2. Taxation on Sale of Immovable Property by NRI
Under Section 9(1)(i) of ITA 2025 (old Section 9(1)(i) of ITA 1961), all income accruing or arising, whether directly or indirectly, through or from any property situated in India is deemed to accrue or arise in India. This makes the capital gains on sale of Indian immovable property taxable in India regardless of: (a) where the NRI is resident, (b) where the sale agreement is signed, (c) where the consideration is received, or (d) whether the property title is held through a power of attorney. NRIs sometimes believe that signing the sale deed outside India or receiving payment in a foreign bank account removes Indian tax liability — this is incorrect. Capital gains on Indian property are always India-sourced income and fully taxable here.
Not all immovable property generates capital gains on sale. Under Section 2(14) of ITA 2025 (old Section 2(14) of ITA 1961), agricultural land situated in rural areas (i.e., not within specified urban limits notified by the Central Government) is excluded from the definition of capital asset. Sale of such rural agricultural land does not attract capital gains tax at all — no LTCG, no STCG, no TDS obligation on the buyer. NRIs who inherit or acquire rural agricultural land (by inheritance — NRIs cannot purchase agricultural land) must first determine whether the land falls within the specified urban area or not before computing any tax liability. This is a frequently overlooked point in NRI estate planning.
2.1 Capital Gains — Classification and Holding Period
The first question on any property sale is whether the gain is Short-Term Capital Gain (STCG) or Long-Term Capital Gain (LTCG). Under Section 2(101)(a) of ITA 2025, a capital asset is short-term if held for 24 months or less immediately preceding the date of transfer. For immovable property, this 24-month threshold is unchanged from the old Act.
| Type of Gain | Holding Period | Tax Rate — NRI (ITA 2025) | Indexation | ITA 2025 Section |
|---|---|---|---|---|
| STCG | 24 months or less | Slab rates — no special rate section for property STCG | Not available | General slab provisions |
| LTCG | More than 24 months | 12.5% — Section 197(1)(b) | Not available for NRI — Section 197(3) relief restricted to resident individual/HUF only | Section 197(1)(b) |
Section 197(3) provides that for properties acquired before 23 July 2024, a taxpayer may opt for the lower of 12.5% (without indexation) or 20% (with indexation). However, Section 197(3) explicitly states this applies only to "an individual or a Hindu undivided family, being a resident". An NRI is excluded from this relief. Regardless of the property's acquisition date, an NRI always pays 12.5% without indexation on LTCG from property under Section 197(1)(b). This is a significant disadvantage for NRIs with old properties acquired at low cost — for example, a property bought in 2005 at ₹20 lakh sold for ₹1 crore — a resident could opt for 20% with indexation and potentially pay less tax, but an NRI cannot.
Sections 212 to 215 of ITA 2025 (old Section 115E of ITA 1961) provide special NRI provisions for foreign exchange assets — defined as shares in Indian companies, debentures, deposits, and Government securities acquired in convertible foreign exchange. Immovable property is not a "foreign exchange asset" under Section 212(e). Therefore these sections have no application to NRI property sales — the LTCG on NRI property is governed solely by Section 197(1)(b) at 12.5%. For properties acquired before FY 2001-02, Fair Market Value as on 1 April 2001 is used as the cost of acquisition.
Under Section 47 of ITA 2025 (old Section 47 of ITA 1961), the following transfers are not regarded as a transfer for capital gains purposes — no capital gains arise at the time of such transfer: (a) transfer under a will or by way of inheritance; and (b) transfer of a capital asset by way of gift to a relative (as defined under the Act). Many NRIs receive property by gift from parents or relatives — no capital gains arise on the NRI at the time of receipt. When the NRI subsequently sells the gifted property, the cost of acquisition is the original cost to the previous owner (or FMV as on 1 April 2001 if earlier) and the holding period includes the previous owner's holding period. However, when the NRI beneficiary subsequently sells the inherited property: (a) the cost of acquisition is the original cost to the previous owner (or FMV as on 1 April 2001 if acquired before that date); and (b) the holding period includes the period for which the previous owner held the property. This means an NRI who inherits a property held by the deceased for 20 years can immediately sell it as an LTCG transaction. The date of inheritance is irrelevant for computing the holding period — the predecessor's ownership period is included.
2.2 Cost of Acquisition and Improvement
The gain is computed as Sale Consideration (or Stamp Duty Value, whichever is higher) minus Cost of Acquisition minus Cost of Improvement. Under ITA 2025, the Stamp Duty Value (SDV) provision continues — if the actual sale price is lower than the SDV adopted by the sub-registrar, the SDV is treated as full value of consideration for the seller.
