For many Non-Resident Indians (NRIs) living in Canada, owning property in India is both an investment and a connection to their homeland. However, when it comes time to sell such property, the tax implications for NRIs involve more than just finding a buyer and completing paperwork. One of the most significant aspects to consider is taxation.

The tax implications for NRIs of selling Indian property while living in Canada can be complex, as they involve compliance with Indian income tax laws, capital gains rules, and in some cases, the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and Canada.

This article explains the key tax considerations, relevant Indian laws, and procedural requirements for NRIs selling property in India while residing in Canada. The goal is to provide clear, reliable information in simple terms without unnecessary legal jargon.

Understanding Residential Status and Taxation

Before diving into taxation, it is important to determine residential status under the Indian Income Tax Act, 1961.

  • Resident Indian: If you spend 182 days or more in India during a financial year, you are considered a resident for tax purposes.

  • Non-Resident Indian (NRI): If you spend fewer than 182 days in India during a financial year, you qualify as an NRI.

For NRIs, income earned or accrued in India is taxable in India. Since the sale of property located in India falls under this category, it will be subject to Indian tax laws, regardless of where the seller resides.

Capital Gains Tax on Sale of Property in India

The most important tax consideration when selling property in India is capital gains tax.

1. Short-Term Capital Gains (STCG)

  • If the property is sold within 24 months of purchase, the profit is considered short-term capital gain.

  • Tax Rate: STCG is taxed at the individual’s applicable income tax slab rate in India.

2. Long-Term Capital Gains (LTCG)

  • If the property is sold after 24 months of purchase, the profit is considered long-term capital gain.

  • Tax Rate: LTCG is taxed at 20% with indexation benefits under Section 112 of the Income Tax Act, 1961.

Example:

If an NRI purchased a property in 2010 for ₹50 lakhs and sells it in 2025 for ₹1.5 crores, the indexed cost of acquisition will be adjusted using the Cost Inflation Index (CII). The capital gain will then be calculated on this adjusted cost, reducing the taxable amount.

Tax Deducted at Source (TDS) for NRIs

Under Section 195 of the Income Tax Act, when an NRI sells property in India, the buyer is required to deduct Tax Deducted at Source (TDS) before making payment.

  • For LTCG: TDS is deducted at 20% (plus surcharge and cess, if applicable).

  • For STCG: TDS is deducted at the applicable slab rate of the seller.

Important Note:

The buyer must obtain a Tax Deduction Account Number (TAN) to deposit TDS with the Indian government. The NRI seller can later claim refunds if the actual tax liability is lower than the TDS deducted.

Exemptions Available to Reduce Tax Liability

Indian tax law provides certain exemptions that can reduce or eliminate capital gains tax liability. These include:

1. Section 54 – Exemption on Purchase of Residential Property

  • If LTCG is reinvested in purchasing or constructing a residential property in India within specified timelines, exemption can be claimed.

  • Timeline: Purchase within 2 years or construct within 3 years of sale.

2. Section 54EC – Exemption by Investing in Bonds

  • NRIs can invest up to ₹50 lakhs in NHAI (National Highways Authority of India) or REC (Rural Electrification Corporation) bonds within 6 months of sale.

  • This provides exemption from LTCG tax.

3. Section 54F – Sale of Other Assets

  • If the property sold is not residential but the gains are invested in purchasing a residential property, exemption may be available.

Repatriation of Sale Proceeds to Canada

Selling property in India while residing in Canada often involves transferring the proceeds abroad. The process is governed by the Foreign Exchange Management Act (FEMA), 1999 and the Reserve Bank of India (RBI) guidelines.

Key Points:

  • Funds can be repatriated only through NRE/NRO accounts maintained in India.

  • Repatriation is allowed up to USD 1 million per financial year, subject to submission of required documents (such as Form 15CA/15CB certified by a Chartered Accountant).

  • Taxes must be paid in India before remitting funds abroad.

Double Taxation Avoidance Agreement (DTAA) Between India and Canada

The India–Canada DTAA ensures that NRIs are not taxed twice on the same income.

How it Works:

  1. Primary Taxation in India: Since the property is located in India, capital gains tax must first be paid in India.

  2. Relief in Canada: When filing Canadian tax returns, the NRI must declare global income, including capital gains from India. However, under DTAA provisions, tax already paid in India can be claimed as a credit in Canada, preventing double taxation.

Practical Steps for NRIs Selling Property in India

  1. Determine Capital Gains Type: Check whether it is short-term or long-term.

  2. Calculate Indexed Cost (if LTCG): Use the Cost Inflation Index.

  3. Ensure Buyer Deducts TDS: Verify proper deduction and deposit.

  4. File Income Tax Return in India: Report the capital gains and claim exemptions, if eligible.

  5. Plan Repatriation: Follow FEMA and RBI rules for transferring funds to Canada.

  6. Check DTAA Provisions: Claim tax credit while filing Canadian taxes.

Relevant Indian Laws and Guidelines

  • Income Tax Act, 1961 – Governs capital gains taxation and exemptions.

  • Section 195, Income Tax Act – TDS provisions for NRI property sales.

  • FEMA, 1999 – Regulates repatriation of funds abroad.

  • DTAA (India–Canada, 1997 Agreement) – Prevents double taxation.

  • CBDT Circulars and Notifications – Provide procedural clarity on exemptions and TDS.

FAQs on Tax Implications for NRIs Selling Property in India

1. Do NRIs have to pay capital gains tax in India when selling property?

Yes, since the property is located in India, capital gains tax applies under Indian law, irrespective of the seller’s residence.

2. Can NRIs avoid paying TDS when selling property?

No. The buyer is legally required to deduct TDS. However, NRIs can apply for a lower or nil TDS certificate from the Income Tax Department if their actual liability is lower.

3. Can sale proceeds be freely transferred to Canada?

Yes, subject to FEMA and RBI guidelines. Taxes must be cleared first, and repatriation is capped at USD 1 million per financial year.

4. Does Canada also tax the property sale?

Yes. Canadian residents must declare worldwide income. However, DTAA ensures relief through foreign tax credit for taxes paid in India.

5. Are exemptions under Sections 54 and 54EC available to NRIs?

Yes, NRIs can claim exemptions on reinvestment in residential property or specified bonds, similar to resident Indians.

The tax implications of selling Indian property while living in Canada involve multiple layers of compliance, including Indian income tax laws, TDS requirements, capital gains exemptions, FEMA rules, and DTAA provisions.

While the tax implications for NRIs may appear complex, breaking them down into clear steps—understanding capital gains classification, ensuring proper TDS compliance, filing income tax returns, and planning repatriation—helps streamline the sale and avoid legal complications.

By being well-informed, NRIs can not only remain compliant with Indian tax laws but also optimize their tax liability while ensuring smooth transfer of funds to Canada.