I am a resident in India for this financial year. When I was in the UK five years ago, I had purchased a flat there, and now I am planning to sell it. My first query is: can I invest the capital gains from this flat into a property in India? Second query: how is capital gains calculated, and is it the same for Mumbai and other cities? I have to pay capital gains tax in the UK, can that be shown as tax paid in the returns? Third query: what are the implications if this was not declared earlier in any of the IT returns so far, and what are the penalty charges that it can incur? Also, what are the implications on earning of rent when there was rental income and where there was not? Fourth query: Is it ok to get all the money transferred in one transaction itself?
—Name withheld on request
We have assumed that in the current financial year (FY) being the FY of sale of the property, you qualify as a resident and ordinarily resident (ROR) as per the domestic tax laws in India and you do not qualify as a tax resident of UK as per UK domestic tax laws.
Query 1: On the basis of assumption that you qualify as ROR of India, sale of the UK house property shall be chargeable to tax in India. As the immovable property was held for more than 24 months prior to sale, the said property will qualify as a long-term capital asset (LTCA). The resultant gain or loss arising out of sale of the said property would be taxable as long-term capital gains or loss (LTCG/L) in your hands.
A roll over exemption from LTCG on sale of residential house property is available towards the following investments, subject to the prescribed conditions and timelines: under Section 54 of the Act, by investing the LTCG in a new residential house in India; under Section 54EC of the Act, by investing the LTCG in specified notified bonds; under Section 54GB of the Act, by investing net consideration in equity shares of an eligible startup. Accordingly, in your case you can evaluate availing exemption from LTCG arising out of sale of your UK House property in the modes specified above and subject to satisfaction of the conditions mentioned therein.
Query 2: Assuming that the sale transaction would occur entirely outside India, LTCG/L is first calculated in the foreign currency, as the difference between net sale consideration (actual sale consideration less brokerage and incidental expenses) and the indexed cost of acquisition (ICOA) and improvement. The indexed cost of acquisition of the flat in your case would be calculated as cost of acquisition or Cost Inflation Index (CII) of year of purchase multiplied by CII of the year of sale.
The LTCG/L so determined in foreign currency is required to be converted to Indian rupees using the telegraphic transfer (TT) buying rate issued by the State Bank of India (SBI), as on the last day of the month immediately preceding the month in which the property is sold.
You may evaluate claiming foreign tax credit (FTC) under the India-UK Double Tax Avoidance Agreement (DTAA), for the taxes if any paid in the UK on the sale of property, subject to satisfaction of the conditions prescribed under the DTAA. Also, in case any FTC is claimed, in addition to the tax return in India you are required to file a Form 67 in India, along with the prescribed supporting documents.
Query 3: For the tax years you qualified as ROR of India, there was a requirement to disclose the said property in the foreign asset (FA) schedule of your Indian income tax return and AL Schedule, if applicable. Also, there was a requirement to offer any income thereon (actual or deemed) to tax in India, as per the prescribed rules in this regard.
In case the said property was actually let out, the rental income should have been offered to tax as per the prescribed rules in this regard, In case the said property was not let out, it could have qualified either as self-occupied (with nil annual value) or deemed let out property (to be offered to tax at a notional rental value), depending upon the facts of your case, number of such vacant properties held and the income tax provisions for the relevant tax year.
Along with the taxes, interest would also be payable by you for default or deferment in payment of the taxes with respect to such property, under Section 234B and 234C of the Act. With respect to penalty, the same is at the discretion of the tax authorities and they may levy penalty in the range of 50% to 200% of the tax, depending upon the nature of default. Also, there may be potential prosecution implications in case it is established that there was a willful attempt to evade taxes.
Please also note that as this relates to overseas income and assets, there may be penalties and other implications under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 which may potentially need to be evaluated in the instant case.
Query 4: There should not be any implications with respect to repatriation of money into India from an Indian income tax perspective. Further from a foreign exchange regulations perspective the same should be repatriable into India, under the relevant provisions of the Foreign Exchange Management Act, 1999.
Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India. Queries and views at firstname.lastname@example.org