The 10% SDV tolerance continues under Section 78 of ITA 2025 (carried forward from the Finance Act 2018 amendment to old Section 50C) — where the actual sale price is within 10% of the SDV adopted by the sub-registrar, the actual price is accepted without deeming SDV as consideration. This tolerance was increased from 5% to 10% by Finance Act 2018 and is preserved under ITA 2025. This prevents hardship where minor valuation differences arise on account of negotiation or market conditions.
2.3 Exemptions Available to NRI on LTCG — Sections 82, 85 and 86 (ITA 2025)
NRIs can avail the same reinvestment exemptions as resident individuals and HUFs to reduce or eliminate LTCG on property sale. All three exemptions below are available only to individuals and HUFs — not to companies, firms, or other entities.
| Exemption | ITA 2025 Section | Old ITA 1961 Section | Key Conditions | Cap |
|---|---|---|---|---|
| Purchase / construction of new residential property in India — from sale of residential house | Section 82 | Section 54 |
— Individual or HUF only [Sec. 82(1)] — Original asset must be a residential house by nature — the property must be a residential house; it does not need to have actually earned rental income. Even a vacant residential property that generated no House Property income qualifies — the phrase "income of which is chargeable under House Property" refers to the character of the property, not actual income. Commercial property sale does not qualify. — Purchase within 1 year before or 2 years after transfer; construction within 3 years after — New property must be in India — foreign property purchase not allowed — One new property; two properties if LTCG ≤ ₹2 crore — strictly once in lifetime election [Sec. 82(5)] — if this election has been exercised in any previous year, only one property is permitted — CGAS deposit before ITR filing, not later than due date under Sec. 263(1) [Sec. 82(2)] |
₹10 crore on new asset cost [Sec. 82(7)]; ₹10 crore on original LTCG [Sec. 82(8)] |
| Purchase / construction of new residential property in India — from sale of ANY other long-term capital asset | Section 86 | Section 54F |
— Individual or HUF only [Sec. 86(1)] — Original asset = any LTCG asset except a residential house — e.g., commercial property, plot of land, shares, jewellery [Sec. 86(1)(a)] — Purchase within 1 year before or 2 years after; construction within 3 years after [Sec. 86(1)(b)] — New asset = one residential house in India — Proportionate exemption: if net consideration > cost of new asset, only proportionate gain exempt [Sec. 86(1)(i)] — NRI must not own more than one residential house on date of transfer of original asset [Sec. 86(5)(a)(i)] — Must not purchase another residential house within 1 year or construct within 3 years of sale [Sec. 86(5)(a)(ii)/(iii)] — CGAS deposit before ITR filing [Sec. 86(2)] |
₹10 crore on new asset cost [Sec. 86(8)]; ₹10 crore on net consideration for CGAS [Sec. 86(9)] |
| Investment in Capital Gains Bonds (NHAI / REC) | Section 85 | Section 54EC |
— Original asset must be land or building, or both [Sec. 85(1)(a)] — Invest in NHAI/REC bonds within 6 months of transfer [Sec. 85(1)(b)] — Bonds redeemable after 5 years [Sec. 85(6)] — all currently issued NHAI/REC bonds carry the 5-year lock-in; the "issued after 1 April 2018" qualifier from the old Finance Act 2018 amendment is no longer relevant since no new 3-year bonds are being issued — No loan or advance against bonds — deemed conversion into money [Sec. 85(4)] — Available to NRIs — no restriction to residents only |
₹50 lakh per Tax Year [Sec. 85(2)(a)]; also limited to ₹50 lakh across year of transfer and subsequent year [Sec. 85(2)(b)] |
Where the entire net consideration is not reinvested in the new residential house, the exemption is proportionate under Section 86(1)(i):
Exempt LTCG = LTCG × (Cost of New Asset / Net Consideration)
Example: NRI sells a commercial property for ₹80 lakh (net consideration after transfer costs). LTCG = ₹30 lakh. Invests ₹60 lakh in new residential house. Exempt LTCG = ₹30 lakh × (₹60 lakh / ₹80 lakh) = ₹22.5 lakh exempt. Taxable LTCG = ₹7.5 lakh at 12.5% = ₹93,750 + surcharge + cess. The remaining ₹20 lakh of net consideration not invested does not need to go into CGAS — only the LTCG proportionate to the uninvested amount is taxable.
Section 86 is often more useful for NRIs than Section 82 because the original asset can be any long-term capital asset — not just a residential house. An NRI selling a commercial shop, open plot, agricultural land in a specified urban area (which qualifies as a capital asset under Section 2(14) — rural agricultural land is not a capital asset and generates no capital gains), or shares can claim Section 86 exemption by investing the net consideration (not just the capital gain) in a new residential house in India. However, the NRI must not own more than one residential house at the time of sale — a condition that requires careful planning for NRIs with existing property portfolios. The exemption is proportionate — if the entire net consideration is not reinvested, only the corresponding proportion of gain is exempt.
