I understand that if a property is sold and the receivable is reinvested in another property, then capital gains tax can be avoided/ deferred. Does this hold true even if a residential property is sold and the funds received are used to buy a commercial property?
— Harshal Punj
Reinvestment of the capital gains into another residential property provides exemption from paying capital gain tax. Some notable points —- such reinvestment for tax saving is only available for a property that is long-term in nature, i.e. it has been held for over three years. The reinvestment has to be done within two years of sale (in case the new property is being constructed, the time limit is increased to three years). In case residential property is being sold, only the capital gain portion needs to be reinvested.
Where commercial property is being sold, the net sale proceeds (as against only the capital gain portion) after deducting brokerage and other incidental expenses have to be reinvested.
And lastly, the reinvestment has to be necessarily into another residential property only and not in any commercial property.
Shortly, I will complete 10 years of living in the US. Over this time, I have been staying about 300 days (more than 182 days) each year out of India and hence have maintained my NRI status throughout. This year, I plan to wrap up here and come to India to settle for retirement. I have three properties here in the US. Selling these may take some time —- perhaps over a year or more. When I bring back the funds after selling the properties, will there be any tax liability in India? Note that I will be paying tax in the US.
If you come to India anytime from now till March 2011, you would continue to be an NRI for the current financial year too. It is only for and from April 2011 that you would be a tax Resident of India. Moreover, by virtue of having been an NRI for all these years, for FY 2011-12 and for FY 2012-13, you will have the status of RNOR (Resident but Not Ordinarily Resident).
An RNOR does not have to pay tax on this foreign income in spite of the fact that he is a tax Resident of India. Therefore, if you manage to sell the properties before April 2013, there will be no India tax applicable on the sale. Note that tax applicability has to be determined at the first instant when the income is booked, i.e in this case when the properties are sold.
Bringing the money to India is a mere application of income (transfer of funds) and is tax neutral. In other words, whether you bring the sale proceeds to India or not, the tax incidence will not change.
If the sale is effected prior to April 2013, there will be no tax imposed in India; else, you will also be liable for capital gains tax in India and will then have to take shelter under the DTAA that India has with the US.
The writer is director, Wonderland Consultants, a tax and financial planning firm. He can be reached at firstname.lastname@example.org