Due to globalisation, most Indian residents own properties outside India either by inheritance, purchase or investment when they are staying outside India. In the case of selling such property, the issue of taxation comes under the Indian Income Tax Act, 1961. Immovable property that is located in another country can be complicated to tax since it incorporates the cross-border aspects and the treaties on the elimination of double taxation, as well as the foreign exchange laws. This blog discusses taxation of a resident selling immovable property abroad and taxation, compliance requirements and other legal implications.
Residential Status and Its Significance
The level of property outside India income tax mainly depends on the residential status of the taxpayer. Income tax act section 6 classifies individuals as Resident, Resident but Not ordinarily Resident (RNOR), or Non-residents.
Tax is paid by a Resident in India on any income that he earns anywhere in the globe. According to the law of India, therefore, when an individual sells property outside India, the income is taxed in India only in the case that such an individual is a resident in India.
The RNOR or non-resident tax is a tax on the Indian earned income only. Therefore, when they sell property in a foreign country and save the money outside India, they will not have taxable income in India.
Taxability of Capital Gains from Foreign Property
Capital gains in the hands of the seller are because of the sale of immovable property outside India. In India, the capital gains are taxable in case the seller is a resident taxpayer. The calculation of capital gains is performed according to the same principles as that of the property located in India, but indexed cost and currency issues are taken into account.
The short period or long period of holding is the basis of classifying capital gains as either short-term or long-term. In case the property is retained for a period of over 24 months, the gains are considered long-term capital gains. Otherwise, they can be considered short-term.
Computation of Capital Gains
To determine the amount of capital gains as a result of selling property outside India, under the Income Tax Act, first, the entire amount realised as the selling price is considered. Next, deduct the purchase price of the property plus any cost of improvement. In the long run, assets, purchase and improvement costs are to be adjusted for inflation and thereafter deducted. The rest is subject to capital gains.
It is also essential to convert the foreign money into Indian rupees. Regulations provide that the money which you receive from the sales, the amount which you pay to purchase goods and other expenses should be changed into Indian rupees at the exchange rate provided in rule 115A. This ensures uniformity in calculations and prevents currency fluctuations.
Rate of Tax on Capital Gains
Capital gains in respect of property situated outside India on a short-term basis are taxed at the customary slab rates that the assesse is subjected to. Indexation Penalty: The long-term capital gains are usually taxed at 20 per cent. There are also the surcharge, health, and education cess.
In the event of a loss in the sale of the property, the resulting loss in capital may be offset against any other capital gains, or it may be carried on to the following years in accordance with the provisions of the Act.
Relief under the Double Taxation Avoidance Agreement
One of the fears of taxpayers is the risk of having to be taxed twice, in the country of property and in India. To prevent this India has signed Double Taxation Avoidance Agreements (DTAAs) with some countries.
By these treaties, the country in which the property is located normally has a right to tax capital gains of immovable property. The country of residence, however, India, also taxes the income. In this situation, the taxpayer may claim a relief by receiving credit for the tax paid in foreign countries against Indian tax, but with the provisions of Section 90 and Section 91 of the Income Tax Act.
The presence of the foreign tax credit is known to guarantee that the same earnings are not subjected to taxation twice, hence promoting cross-border investments.
Repatriation of Sale Proceeds to India
The other factor that should be considered is the repatriation of sale proceeds to India. India has a law in its Foreign Exchange Management Act (FEMA), according to which money brought into the country through the sale of foreign property should meet the regulations of the RBI. The taxpayer is supposed to make sure that he or she repatriates the funds using the legitimate banking platforms and keeps the required records.
The repatriation does not impose any tax liability when the income has already been subjected to tax in India. Non-observance of FEMA guidelines can, however, result in regulatory repercussions.
Non-Residents and RNORs Treatment
As previously stated, the non-residents and RNORs do not have to pay tax in India when selling the property located outside India unless the income is collected in India. However, if a non-resident receives the sale proceeds directly in India, the income may become taxable.
Non-residents must therefore plan the manner in which the funds of the sale proceeds will be received so as not to breach the Indian and foreign tax laws.
Conclusion
The tax laws used in sale of the immovable property located outside India are a combination of the domestic tax laws, foreign tax laws, and international treaties. In India, the income of residents is taxable as part of global income, but non-residents are not usually taxable except where they receive the proceeds in India. The key factors that will define the final tax liability are the classification of gains as long-term or short-term, computing under the rules of India, conversion of currency, and the benefit of relief from double taxation.
Considering the complexities, taxpayers need to carefully review the transaction, adhere to the regulations of both the Income Tax Act and FEMA, and provide complete disclosure in their income tax returns. It is not just that compliance is achieved by proper planning and documentation, but it also assists in availing legitimate tax reliefs under DTAA that optimise the overall tax result.
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