Under Section 82(1)(b), the purchase window is 1 year before OR 2 years after the date of transfer — so a property purchased within 12 months before the sale qualifies. Construction must be completed within 3 years. Both the original and new asset must be residential houses in India — commercial property sales do not qualify, and new property cannot be purchased abroad. Unutilised gains must be deposited in CGAS before filing the ITR, not later than the due date under Section 263(1) [Sec. 82(2)(b)].
2.4 TDS on Sale of NRI Property — Section 393(2) [Table: Sl. No. 17]
When a buyer purchases immovable property from an NRI, TDS must be deducted before payment. Under Section 393(2) Table Sl. No. 17, TDS applies on "any other sum chargeable under the provisions of this Act" payable to a non-resident at "rates in force" — meaning the actual capital gains rate applicable to that NRI's gain, not a fixed percentage.
| Nature of Gain | TDS Rate (ITA 2025) | Surcharge | Cess | Effective Rate (indicative) |
|---|---|---|---|---|
| LTCG (property held > 24 months) | 12.5% (rates in force for LTCG on property) | 10% if income > ₹50L; 15% if income > ₹1 crore — CAPPED AT 15% for LTCG under Section 197 (25%/37% slabs do not apply to LTCG on property) | 4% | 13% (income ≤ ₹50L, no surcharge: 12.5% × 1.04) → 14.30% (10% surcharge, income ₹50L–₹1Cr: 12.5% × 1.10 × 1.04) → 14.95% (15% surcharge, income > ₹1Cr — surcharge capped at 15% for LTCG: 12.5% × 1.15 × 1.04). 25%/37% slabs do NOT apply to LTCG. |
| STCG (property held ≤ 24 months) | Applicable slab rate (rates in force) | 10% (income ₹50L–₹1Cr); 15% (₹1Cr–₹2Cr); 25% (>₹2Cr); 37% (>₹5Cr) — STCG surcharge is NOT capped | 4% | 31.2% (no surcharge: 30% × 1.04) → 34.32% (10% surcharge: 30% × 1.10 × 1.04) → 35.88% (15% surcharge: 30% × 1.15 × 1.04). For income > ₹2Cr/₹5Cr, 25%/37% surcharge applies — effective rate up to ~42.744%. |
| With valid Form 128 [old Form 13] LDC [Section 395, ITA 2025] | Rate specified in certificate | — | — | Can be Nil where full gain is covered by Section 82 / 86 exemption |
This computation illustrates two critical advisory actions: first, obtain a Form 128 [old Form 13] LDC citing the Section 82 reinvestment exemption — the AO would likely issue a Nil TDS certificate; second, deposit the capital gain in a Capital Gains Account Scheme (CGAS) account if the new property is not purchased before the ITR due date.
- TDS on NRI property sale is on full consideration at 12.5% (LTCG) or slab rate (STCG) — not just on the gain. A Form 128 [old Form 13] LDC is essential to avoid refund blockage.
- LTCG rate under ITA 2025 is 12.5% without indexation [Section 197] — down from 20% with indexation under old Section 112, but indexation was already removed from FY 2024-25.
- Reinvestment exemption under Section 82 [old Section 54] is available to NRIs — new property must be in India. Cap of ₹10 crore applies.
- Section 54EC bonds [now Section 85, ITA 2025] — invest within 6 months, ₹50 lakh per year limit, 5-year lock-in. Still a valid route for NRIs.
- Surcharge on NRI capital gains: 10% (income ₹50L–₹1Cr); 15% (above ₹1Cr) — LTCG surcharge capped at 15% regardless of income level; STCG surcharge NOT capped (25%/37% slabs apply for income > ₹2Cr / ₹5Cr)
- TDS on rent paid to NRI is 30% on gross rent + 4% H&E Cess = 31.2% effective [Section 393(2)] — Form 128 [old Form 13] LDC with actual income computation can bring this to a realistic effective rate.
- TRC (Tax Residency Certificate) + Form 10F must be furnished by the NRI to claim DTAA benefit — without these, domestic rates apply.
- Repatriation of sale proceeds: max USD 1 million per financial year from NRO account. Form 145 / Form 146 [old Form 15CA / 15CB] mandatory before remittance.
- Agricultural land / plantation / farmhouse proceeds cannot be repatriated [Reg. 6, FEMA Remittance of Assets Regs 2016] — must remain in NRO account.
