Capital Gain Tax
Do you own any immovable property in India? Do you anticipate your parents giving you an immovable property under a Will?
There has been multi-fold appreciation in the real property (“property”) prices throughout India. Due to appealing exchange rates of the U.S. Dollar to the Indian Rupee, purchase of property by Non-Resident Indians (NRIs) has grown multi-fold in the recent months.
So what happens when you sell such property? For the sake of simplicity, we have assumed that all properties sold were second homes; they were not used for business and were not let out for rental purposes.
From India Income Tax point of view:
- If the property is held for more than three years, you get indexation benefit on the cost (basis) that you have purchased. Indexation is a technique to adjust income payments to maintain purchase power after inflation.
- If the property is acquired prior to 1st April 1981, you are entitled to substitute the market value of a property as on 1st April 1981 as your cost of acquisition and thereafter you can avail of indexation benefits.
- The capital gains on a sale of the property is computed as under:
Sale value of property – 100
Expenses on sale ———-2
Cost of acquisition —-10
Indexed cost 10*852/100—–85
Capital gain – 13
- If the Sale price of the property is less then the Stamp Duty value (as determined by the Stamp Duty Authority in India), then the difference in the price may amount to capital gains in India.
- You can avail of “roll over benefit” under Section 54 of the Indian Income Tax Act by purchasing another residential house either one year before or within two years after the date of sale or construct a residential house within a period of three years from the date of sale. The cost of acquisition/construction of new residential house should be more than capital gains. If you invest less, the shortfall will be taxed as capital gain.
- You can also take benefit of reinvestment in certain notified bonds. However, you can invest only up to Rs. 50 lakh in a financial year (which is April to March).
- If you are not able to make the required investment to avail of the exemption on capital gains before the due date for filing your tax return, the amount of capital gain has to be deposited in a separate account in a nationalized bank under the Capital Gains Account Scheme (CGAS) before the Due Date of filing your return for the relevant year.
- The Purchaser would be required to deduct tax at source at the rate of 20%, if property is held by you for a period of three years or more. At the rate of 30% if the property is held for a period of less than three years.
From U.S. Income Tax point of view:
The sale of property in India is taxable in the United States if you are a U.S. Resident for U.S. Income Tax purposes.
- The capital gain is calculated by deducting cost of acquisition from the sale price.
- You do not get any indexation benefits in the United States.
- If the property was your main home for at least 2 years during the 5-year period ending on the date of sale, you can exclude up to $250,000 of the gain. If married, filing jointly, you can exclude up to $500,000 if you both used the home as your main home for the required period. You can’t claim the exclusion if you sold another home within the 2-year period ending on the date of sale and claimed the exclusion for that sale.
- If the property does not meet the above conditions, the property would be regarded as a second home (i.e. property which was not used primarily for your residential purposes). 5. If the property (second home) is held for more than one year and is sold at a gain, such gain will be taxed as long-term capital gain subject to a maximum federal tax rate of 15%. For property held for less than one year, normal rate of tax applies.
A U.S. Person selling property in India can avoid paying of tax on the gain arising on the sale of property in India by using various tax exemption provisions stated above under the Indian Income tax act. However, he may still be liable to pay the tax in the United States.
Further, it is very important to determine what would be the cost (basis) of property sold (e.g. inherited property, property received as gift, etc.). U.S. Income Tax rules in comparison to the Indian Income Tax rules are quite complex and different in such matters. You also need to look into what disclosures would be required in India and in the United States and how you would remit your funds back to the United States.