Property sale overseas is taxable

Parizad Sirwalla :Live Mint :Wed, Mar 06 2013. 05 04 PM IST
If sale proceeds are directly credited to your Indian bank account, 
then the gains shall be taxable.

  Q  :   I was working as a doctor in the UK and moved back to India in 2006. I had a property in the UK which I was unable to sell for the last six years and now I have found a buyer. The money will be transferred to my Indian bank account. What taxes do I need to pay? Will it be only capital gains? I had not disclosed the property previously to the income-tax department. Will I be penalized?

—Arun Kumar

  A  :Under the provisions of the Income-tax Act, 1961, the gains, if any, resulting from sale of any property (whether in or outside India) shall be taxable as capital gains. Further, the tax implications on sale of property (assuming residential property) in your hand would depend upon your tax residential status in India in the financial year (FY) of the sale of property. Your residential status in turn would be determined by your physical presence in India during the FY and the immediate preceding seven FYs.

Depending upon your stay in India, in case you qualify as either non-resident (NR) or not-ordinarily resident (NOR) in the FY of sale of property, you shall be taxable only on India sourced income. Accordingly, the gains, if any, arising from sale of the property located in the UK shall not be taxable in India provided the sale proceeds are directly credited to the overseas bank account. If the sale proceeds are directly credited to your Indian bank account, then the gains shall be taxable in the first instance in India on receipt basis. Please note that the mere remittance of funds from overseas bank account to the Indian bank account shall not attract any tax implications in India.

However, if you qualify as ordinarily resident (OR) of India (likely if you have spent more than 729 days in India in seven FYs preceding the FY of sale of property), your global income shall be taxable in India irrespective of source or place. Accordingly, the gains arising from sale of the UK property shall be taxable in India subject to the benefits available under the double tax avoidance agreement between India and the UK.

Since the property has been held by you for more than 36 months since its purchase, the gains, if any, arising from sale shall be taxable as long-term capital gains (LTCG).

While computing the LTCG, the purchase cost and the cost of improvement, if any, made subsequent to purchase shall be increased based on the cost inflation index published by the Income tax department. You could avail an exemption from capital gains tax by re-investing the LTCG in a residential apartment or specified bonds .

The quantum of LTCG re-invested can be claimed as exempt from tax.

The balance LTCG shall be taxable at a flat rate of 20.60% (including education cess) assuming that your income exceeds the basic tax exemption threshold.

The investment in the residential apartment or specified bonds has a lock-in period of three years. Accordingly, if the new property is sold or the bonds are converted into cash within a period of three years, the exemption claimed from LTCG in respect of the old property shall be revoked.

Further, if you have paid any taxes in the UK on the said income, you may also be eligible to claim a credit of taxes in India subject to examination of the provisions of the treaty.

As per the provision of the Act, effective from the FY12 onwards, an individual who qualifies as OR of India and who has assets located outside India is required to furnish details of assets located outside India such as foreign bank accounts, immovable property in the income-tax return.

Accordingly, depending upon your residential status if you qualify as either NR or NOR of India for the relevant FY, you would not be required to comply with the aforesaid disclosure requirements. However, if you qualify as OR of India, you shall be required to disclose the details of the immovable property, such as cost of investment, address where the property is located in your income-tax return. Any failure to comply with the above disclosure requirement may attract penal consequences.

Under the wealth tax provisions, wealth tax is payable at the rate of 1% on net wealth exceeding Rs.30 lakh on specified assets (for foreign citizens, only assets situated in India). Any residential property (other than one self-occupied residential property) that has not been let out for a minimum period of 300 days is considered as one of the specified asset and hence, attracts wealth tax. Accordingly, considering your citizenship and other assets, you may examine the applicability of wealth tax provisions.

Also, you could check from a Foreign Exchange Management Act, 1999, perspective with your bankers in respect of receiving a foreign inward remittance certificate for remitting the funds from overseas bank account into India if you want to first receive the sale proceeds in overseas bank account. If this is the case, then you will have to check the tax implications in the UK on such transactions.