How Indians in the UAE can save on taxes when selling property back home

They can either reinvest capital gains in government bonds or apply for a low-tax deduction certificate

When you sell a property in India, the buyer is required to deduct a 20 per cent to 25 per cent TDS from the transaction price. Getty Images

Nitin Kakaria, a 43-year-old Indian chief executive of a Dubai-based investment advisory company, sold a plot of land in the city of Noida in the Delhi-National Capital Region in March.

He invested his capital gains from the sale into tax saving bonds, which are issued by the Rural Electrification Corporation and National Highways Authority of India.

“It took around one year after I advertised the plot for sale for the actual transaction to happen. I sold it through a broker,” says Mr Kakaria, who’s been in Dubai for eight months after relocating from Singapore.

“The biggest struggle is when non-serious buyers message you and quote a price, which is typically 25 per cent to 35 per cent of your asking price and sometimes even lower than the market average price of that area.

“This is typically done by brokers who will reach out to you saying that they have a serious buyer and when the discussion starts, they quote a random price and you get to know that there was never a real buyer.”

He recommends sellers to list their property with Indian portals, such as Magicbricks, Nobroker and Homebazaar, among others.

The Asian country is a preferred real estate investment destination for GCC-based non-resident Indians.

NRIs accounted for 10 per cent to 15 per cent of overall property purchases in India during the first three months of the year, according to property consultancy Anarock.

UAE-based NRIs accounted for 9 per cent of investors in the residential property segment, Anarock data shows.

Delhi-NCR, Hyderabad and Bengaluru were the top picks to buy homes for NRIs, according to a joint survey by the Confederation of Indian Industry and Anarock last year.

The depreciating rupee and buoyancy in the Indian residential real estate market are significant factors drawing NRIs’ interest, the survey found.

From a long-term investment purpose, Tier 2 cities have now become a prime focus, especially Lucknow, Nagpur, Pune, Ahmedabad, Kochi and Jaipur. These are emerging as the most value-for-money destinations, a separate report by Anarock found.

However, selling these properties presents challenges in the form of tax levies, according to DVS Management Consultancy, a tax and business advisory company.

When an NRI sells a property in India, the buyer is required to deduct a 20 per cent to 25 per cent TDS (tax deducted at source) from the transaction price, along with relevant cess and surcharge, the company said.

Kiran Nair, an associate professor at Abu Dhabi School of Management, recalls the process of selling his two-bedroom apartment in the south Indian city of Chennai. He had purchased the property for about Rs6 million ($724,562) in 2014 and could only sell it for the same amount two years ago.

“Although there was no capital gain, I had to pay Rs1.4 million as tax. I can claim a tax refund, but have only received half the amount from the income tax department so far,” the 46-year-old says.

“I wanted to sell the property and invest in mutual funds or other assets that offer more attractive returns.”

The land laws in India are not homogeneous, according to Nabeel Ahmed, partner at DVS Management Consultancy.

With land being a state subject, procedural applicability differs with respect to each state where the property is situated, he says.

Therefore, NRIs selling properties in locations other than their home states encounter certain key challenges. These include identification of reliable agents, preparation of extensive documentation, navigating repatriation restrictions and complying with tax regulations, among others, he adds.

Further, the TDS can also be exorbitant, resulting in a huge amount of tax being withheld.

If the holding period of the property is less than 24 months, the rate of TDS shall depend upon the NRI’s income slab and this may go up to 39 per cent, Mr Ahmed explains.

“One effective way to lower the TDS rates on property sales is by applying for a nil deduction or lower tax deduction certificate [LTC],” he suggests.

“It is a certificate issued by the income tax department confirming either a nil rate of TDS or a lower rate of TDS, depending upon the specific circumstances of each case.”

The time frame to obtain an LTC can typically take around six to eight weeks and the certificate remains valid from the date of issuance till the end of the financial year for which it is applied, according to Mr Ahmed.

The buyer and the seller must be specifically identified to apply for LTC, necessitating the completion of the sale agreement and other relevant documentation before making the application. The LTC shall not be valid if the buyer has changed, he clarifies.

The documents required to apply for an LTC include the sale agreement, permanent account number (PAN) of both buyer and seller, tax deduction and collection account number (TAN) of the buyer, income tax returns for the past four years, assessment order (if any) for the past four years and computation of estimated income, according to DVS.

In case of a self-acquired property (purchased with one’s own funds), NRIs can include the purchase agreement, and appropriate agreements where the property is not self-acquired by the seller, for instance, inheritance or gift, Mr Ahmed explains.

In most cases, the actual tax payable could be lower than the TDS deductible on the sale consideration.

This could be because of many reasons, such as the NRI earning no other income apart from the income from the sale of the property, loss during the current year from any other source, or carrying forward loss of the previous year, Mr Ahmed says.

Other reasons may include exemptions and deductions available during the year, income not exceeding the basic tax exemption limit (which is generally Rs250,000), or respective slab rates being lower than the rate of TDS prescribed under the law, he adds.

In order to reduce tax liabilities, Mr Ahmed also recommends that NRIs consider reinvesting the long-term capital gains arising from the sale of property in the purchase of another property.

They can also avail of capital gain exemption if they invest the funds in bonds issued by the National Highways Authority of India or Rural Electrification Corporation.

They can also claim all the expenditures incurred for sale, such as the agent’s commission, advertisement expenditure and documentation charges as a deduction upon computing the capital gains, Mr Ahmed says.

“To benefit from LTC, the NRI can make an application in Form 13. When submitting Form 13, a detailed tax computation along with supporting documents shall be attached for the assessing officer’s review,” he says.

A common challenge faced by NRIs in applying for the LTC arises when the property is inherited, Mr Ahmed says.

In such scenarios, the indexation benefits are provided only from the date of inheritance rather than from the date of acquisition by the previous owner, he adds.

“This denial of indexation benefits results in a significant loss for the seller.”

Additionally, NRIs often experience difficulties in having their carried forward losses and proposed section 54 exemptions verified by the assessing officer, he says.

Moreover, an NRI is permitted to receive the sale proceeds to the non-resident ordinary account and can remit only $1 million per financial year.

However, with a prior approval from the Reserve Bank of India, NRIs can remit more than the prescribed limit, he adds.