How to Avoid Double Taxation of Capital Gains on Sale of Property in India

Here is your most comprehensive guide to Capital Gain on the Sale of Property in India. This article is for NRIs living in Australia looking to sell property in India.

It is common for migrants to Australia to have properties in their parent country, often acquired before migrating or thru inheritance. At some point, there is a need to sell the properties and repatriate the sale proceeds to Australia to invest or fund the lifestyle here.

Selling a property in India by NRIs poses challenges of double taxation of the capital gains in Australia and the parent country. As a result, you risk losing a significant portion of your gains to taxes. In addition, migrants from countries like India, which has a strict foreign exchange repatriation regime, have numerous bureaucratic hoops to jump through.

This blog details the issues, tax laws, and solutions to help the non-resident Indians (NRIs) settled in Australia who are considering selling their properties in India. However, the general concepts in this article should apply to all Australian residents selling their overseas properties.

This blog will cover:

Key Challenges for NRIs Selling a Property in India
How is Capital Gain Calculated on the Sale of Property in India
How to Save Tax on the Sale of Indian Property in India?
Repatriation of Sale Proceeds from India
How to minimise Australian Tax on the Sale of Property in India
Frequently Asked Questions
Final Thoughts on Capital Gains on Sale of Property in India for NRIs in Australia

Key Challenges for NRIs Selling a Property in India

A significant part of the challenge is to negotiate the tax system of two countries, i.e., India and Australia, and deal with a very bureaucratic repatriation process

Pre-sale challenges

Identifying the right real estate agent to sell your property. This sector in India is unlicensed, and it can be difficult to decide who to trust.
Availability of PAN (the equivalent of Australian TFN)
Lack of insights about the complex mix of Market Value and Circle Rates.
Opening NRO and NRE accounts and choosing the right bank.
Not having the right network of Accountants, Lawyer, and Banker in India

During-sale challenges

Executing the Agreement to Sell.
Legal formalities of appointing a Power of Attorney to act on your behalf.
The onerous documentation, certification, and verification. You may need Indian identifications like PAN, OCI, Aadhar etc., as Australian identifications will not work.
Process of Executing the Registry to the Buyer.

Post-sale challenges

Lack of awareness around Tax Compliance, Tax Deducted at Source (TDS), Capital Gains Tax, and lodging the Tax Return.
Repatriation of funds to Australia in compliance with the complexity of Reserve Bank of India (RBI) Guidelines and Foreign Exchange Management Act 1999.

How is Capital Gain Calculated on the Sale of Property in India

Capital Gain on the sale of property in India is calculated as below:

Sale Price (A)

Less: Expenses incurred in connection with the sale (B)

Net Consideration C= (A-B)

ii. Cost of Acquisition (Indexed for properties held for 2 years or more) (D)

iii. Cost of Renovations or Improvements (indexation available after 2 years) (E)

Taxable Capital Gains (C-D-E)

The resultant capital gain will be long-term if the property has been held for more than two years. For properties held for less than two years, the resultant capital gain will be treated as a short-term capital gain.

Compliance with the Indian Income Tax Act

The buyer will deduct TDS @20% of the transaction price and deposit it with the Indian Tax Office. You can apply for a lower rate of TDS.
The seller must file an Income Tax Return after the end of the fiscal year in which the property is sold, i.e., Post March 31, 20XX. Any excess tax paid due to TDS can be refunded after the tax return has been lodged and the assessment is finalised.

How to save tax on the sale of property in India?

Tax concessions in India are available only for long-term capital gains, i.e. for properties held for more than 2 years. However, availing of these concessions will require you to re-invest the capital gains in Indian property or specified government bonds and lock in your reinvestment for a certain number of years.

Long Term Capital Gain can be exempted if reinvested in a new residential house property in India within 1 year before or 2 years after the sale, and if the new property is being constructed, then construction should be completed within 3 years of the sale. Also, such new assets should be held for at least 3 years from the date of their purchase by the NRI.
The Long-Term Capital Gain can also be exempted if reinvested within 6 months in purchasing bonds in specified government corporations. The Bond should not be redeemable before 5 years from the date of issue, and the maximum limit for reinvestment is INR 50,00,000

There are other conditions that may need to be satisfied before being eligible to take advantage of the above concessions. These concessions come at the cost of locking your funds and taking on the risk of fluctuating foreign exchange rates.

Repatriation of Sale Proceeds from India

The repatriation of proceeds from the sale of your property in India is tightly regulated by The Foreign Exchange Management Act, 1999(FEMA) and The Reserve Bank of India (RBI) directives.

Key Highlights:

As per FEMA rules, repatriation of funds by NRIs is restricted to the sale of up to two residential properties only.
Repatriation is limited to a maximum of 1 Million USD from the Balance held in their NRO account per financial period, i.e. April- March. If you want to remit more, you need to seek permission from the RBI.
Repatriation is subject to the submission of necessary certificates from your Chartered Accountant, documentary evidence of the sale of property as well as Tax compliance in relation to the amounts being repatriated.

