Property sales by NRIs: Experts explain tax rules & life without indexation

New tax rules mean steeper bills and bigger TDS for NRIs selling property. Experts break down what's changed and how to plan smarter.

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For many non-resident Indians (NRIs), real estate has long been a preferred investment back home. But selling the property could be tricky for the uninitiated, especially after the recent changes introduced in the Finance Act, 2024.

 

While the government has simplified long-term capital gains (LTCG) tax by introducing a flat rate, the removal of indexation benefits and mandatory tax deduction at source (TDS) on the full sale value have added fresh challenges. 

 

What are the current tax rules?

The tax liability for NRIs selling property in India depends on how long they’ve held the asset.

 

“If the property is held for 24 months or less, the gains are treated as Short-Term Capital Gains (STCG) and taxed at the applicable income slab rates, which could go up to 30 per cent,” says Ritika Nayyar, partner at Singhania & Co.

 

“For properties held beyond 24 months, the gains are considered Long-Term Capital Gains (LTCG) and taxed at a flat 12.5 per cent from July 23, 2024 onwards, but without indexation benefits,” she noted.

 

“Properties held for over 24 months now attract a flat 12.5 per cent long-term capital gains tax plus applicable surcharge and cess. However, the key change is the removal of indexation benefit, meaning inflation is no longer factored in to adjust the purchase price,” says Sudeep Bhatt, director strategy, Whiteland Corporation, a real estate company.

 

“Importantly, the buyer must deduct tax at source (TDS) and issue a TDS Certificate. That said, exemptions are available if the capital gains are reinvested in another property or specified bonds,” he adds.

 

SR Patnaik, partner (head-taxation), Cyril Amarchand Mangaldas, adds, “Earlier, NRIs could opt for a 20 per cent tax rate after adjusting their purchase price for inflation using indexation. That option is now gone, which means those who’ve held property for many years could see a higher taxable gain despite the lower headline rate.”

 

Why is TDS deducted on the full sale value?

One of the biggest pain points for NRIs is tax deduction at source (TDS). Under Section 195 of the Income Tax Act, the buyer of the property must deduct TDS on the entire sale price, not just on the profit. “The TDS rate is 12.5 per cent (plus surcharge and cess) for LTCG and up to 30 per cent for STCG,” explains Nayyar.

 

This can lead to significant cash flow issues, as the deducted amount often exceeds the actual tax liability.

 

“NRIs can apply in advance for a certificate of lower or nil TDS from the tax department to avoid excessive deduction,” advises Adil Altaf, managing director at Trinity, a real estate developer.

 

Real-life example

To explain how this works, Altaf shares an example:

 

“If an NRI sells a property in India in August 2025 for Rs 3 crore that was purchased in 2010 for Rs 1 crore:

 

The capital gain is Rs 2 crore.

 

At a flat 12.5 per cent tax rate (without indexation), the base tax comes to Rs 25 lakh.

 

Adding a 10 per cent surcharge and 4 per cent cess, the total tax liability is about Rs 29 lakh.

 

However, under Section 195, the buyer must deduct TDS on the full sale value, not just the gain:

 

The applicable TDS rate, including surcharge and cess, is around 14.95 per cent.

 

This means a TDS deduction of approximately Rs 44.85 lakh on the Rs 3 crore sale price.

 

“The NRI can claim a refund of the excess TDS by filing an income tax return or avoid high deduction by applying for a lower TDS certificate in advance,” Altaf added.

 

How can NRIs reduce their tax outgo?

There are some strategies NRIs can use to ease the tax burden.

 

According to Nayyar, “Under Section 54, LTCG is exempt if the money is reinvested in another residential property in India within specified timelines. Section 54EC also allows exemption if gains are invested in certain bonds within six months, subject to a limit of Rs 50 lakh.”

 

Patnaik cautions, “The conditions for these exemptions are stringent. NRIs should plan the reinvestment carefully and keep all documentation in place to avoid denial of exemption claims.”

The indexation blow

The removal of indexation benefits is particularly harsh for NRIs who bought property many years ago or inherited it.

 

“Without indexation, the original purchase price cannot be adjusted for inflation, leading to steeper taxable gains,” says Altaf.

 

Nayyar suggests NRIs “evaluate potential tax liability before finalising a sale and explore exemptions or a lower TDS certificate to avoid unnecessary cash flow crunches.”