I am a non-resident Indian (NRI) and have inherited two properties in the UK. I want to return to India and settle here. I will be selling the properties I have inherited in the UK and use the money to purchase a house in India. What would be the tax implications?
Under the Indian tax laws, the gains, if any, arising from sale of the properties in the UK shall be taxable as capital gains. Further, the tax implications on sale of properties (assuming residential house) in your hands would depend upon your tax residential status in India in the financial year (FY) in which you would sell the properties.
Your residential status in turn would be determined by your physical presence in India during the FY and immediately preceding seven FYs. Just for understanding, there are three categories of residential status in India: non-resident (NR), not ordinarily resident (NOR) and ordinarily resident (OR).
Depending upon your stay in India, if you qualify for NR or NOR in the FY of sale of properties, you shall be taxable in India only on India sourced income. Accordingly, the capital gains, if any, arising from sale of the properties located in the UK shall not be taxable in India, provided the sale proceeds are directly credited to the overseas bank account. The subsequent 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 OR, your global income shall be taxable in India, irrespective of the source or place of receipt of such income. Accordingly, the capital gains arising from the sale of the UK properties shall be taxable in India subject to the benefits available under the double tax avoidance agreement between India and the UK.
In case the properties have been held for more than 36 months since purchase, the gain arising from sale of properties shall be termed as long-term capital gains (LTCG), otherwise it will be short-term capital gains (STCG). While determining the period of holding in case of inherited properties, the period of holding of the previous owner should be factored.
For computing LTCG, the purchase cost should be indexed based on cost inflation index published by the tax department. LTCG shall be taxable at a flat rate of 20.60% (including education cess). STCG shall be taxable at normal slab rates applicable to an individual.
You could claim an exemption from tax under section 54 of the Income-tax Act in respect of taxable LTCG. The language of law suggests that such exemption is available on capital gain arising from transfer of long-term capital assets being buildings or lands and a residential house when utilized for purchase or construction of a residential house.
However, there are case laws wherein it has been held that the word “a” should not be read for a single house. Therefore, you may be able to claim exemption from LTCG arising from sale of more than one residential house if utilized to purchase one house. Please note that this may be challenged by the tax authorities at a lower level.
Further, the new house should be purchased either one year prior or two years after the sale date of the original properties in the UK. Alternatively, you could construct a new house within three years from the sale date. You should further ensure that the new house(s) is not sold within three years from purchase date, else the entire exemption availed shall be revoked and accordingly be taxed in your hands in the year of subsequent sale.
Wealth tax implications: Assuming that you intend to permanently settle in India, under the current wealth tax law, the money or the value of specified assets as covered under the definition of Wealth Tax Act brought by you into India and the value of the specified assets proposed to be acquired by you out of such money within one year immediately preceding the date of your return and at any time thereafter could be claimed as exempt from the wealth tax. The exemption could be availed for seven FYs commencing from the FY in which you would return to India.
Also, you may check from a Foreign Exchange Management Act, 1999 (FEMA) perspective with your bankers before remitting the funds from overseas bank account into India. Further, the tax implications in the UK on account of such sale of properties need to be separately examined.
Parizad Sirwalla is partner (tax), KPMG
Queries and views at firstname.lastname@example.org