Tax on Sale of Immovable Property Situated Out of India
Income Tax

Tax on Sale of Immovable Property Situated Out of India

Tax on Sale of Immovable Property Situated Out of India
Tax on Sale of Immovable Property Situated Out of India

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  Posted on October 28, 2021

Tax on Sale of Immovable Property Situated Out of India

Considering the provisions of Income Tax Act, 1961, gains which are arising in the hands of an assessee from the sale of immovable property despite of the same being located inside or outside India, the taxability of such gains made by the assessee shall rely on the residential status of the assessee in India during the relevant financial year, in which the sale of such property took place.

Determination of Residential Status of Assessee

The residential status is one major point on the basis of which, the incidence of tax takes place in the hands of an assessee. Say in case of an assessee who is a resident shall pay tax on an income which accrued to such assessee outside India based on the residential status of such assessee.

In case of a foreign national residing in India, and is a resident of India, then the income which is earned by such assessee outside India shall also be taxed in the hands of such assessee, based on such residential status of the assessee. And this shall not change based on the citizenship of such assessee. Hence, we can say that determination of residential status of an assessee is vital for deriving the tax liability of such person.

Residential status determination of an Individual and HUF has been discussed below:

Individual

Considering the Income Tax Act, for being qualified as a resident, an assessee shall satisfy one of the following two conditions:

  1. A person stays in India for a year is 182 days or more, or
  2. A person’s stay in India during the immediately preceding 4 years is, 365 days or more and 60 days or more in the relevant financial year.

Further, for determining if such a resident is a Resident but Not Ordinarily Resident (RNOR) or Resident and Ordinarily Resident (ROR), the following satisfaction of two additional conditions shall also be considered, and this include;

  1. Has been a resident of India in at least 2 out of 10 years immediately preceding the current previous year, and
  2. Has stayed in India for at least 730 days in the 7 years immediately preceding the current previous year.

So, if the assessee satisfies both these additional conditions then such assessee shall be considered as ROR. But if the assessee fails to satisfy any one of above additional conditions specified under Income Tax Act, then he shall be an RNOR.

HUF

HUF or Hindu Undivided Family, shall be considered to be a resident of India if, the control and management of the affairs of the HUF is wholly or partly situated in India. An HUF is a non-resident in India, if control and management of its affairs is wholly situated outside India.

In a general sense, control and management of affairs of an HUF will be situated at a place where the head or the power managing the business is situated.

And for determining if an HUF is ROR or RNOR in India, the satisfaction of the following additional conditions by the Karta or Manager of the HUF shall be considered:

  1. He has been a resident in India in at least 2 out of 10 previous years immediately preceding the relevant previous year, and
  2. He has been in India, for a period of 730 days or more during the 7 years immediately preceding the relevant previous year.

Taxability of Income from Sale of Property located Outside India

In case an assessee who qualifies to be a Non-resident or RNOR, on the basis of the extend of stay, during the financial year in which the property was sold, it is to be noted that only the income which has accrued or arisen in India shall be taxed. Hence, the gains (if any) arising out of sale of a property located outside India, shall not be taxable in India provided such proceeds from sale are directly credited to the overseas bank account owned by the assessee.

But if the proceeds from such sale of property located outside India is credited to the Indian Bank Account, then the same shall be taxed in the hands of the assessee on the receipt basis of such income. It is to be further noted that mere remittance of funds from overseas bank account to Indian bank account shall not attract tax in India.

If the assessee is a resident or ROR, then the global income earned by such assessee shall be taxed in the assessee hands in India, irrespective of the source or place of accrual or arising of such income. So, we can say that, in such case the income or gain earned by the assessee from sale of property located outside India shall be taxed in India. Accordingly, the gains which are taxed here would be subject to benefits available under the Double Taxation Avoidance Agreement (DTAA) between India and the country where such property is located or such income accrued or raised.

Head under which it shall be Taxed

The income which is arising from the sale of immovable property shall be taxed under the head Income from Capital Gains. And it shall be classified as below on the basis of the period of holding of such property:

  1. Short-term Capital Gain (STCG)
  2. Long-term Capital Gain (LTCG)

If the immovable property was held for a period of 24 months or less then the gains earned from the sale of such property shall be termed as STCG. But if the same was held for a period of more than 24 months, then the same shall be classified as LTCG.

Computation of STCG

Firstly, the full value consideration earned from such sale should be taken, and after this the following amounts or expenses should be deducted from the same:

  • Expenditure incurred wholly and exclusively in connection with such transfer
  • Indexed cost of acquisition
  • Indexed cost of improvement

Now the final amount we derive at after deducting all this is the STCG (provided the same is a positive figure). And it shall be added to the total taxable income of the assessee and taxed at the normal slab rates applicable to the assessee.

Say, Mr. Hareen Sena bought a property worth $1,00,000(INR 70 Lakhs) in January 2021 and sold the same for $1,20,000 (INR 84,00,000) in September 2021. There was also a cost of improvement expense of $1,000 (INR 70,000) done on the property on May 2021. Here the short-term capital gain on immovable propertysale can be computed as follows:

Short term capital gain = 84,00,000- 70,00,000 – 70,000 – 0 = INR 13,30,000.

Exchange Rate is $1 = INR 70 (assumed).

This gain amount of INR 13,30,000 would then be added to the gross total income of the assessee which then would be taxed as per the normal income tax slab rates pertaining to the respective financial or assessment year and the type of taxpayer.

Computation of LTCG

The full value consideration earned by the assessee from sale of immovable property located outside India should be taken, from which the following should be deducted,

  • Expenditure incurred wholly and exclusively in connection with such transfer
  • Indexed cost of acquisition
  • Indexed cost of improvement
  • Such other expenses as maybe allowed by the Income Tax Act pertaining to section 54, 54EC, 54F, and 54B shall also be made.

The formula for Indexed cost of acquisition and indexed cost of improvements have been given below:

Indexed cost of acquisition = (Cost of acquisition) * (Cost Inflation Index (CII) for the year in which the asset is transferred / Cost inflation index (CII) for the year in which asset was first held by the seller or 2001-02 whichever is later)

Indexed cost of improvement = (Cost of improvement) * (Cost inflation index for the year in which the asset is transferred / Cost inflation index of the year in which improvement took place)

Indexation of the same shall be done for covering the inflation which has taken place during the period of holding of the asset by the assessee as this is more than 24 months. And such LTCG derived after deducting the above said expenses shall be taxed at a flat rate of 20%.

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