Exemptions available to NRIs on long-term capital gains from sale of capital asset in India

1. Exemption under Section 54: Proceeds from Sale of Old Residential Property used to Purchase a New Residential Property.

Exemption under Section 54 is available when there is a long-term capital gain on sale of a residential house property of the NRI and the NRI has purchased or constructed another residential house property in India. Following are the provisions related to this exemption:

• The new residential house shall be purchased in India within a period of one year before or two years after the date of transfer of old house, or should construct a residential house within a period of three years from the date of transfer of the old house.
• In case of compulsory acquisition, the period of acquisition or construction will be determined from the date of receipt of compensation (whether original or additional).
• Exemption can be claimed only in respect of one residential house property purchased/constructed in India. If more than one house is purchased or constructed, then the exemption under section 54 will be available in respect of one house only.
• No exemption can be claimed in respect of house purchased outside India.
• The amount of exemption under section 54 will be lower of following:
  • Amount of capital gains arising on transfer of residential house, or
  • Investment in new residential house property
• If the new house is sold before a period of 3 years from the date of purchase/construction then the amount of capital gain claimed as exemption will be withdrawn.
• If till the date of filing the return of income, the capital gain arising on transfer of the house is not utilized (in whole or in part) to purchase or construct another house, then the benefit of exemption can be availed by depositing the unutilized amount in Capital Gains Deposit Account Scheme in any branch of public sector bank, in accordance with Capital Gains Deposit Accounts Scheme, 1988. A new house can be purchased or constructed by withdrawing the amount from the said account within the specified time-limit of 2 years or3 years, as the case may be.

Example:

Mr Sharma an NRI, who lives in the USA from 2012, purchased a residential house in India in April 2011 and sold the same in January 2016 for Rs. 8,40,000. Capital gain arising on sale of house amounted to Rs. 1,00,000. Out of the sale proceeds of the old house, he purchased another residential house in India for Rs. 1,20,000 in May,2016. Can Mr Sharma claim an exemption and if yes then what will be the amount of exemption under section 54 which can be claimed by Mr Sharma?

Yes, Mr Sharma can claim exemption under section 54

The exemption, in this case, will be lower of the following amount:

• Amount of capital gain is Rs. 1,00,000.
• Amount of investment in the new house is Rs. 1,20,000

Thus, the exemption will be Rs.1,00,000. The taxable capital gain will come to Nil (entire gain will be exempt).

2. Exemption under Section 54F: Proceeds from Sale of Any Capital Asset other than a residential house property used to Purchase a Residential House Property.

Exemption under Section 54F is available when there is a long-term capital gain on sale of any capital asset other than a residential house property of NRI and the NRI has purchased or constructed a residential house property in India.

• The new residential house shall be purchased in India within a period of one year before or two years after the date of transfer of the capital asset, or should construct a residential house within a period of three years from the date of transfer of the capital asset.
• No exemption can be claimed in respect of house purchased outside India.
• The new house purchased shall not be sold before a period of 3 years, otherwise, the capital gain earlier exempted will be withdrawn.
• Amount of exemption =Long-term capital gain x Amount invested to purchase or construct a residential houseNet sales consideration (Sales consideration-Transfer expenses)

 

• If the new house is sold before a period of 3 years from the date of purchase/construction then the amount of capital gain claimed as exemption will be withdrawn.
• If till the date of filing the return of income, the capital gain arising on transfer of the house is not utilized (in whole or in part) to purchase or construct another house, then the benefit of exemption can be availed by depositing the unutilized amount in Capital Gains Deposit Account Scheme in any branch of public sector bank, in accordance with Capital Gains Deposit Accounts Scheme, 1988. New house can be purchased or constructed by withdrawing the amount from the said account within the specified time-limit of 2 years or3 years, as the case may be.

3. Exemption under Section 54EC: Proceeds from Sale of Any Capital Asset used to Purchase a Specified Bonds.

If an NRI sells any of his capital asset in India and invests the proceeds from the sale of the capital asset in purchasing bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) then he can claim the exemption under Section 54EC. The only condition with this exemption is that the bonds should be purchased within 6 months from the date of transfer and stay invested in them for a minimum period of 3 years. Amount of Exemption: Capital gain shall be exempt to the extent of amount of investment in such specified bonds and up to a maximum of Rs.50 Lakhs in a financial year i.e. if an NRI has a long-term capital gain of Rs 75 lakhs and he invests his entire capital gain in the specified bonds within a period of 6 months from the date of transfer then only Rs 50 lakhs will be exempt from tax and the remaining will be taxable.