­Understanding U.S. Taxation and Indian Taxation on Capital Gains from Indian Property Sales

As a Non-Resident Indian (NRI), selling property in India has tax implications in the United States. Although the transaction occurs overseas, the proceeds and gains are subject to U.S. tax laws. This guide outlines the reporting process and compliance requirements for federal and state taxes.

(A) Essential USA Taxation Compliance Guidelines for NRIs:

1. Reporting Income on IRS Form 1040
   • Capital gains from foreign property sales must be declared on your federal tax return (Form 1040).
   • Accurate reporting helps prevent penalties or audits.

2. Foreign Asset Disclosure (FBAR & Form 8938) – If sale proceeds are held in Indian bank accounts exceeding reporting thresholds, you must file:
   • FBAR (Foreign Bank and Financial Accounts Report) in Form FinCEN 114.
   • Form 8938 (Statement of Specified Foreign Financial Assets) with your federal tax return.

3. Claiming Tax Credits for Indian Taxes Paid
   • Taxes paid in India can be offset in the U.S. by filing Form 1116 with Form 1040.
   • Maintain records like tax receipts and the sale agreement for verification.

4. Repatriation & Gift Reporting
   • If transferred funds exceed $100,000 and qualify as a gift, report them via Form 3520.
   • While the IRS does not tax gifts and inheritances, some states may have specific regulations.

5. State Tax Filing Requirements
   • Capital gains must also be reported on state tax returns. Some states impose additional taxes or filing requirements on foreign income.

Importance of Proper Record-Keeping

Maintaining comprehensive records is essential for compliance. Ensure you document:

• Sale Agreement & Ownership Proof – Keep records of the property sale agreement and ownership documents.
• Financial Details – Track the purchase price, cost of improvements, and final sale proceeds.
• Currency Conversion Rates – Record exchange rates used for IRS reporting.
• Tax Payment Receipts – Retain proof of Indian taxes paid for verification.

(B)  LTCG & TDS Rates for NRIs: Post-Budget 2024 Guide on Real Estate Transactions:

The Finance (No. 2) Bill, 2024, has introduced clear and structured tax regulations for Non-Resident Indians (NRIs) selling property in India. Referring to Section 112(1)(c), these amendments define the Long-Term Capital Gains (LTCG) tax rates and Tax Deducted at Source (TDS) obligations, ensuring transparency and reducing ambiguity.

Revised LTCG Rates for NRIs:

As per the updated provisions:

🔹 For property transfers before July 23, 2024:

• LTCG tax rate (held >24 months): 20% with indexation benefits.

🔹 For property transfers on or after July 23, 2024:

• LTCG tax rate (held >24 months): 12.5% without indexation benefits.
• STCG tax rate (held ≤24 months): Individual’s regular income tax slab rate

NRIs have to mandatorily adhere to 12.5% LTCG without indexation benefit even for properties acquired before July 23, 2024.

TDS on Property Transactions for NRIs:

Under Section 195 of the Income Tax Act, TDS is applicable on payments made to non-residents in property transactions. The deduction is based on the LTCG rate, calculated on the entire sale consideration, irrespective of actual capital gains.

📌 TDS Rates:
✔ 12.5% + surcharge + cess on the total sale value for transactions post-July 23, 2024.
✔ 20% + surcharge + cess on the total sale value for transactions before July 23, 2024.

✔30% + surcharge + cess on the total sale value for transactions before July 23, 2024.

TDS Rate in case of Long-Term Capital Gains:

This clarification ensures that both buyers and NRIs remain aligned with tax regulations, preventing compliance issues.

Why This Amendment Matters?

The confusion earlier stemmed from the differing tax treatments for residents vs. NRIs:

🔹 Residents: Can choose between 12.5% (without indexation) and 20% (with indexation) for properties acquired before July 23, 2024.
🔹 NRIs: Must comply with fixed 12.5% on the total sale value for transactions post-July 23, 2024 even for properties acquired before July 23, 2024.

Key Takeaways for NRIs

✅ LTCG Simplified: A flat 12.5% LTCG tax rate for sales post-July 23, 2024, eliminating the complexity of indexation.
✅ TDS Clarity: The deduction aligns directly with applicable LTCG rates, ensuring uniform compliance.
✅ Plan Your Transactions: NRIs should structure their real estate sales strategically to align with the most favourable tax implications.
✅ Documentation is Key: Ensure proper records of sale agreements and TDS deductions to avoid disputes during tax filing.

FAQs on NRI Property Taxation

🔹 What is the LTCG tax rate for NRIs post-July 23, 2024?
➡ 12.5% without indexation for property sales on or after this date.

🔹 How is TDS deducted for NRIs?
➡ TDS is deducted at 12.5% of the sale value for transactions post-July 23, 2024, and at 20% for sales before this date.

🔹 Can NRIs choose between the two tax rates?
➡ No, NRIs must follow the prescribed rates as per Section 112(1)(c).

🔹 How does this differ for residents?
➡ Residents can choose between 12.5% (without indexation) and 20% (with indexation) for properties acquired before July 23, 2024, unlike NRIs.

🔹 Do these changes apply to foreign companies?
➡ Yes, these provisions extend to non-residents and foreign corporations as well.

(C) Lower TDS Deduction & Compliance for NRIs Selling Property in India:

1. How NRIs Can Reduce TDS on Property Sales

✅ Apply for Lower/Nil TDS Deduction (Section 197)

• File Form 13 with required documents (sale agreement, PAN, property details).
• Obtain a certificate from the Income Tax Department.
• Provide the certificate to the buyer to ensure lower TDS deduction.

📌 If excess TDS is deducted, NRIs can claim a refund when filing their ITR.

📌 No Minimum Threshold: Unlike resident transactions, NRI property sales attract TDS regardless of the sale value.

2. Buyer’s Responsibilities When Purchasing Property from an NRI

• Obtain a TAN (Tax Deduction & Collection Account Number).
• Deduct TDS at prescribed rates or as per the seller’s Lower TDS Certificate.
• Deposit TDS via e-challan by the 7th of the following month.
• File TDS return in the next quarter & issue Form 16A to the seller.

3. Penalties for Non-Compliance

🔹 Buyer’s Liability:

• Failure to deduct TDS properly results in penalty equal to the TDS amount (Section 271C).
• Interest liability under Section 201 on the defaulted sum.

🔹 NRI Seller’s Liability:

• Non-compliance may block repatriation of sale proceeds.
• Misrepresentation of tax residency can lead to prosecution.

Expert Tax Assistance for NRIs:

Navigating NRI and cross-border taxation requires professional expertise. R. Tulsian & Co. specializes in:

• Proper declaration of foreign income to the IRS
• Compliance with FBAR & Form 8938 reporting for overseas financial accounts
• Utilizing tax credits under the India-U.S. DTAA
• Adhering to federal and state tax regulations

For expert guidance on cross-border taxation, visit www.rtulsian.com or reach out to us on ishan@rtulsian.com or WhatsApp us on +91 6289107303 for a personalized consultation and seamless tax compliance solutions.