- NRI must file ITR-2 in India if Indian income exceeds basic exemption — mandatory even when full TDS has been deducted, to claim refunds. Late filing fee of ₹5,000 under Section 428 [old Section 234F] applies if filed after due date.
- Buyer of NRI property must obtain TAN and file Form 144 [old Form 27Q] (non-resident TDS return). Section 393(1) [Table 3(i)] / Form 141 process does NOT apply for NRI sellers — that is only for resident sellers.
- PAN-based TDS for resident individual / HUF buyers — from 01.10.2026: Section 397(1)(c)(iii) [inserted by Finance Act 2026, effective 01.10.2026] exempts resident individual and HUF buyers from TAN requirement for NRI property TDS. Until 30 September 2026, TAN remains mandatory for all buyers including individuals.
Frequently Asked Questions — NRI Property Sale
From 1 October 2026, Section 397(1)(c)(iii) — inserted by the Finance Act, 2026 — exempts resident individual and HUF buyers from the TAN requirement specifically for NRI property TDS under Section 393(2) [Table: Sl. No. 17]. This means from October 2026, such buyers can proceed using their PAN (similar to the Form 141 process for resident sellers) without separately obtaining TAN. However, companies and firms purchasing from NRIs continue to need TAN even after October 2026.
Until 30 September 2026: TAN is mandatory for all buyers — individual or company. Using the wrong form (Form 141 instead of Section 393(2) process) makes the buyer an assessee-in-default and attracts interest under Section 398(3) and penalty.
Important — Tax Year specific: The Form 128 [old Form 13] certificate is valid only for the specific Tax Year for which it is issued and only for the transactions specified in it. It cannot be carried forward to a subsequent year — a fresh application must be filed each Tax Year. NRIs who plan to sell in a future Tax Year cannot apply in advance. The certificate is also transaction-specific — it covers only the property and consideration amount mentioned in the application.
The purchase window is 1 year before OR 2 years after the date of sale; construction must be completed within 3 years. If LTCG is ₹2 crore or less, the NRI may purchase two residential houses (once in a lifetime) [Sec. 82(5)]. The cost of the new asset is capped at ₹10 crore [Sec. 82(7)] and the original gain eligible for CGAS deposit is also capped at ₹10 crore [Sec. 82(8)]. Unutilised gains must be deposited in a Capital Gains Account Scheme (CGAS) account before filing the ITR, not later than the due date under Section 263(1).
Key differences from Section 82 [old Section 54]:
— Section 82 applies when the original asset IS a residential house. Section 86 applies when it is NOT.
— Section 86 uses net consideration (full sale price minus brokerage/registration) as the reinvestment benchmark — not just the gain. If only part of the net consideration is reinvested, the exemption is proportionate.
— Section 86 requires the NRI to own not more than one residential house on the date of transfer of the original asset [Sec. 86(5)(a)(i)] — a condition that needs careful verification for NRIs with an existing Indian property portfolio.
— Section 86 cap: ₹10 crore on the new asset cost [Sec. 86(8)] and ₹10 crore on net consideration for CGAS [Sec. 86(9)].
— Section 86 is available to individual and HUF only — not companies or firms.
Indexation on LTCG from immovable property was removed effective from Tax Year 2024-25 (Assessment Year 2025-26). The Income Tax Act, 2025 at Section 197(1)(b) provides a flat rate of 12.5% without indexation for all taxpayers.
However, Section 197(3) provides an important grandfathering relief for properties acquired before 23 July 2024 — the taxpayer may opt for the lower of 12.5% (without indexation) or 20% (with indexation). This provision explicitly applies only to "an individual or HUF, being a resident". An NRI is excluded. Regardless of when the property was acquired, an NRI always pays 12.5% without indexation under Section 197(1)(b).
For properties acquired before 1 April 2001, the Fair Market Value as on 1 April 2001 (as per CBDT-approved valuation) is used as the cost of acquisition. This relief continues under ITA 2025 and applies to NRIs as well.
Until 30 September 2026: TAN is mandatory for ALL buyers — individual, HUF, company, or firm. The earlier clause (c) of Section 397(1) (before Finance Act 2026 substitution) did not include NRI property transactions in the TAN exemption list, so TAN-based compliance remains fully applicable until then.
From 1 October 2026: A resident individual or HUF buying property from an NRI can use their PAN — similar in convenience to the Form 141 process for resident sellers. However, the rate and nature of TDS remain unchanged — it is still under Section 393(2) at 12.5% (LTCG) or slab rate (STCG) on full consideration, not the 1% under Section 393(1) [Table 3(i)] that applies to resident sellers. Companies and firms must still obtain TAN regardless of this provision.
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