Is the gift of immovable property to a Non-Resident Indian (NRI) subject to tax under Indian income tax laws, especially if the property is later sold and the proceeds are sent abroad, and what conditions must be met for the transaction to be exempt from tax?
Yes, the gift of immovable property to a Non-Resident Indian (NRI) is subject to certain tax rules under Indian income tax laws, even if the transaction involves the sale proceeds being sent abroad, provided certain conditions are met.
Let’s break it down:
1. Gift of Immovable Property to an NRI
If you are gifting immovable property (like land or a house) to an NRI, this transaction is not taxed as a gift under income tax laws if the gift is from a relative as defined in the Income Tax Act (parents, siblings, children, spouse, etc.). In this case:
- No Tax applies to gifts from a relative.
- However, if the gift is from a non-relative, it may be subject to taxation if its value exceeds ₹50,000 (as per Section 56(2)(x) of the Income Tax Act).
2. Sale Proceeds Sent Abroad (USD 1 Million Limit)
The restriction you mentioned refers to the remittance of sale proceeds from the sale of immovable property by an NRI. According to Reserve Bank of India (RBI) and Foreign Exchange Management Act (FEMA) guidelines:
- An NRI can remit up to USD 1 million per financial year (April-March) for the sale of immovable property in India, provided all applicable taxes have been paid and the transaction is in accordance with Indian laws.
- This means that if the immovable property is sold by the NRI (not received as a gift), and the proceeds are being sent abroad, USD 1 million per year is the limit for remittance under the Liberalized Remittance Scheme (LRS).
However, this does not change the taxability of the transaction. The sale proceeds may still be subject to capital gains tax if the property is sold.
3. Taxability under Income Tax (Capital Gains Tax)
If the immovable property is sold, the sale may be subject to capital gains tax in India, depending on:
- Whether the property is short-term (held for less than 2 years) or long-term (held for 2 years or more).
- Short-term capital gains (for property sold within 2 years) are taxed at 30% (plus applicable surcharge and cess).
- Long-term capital gains (for property sold after 2 years) are taxed at 20% with the benefit of indexation (adjusting the cost of acquisition for inflation).
- Note on the 2024 Budget:
As per the 2024 Budget, Starting from 23rd July 2024, the indexation benefit will no longer be available for any asset. However, for land or buildings acquired before this date, taxpayers have the option to choose between paying tax at a rate of 12.5% without indexation benefits or 20% with indexation benefits. For land or buildings purchased on or after 23rd July 2024, the tax rate will be 12.5%, applicable to assets classified as long-term, and no indexation benefit will be allowed.
Important points for the taxability of the gift:
- If the gift involves immovable property, the gift itself is not taxed if it is from a relative.
- The NRI recipient will not pay taxes when receiving the gift (if it’s from a relative). However, if they sell the gifted property, they will have to pay capital gains tax when they sell it, based on the property’s holding period and the capital gains accrued.
4. Sending Sale Proceeds Abroad
If the NRI sells the property and remits the proceeds abroad:
- RBI’s limit of USD 1 million applies to remittances of sale proceeds under the Liberalized Remittance Scheme (LRS), not to the gift transaction itself.
- The remittance must be compliant with FEMA guidelines and the tax on the sale proceeds must be paid.
Tax on Foreign Remittance
Before the 2023 Budget, a Tax Collected at Source (TCS) of 5% was levied on foreign equity investments under the Liberalised Remittance Scheme (LRS) for remittances exceeding Rs 7 lakh. However, in the Budget, Finance Minister Nirmala Sitharaman proposed changes to the TCS structure.
Starting from 1st October 2023, the TCS rates for foreign remittances related to foreign equity investments under LRS and the purchase of overseas tour packages will range from 0.5% to 20%, with the threshold limit remaining at Rs 7 lakh.
Conclusion
- The gift of immovable property to an NRI from a relative is not taxable under Indian tax provisions.
- If the property is sold, the transaction will be subject to capital gains tax based on whether the property is short-term or long-term.
- The USD 1 million limit pertains to the remittance of sale proceeds abroad, but it does not directly affect the taxability of the gift or the sale.
- Starting from 1st October 2023, the Tax Collected at Source (TCS) on foreign remittances under the Liberalized Remittance Scheme (LRS) for foreign equity investments and overseas tour packages will range from 0.5% to 20%, with the threshold limit for remittances remaining at Rs 7 lakh. This means that any foreign remittance exceeding this threshold may be subject to the new TCS rates, depending on the nature of the remittance.
Therefore, while the gift itself is not taxable if it comes from a relative, if the NRI decides to sell the gifted property, capital gains tax would apply, and the remittance of proceeds up to USD 1 million per year is allowed. Additionally, any foreign remittance exceeding Rs 7 lakh may be subject to TCS as per the revised structure from October 2023.
