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Assessment of Long Term Capital Gain (LTCG): An NRI sells house in India Case Law

Facts of the Case:

The assessee is an NRI who wishes to sell his inherited house property in India that his father bought forty years ago. His father passed away, leaving his legal heirs - his wife, son, and two daughters. He seeks clarity on the tax implications on the proceeds he receives, ways to mitigate tax payment, and whether his senior citizen mother has to pay any tax.



Issue:

The core issues in this scenario are:

A. Whether the NRI son is liable to pay tax on the sales proceeds?

B. Are there any legal means to avoid or reduce this tax liability?

C. Does the mother, as a senior citizen, have to pay any tax?



Rule of Law pertaining to Long Term Capital Gain:

Under the Indian Taxation Law, Non-resident Indians (NRIs) are liable to pay tax on income earned or accrued in India. The taxation principle is specifically applicable in cases of capital gains made from selling real estate property located in India. The nature of the gains, either short-term or long-term, depends on the holding period of the asset. If the property is sold within two years from the date of purchase, it's considered a Short-Term Capital Gain (STCG). If sold after two years, it's considered a Long-Term Capital Gain (LTCG).



Application and Discussion:

As per the facts mentioned, the property is held for over two years, hence the NRI son would have to pay LTCG tax at a rate of 20%. The taxable capital gains would be calculated as the difference between the sale proceeds and the indexed cost of acquisition and improvement of the house. However, there are ways to mitigate this tax liability. For instance, under Section 54 of the Income Tax Act, if the capital gains proceeds are reinvested in another property within a specified timeframe, the tax can be avoided.


Furthermore, the NRI son could also invest the capital gains in bonds issued by the National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC) under Section 54EC of the Income Tax Act. This should be done within six months from the date of sale, but the maximum limit is Rs. 50 Lakh.


As far as the senior citizen mother is concerned, she would also have to pay the LTCG tax at 20% on her share of the sale proceeds, despite her senior citizen status, as the concessions for senior citizens do not extend to LTCG taxes. However, she can similarly take advantage of the exemptions provided under Sections 54 and 54EC to reduce or avoid this tax liability.

It should be noted that Tax Deducted at Source (TDS) would also apply to the transaction at the given rates, and the assessees would be required to submit specific forms for tax verification and for repatriation of the money abroad.



Conclusion:

In conclusion, both the NRI son and the senior citizen mother would have to pay 20% LTCG tax on their respective shares of the proceeds from the sale of the house. The tax liability can, however, be avoided or reduced by reinvesting the capital gains in another property or specified bonds within the stipulated timeframe. It's crucial to consider these aspects and plan accordingly to optimise tax savings while complying with the Indian Taxation Law.

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