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:
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
Capital Gain on the sale of property in India is calculated as below:
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.
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.
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.
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.
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.
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.
Below are some frequently asked questions regarding the sale of 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.
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.
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.
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.
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.
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.
Feel free to book a paid consult by clicking this link.
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