How to Minimise Australian Tax on the Sale of Property in India

As an Australian resident, your capital gains on overseas assets are treated the same way as Australian property. This taxation of overseas income in Australia can result in double taxation of foreign-sourced income. To prevent this, Australia has tax treaties with many countries to avoid double taxation of income. For example, Australia has a Double Tax Avoidance Treaty with India. However, these treaties generally do not provide relief from double taxation of capital gains from property.

Further, the incidence of tax in Australia arises when the contract to sell becomes unconditional instead of on settlement. Therefore, the tax liability in Australia could potentially crystalise earlier that in India, particularly in case of a delayed settlement.

However, with some smart tax planning, you can reduce or eliminate the double tax in Australia. Below are some tips.

Income Tax legislation in Australia allows us to take the market value of the property as of the date you became a tax resident as the deemed acquisition cost instead of its original purchase price. This substitution of market value as the acquisition cost will mean your Indian property will effectively enter the Australian Tax system only when you become a resident. This could save you significant tax and, in some cases, even eliminate any tax you may have otherwise had to pay in Australia.
If the property being sold in India was your family home for a period, we could claim a prorate exemption on the gain that relates to the period you lived in it.
Holding the property for 12 months before sale entitles taxpayers to a 50% reduction on capital gains. Therefore, only 50% of the capital gain will be taxable in Australia.
Use any capital losses or carry forward capital losses to reduce the capital gain. It does not matter if the capital losses arise from the sale of Australian assets or overseas assets.
The foreign tax offset only compensates you for any Australian tax liability increase due to foreign tax-paid income. If the increase in the Australian tax liability is less than the foreign tax paid, the offset is restricted, and no refund accrues.

Examples Scenarios:

Kumar is a mining engineer and arrived in Perth on November 30, 2016, on a 457 visa sponsored by Rio Tinto. His family soon joins him, and he rents his flat in New Delhi. On January 26, 2021, Kumar became a permanent resident. Below are some scenario options Kumar can consider if he wishes to sell his Delhi flat and buy a home in Perth.

Suppose Kumar sells the Delhi flat before January 26, 2021. In that case, there will be no Capital Gain Tax in Australia as Kumar sells his Delhi flat before becoming a permanent resident. Therefore, during his work visa phase, he will be a temporary tax resident and not liable for tax in Australia on overseas income. So, he will only have to pay taxes in India.

Refer to our blog, How to Pay Zero Tax on Sale of Your Overseas Home, to read some more scenarios of how Kumar could have reduced tax on the sale of your property in India.

Frequently Asked Questions

Below are some frequently asked questions regarding the sale of property in India:

What happens if NRI sells property in India?

Selling Indian property by a non-resident Indian triggers capital gains tax on the sale of the property in India. In addition, a capital gains tax liability will also accrue in Australia if the NRI is a tax resident of Australia. Therefore, an NRI will be subject to double taxation when selling property in India. However, credit can be claimed for any tax paid in India.

How is capital gain calculated on the sale of property in India?

Capital gain on the sale of property in India is calculated by reducing from the sale price the cost of acquisition and the cost of renovations to the property. Where the property is held for more than two years, the cost of the property and renovations can be indexed.

How can I avoid capital gains tax on property sales in India?

Tax concessions in India are available only for long-term capital gains, i.e. for properties held for more than 2 years. However, you can reduce or avoid tax on the Long Term Capital Gains in India by reinvesting the capital gains in Indian property or in specified government bonds and locking in your reinvestment for 3 to 5 years.

How much tax do I pay on the sale of property in India?

Long Term Capital Gain is taxable in India at a flat rate of 20% + 4% cess + surcharge based on the level of income. Short Term Capital Gains are however taxed as per the normal slab rates.

Can NRI repatriate money from the sale of a property in India?

Yes, you can. Repatriation is limited to a maximum of 1 Million USD from the Balance held in their NRO account per financial period, i.e. April- March. If you want to remit more, you need to seek permission from the RBI.

Final Thoughts on Capital Gains on Sale of Property in India for NRIs in Australia

Selling your property in India can unlock significant funds and liquidity. However, as a resident Australian, the profits from the sale of property in India will be subject to tax both in India and Australia. The impact of the double taxation of capital gains can be significantly reduced in many cases through proper tax planning.

Repatriation of funds from India is tightly governed by the bureaucracy of The Foreign Exchange Management Act, 1999 (FEMA) and The Reserve Bank of India (RBI) directives. Generally speaking, repatriation of funds by NRIs is restricted to the sale of up to two residential properties only. Furthermore, repatriation is limited to a maximum of 1 Million USD from the Balance held in their NRO account per financial period, i.e. April- March. If you want to remit more, you need to seek permission from the RBI.

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