Selling property can be quite challenging, whether you’re an NRI or a resident of India. As an NRI, the first step is finding a buyer who truly appreciates your property. Once you’ve found the right buyer, negotiations begin and the final terms are settled. After finalizing the deal, the buyer is responsible for deducting TDS from the NRI seller’s proceeds, usually at a rate of 20%, along with additional surcharges based on the sale price and cess.
Once the deal is settled, both parties sign an agreement to sell, determining the date for the sale/conveyance deed to be executed. As a buyer, it’s important to remember to deduct TDS from the sale price, including any advance payments made at the time of signing the agreement to sell or memorandum of understanding. Failure to deduct TDS on advance payments is a common mistake made by buyers.
After the negotiation, NRI sign an agreement to sell the property. Then NRI decide on a date to officially transfer ownership (called the sale/conveyance deed). Both parties sign this deed on the decided date.
As a buyer, it’s important to remember to deduct the TDS not just from the final sale price, but also from any advance payments you make (like a token amount) when you sign the agreement to sell. This is a common mistake that buyers make.
After completing all the procedures, the NRI seller is required to file an income tax return and pay taxes on the property transfer. Now, the question arises: how do you determine capital gains on the sale of property according to Indian tax laws?
Let’s break it down in a simple way for NRIs to understand the treatment of capital gains. When you sell property in India, unless it’s part of your business, it’s considered a capital asset. Any profit or loss from such assets is taxable under the head of capital gains.
Since the property is a capital asset, any gain or loss should be taxed under the capital gains provisions of the Income Tax Act, 1961. The profit from selling the property should be calculated by the NRI after deducting the property’s acquisition cost and transfer expenses directly associated with the sale from the sale price.
Here’s a straightforward breakdown:
Sale price of property: xxxxxxx
Minus: Purchase price of property: xxxxx \
Minus: Transfer expenses: xxxxx
Short-term capital gain = xxxxxxx
Capital gains can be categorized as short-term or long-term based on how long the capital asset has been held. For long-term capital assets like property, the purchase price can be adjusted for inflation using indexation.
Now, let’s focus on transfer expenses in relation to selling property. These expenses typically include fees for advocates, brokers, or other nominal charges. NRIs are generally allowed to deduct these expenses from the sale price of the property.
But what about expenses incurred specifically for selling the property, like air ticket, hotel stays, postage, conveyance, and photocopying charges if the NRI travels to India for this purpose?
Recent rulings have favored NRIs in this regard. In a case, the Hyderabad Income Tax Appellate Tribunal (ITAT) ruled in favor of an NRI, allowing them to deduct such expenses from the sale price of the property.
In such case, the assessee, an NRI, sold their property in India during the assessment year 2013-14. They claimed transfer expenses totaling Rs. 281,425. These expenses included the cost of obtaining a special power of attorney from the Indian consulate in the USA, airfare, hotel stays, postage, legal fees, transportation, and photocopying charges.
The assessee argued before the Dispute Resolution Panel (DRP) that the expenses incurred were directly related to the transfer of property, therefore they should be considered allowable expenses. The assessee cited the judgment of CIT vs. Shakuntla Kantilal (1991) 190 ITR 56 (BOM) to support their argument. However, the DRP disagreed, stating that such expenses were merely incidental to the sale transaction and couldn’t be allowed since they weren’t wholly and exclusively for the transfer of the property. Consequently, the appeal was disallowed.
Unsatisfied with the DRP’s decision, the NRI submitted an appeal before the tribunal. The tribunal noted that the issue wasn’t whether the expenses were incurred by the assessee, but whether they were deductible for the purpose of computing capital gains under section 48 of the Income Tax Act. The tribunal observed that the Bombay High Court had considered what constituted expenses incurred wholly and exclusively in connection with the transfer under section 48(1). It concluded that the expression “in connection with such transfer” is broader than “for transfer” and held that the amount paid was absolutely necessary to effect the transfer of the property.
The tribunal held that in this case, the assessee being an NRI had to travel to India for the purpose of transferring the property and incurred such expenses. Without these expenses, the transfer could not have occurred. The tribunal concluded that based on the reasoning in the aforementioned case, these expenditures are covered under section 48(1) of the Income Tax Act and are therefore allowable.
Case Discussed is : Adil Rehman vs ITO (internation taxation) 2, Hyderabad ITA No 15/hyd/2024 Ay 2014-15
