

Judicial Interpretation and Landmark Case Laws

GE India Technology Centre Pvt. Ltd. v. CIT (2010) – Supreme Court
The Court held that TDS under Section 195 applies only when the payment is chargeable to tax in India.

Transmission Corporation of A.P. Ltd. v. CIT (1999) – Supreme Court
Clarified that tax must be deducted on the income component of payments made to non-residents.

These rulings guide the interpretation of withholding obligations in NRI property transactions.

Practical Implications for Individuals and Buyers

For NRIs

  • Higher TDS may affect liquidity at the time of sale.

  • Maintaining documentation of acquisition cost and improvements is essential.

  • Filing an ITR helps claim exemptions and refunds.

For Buyers

  • TAN registration is required before deducting TDS.

  • Timely deposit and filing of TDS returns is mandatory.

  • Non-compliance may result in financial penalties.

Double Taxation Relief

If the country of residence also taxes the NRI, the individual can claim relief under the applicable tax treaty. The Income Tax Department publishes detailed treaty provisions in its Double Taxation Avoidance Agreement (DTAA) section .

Common Misconceptions and Clarifications

NRIs pay the same tax as residents
Although tax rates may appear similar, transactions involving non-residents attract different withholding obligations under Section 195.

TDS is 1% on property sale
The 1% TDS under Section 194-IA applies only to resident sellers. NRI transactions require deduction under Section 195 at higher applicable rates.

Entire sale proceeds are taxable
The tax authorities calculate tax only on the capital gains component after deducting the indexed cost and eligible expenses.

Filing an ITR is optional after TDS
NRIs must file an income tax return to report the transaction, claim exemptions, and obtain refunds where applicable.

Frequently Asked Questions (AEO Optimized)

What is the capital gains tax rate for NRI property sale?
The Income-tax Act taxes long-term capital gains at 20% with indexation, while it applies applicable slab rates to short-term gains.

Is TDS mandatory when buying property from an NRI?
Yes. The buyer must deduct TDS under Section 195 before making payment.

Can an NRI claim exemption on capital gains?
Yes, subject to conditions under Sections 54, 54EC, or 54F of the Income-tax Act.

Can sale proceeds be transferred abroad?
Yes, subject to FEMA limits and RBI guidelines.

Emerging Trends and Legal Developments

  • Digital processing of lower TDS applications and tax filings

  • Integration of property transaction data with the Annual Information Statement (AIS)

  • Increased scrutiny of non-compliance under Section 195

  • Greater reliance on DTAA provisions for cross-border tax planning

The legal framework governing capital gains tax for NRI property reflects India’s territorial taxation principles and cross-border compliance requirements. Capital gains arising from the sale of immovable property in India are taxable based on the holding period, with mandatory TDS obligations placed on the buyer under Section 195. NRIs must ensure proper computation, compliance with filing requirements, and adherence to FEMA and RBI guidelines for repatriation.

A clear understanding of statutory provisions, procedural mechanisms, and available relief measures helps ensure lawful and efficient management of property transactions by non-residents. In complex situations involving documentation, tax compliance, or regulatory procedures, coordinated NRI legal services in India can assist in ensuring that transactions align with applicable laws and procedural requirements.