- India cut long-term capital gains tax to 12.5% without indexation from July 23, 2024.
- NRIs selling older property may still face higher taxable gains because inflation adjustment is gone.
- Buyers must deduct tax under section 195, often forcing NRIs to seek refunds later.
(INDIA) — India’s capital gains tax changes that took effect on July 23, 2024 have forced many NRIs selling property to recalculate deals before they sign, because the new lower rate on long-term gains does not always reduce the final tax bill.
Long-term capital gains on many assets now face tax at 12.5% without indexation. Earlier, long-term gains on immovable property were generally taxed at 20% with indexation, a system that adjusted the purchase cost for inflation and often cut the taxable gain on older properties.
That shift looks favourable at first glance. In practice, NRIs selling ancestral homes, inherited houses, old plots of land, or property bought before large urban price increases can end up with a larger taxable gain once indexation drops out of the calculation.
The Income Tax Department’s capital gains guidance says resident individuals and Hindu Undivided Families, or HUFs, may opt for 20% with indexation for land or buildings acquired before July 23, 2024 and transferred on or after that date. The same guidance ties that choice to resident individuals and HUFs, a distinction that matters in cross-border property sales.
Resident sellers in eligible cases may be able to compare both methods and choose the more favourable outcome. NRIs may not have that same flexibility, which means a tax calculation built on old indexation assumptions can break down once a sale moves toward closing.
Indexation mattered most where the original purchase price sat far below current market value. A family property bought decades ago for a modest amount can show a very large gain on paper if tax authorities measure the difference against historical cost rather than an inflation-adjusted cost.
That sensitivity runs through many NRI transactions. NRIs often hold long-kept family assets, including inherited or ancestral property, where inflation adjustment had long reduced the taxable gain and where old purchase records may be weak or incomplete.
The government had earlier said it removed indexation as part of a broader simplification of capital gains taxation, alongside rationalised rates and simplified holding periods. It also said rollover benefits were not changed, leaving exemptions under sections 54, 54EC and 54F in place for eligible cases.
Sale value is only one part of the tax result. The date and cost of acquisition still sit at the centre of the calculation, and inherited property can require a closer legal and tax review because the cost and holding period may trace back to an earlier owner.
Improvement costs can also change the outcome. Brokerage, legal expenses and other transfer-related expenses may be deductible while computing capital gains tax, and the classification of the asset as long-term or short-term remains important because the tax treatment differs.
That means the headline comparison, 12.5% without indexation versus 20% with indexation, rarely settles the matter by itself. The actual burden depends on the age of the asset, the acquisition trail, the documented cost base, the availability of deductions and the use of exemptions.
Cash flow can become the immediate problem even before the final tax return is filed. Sale of Indian property by a non-resident is generally covered by section 195, not the normal 1% resident property tax deduction at source rule under section 194-IA.
That obliges the buyer to deduct tax at source on payments made to the NRI seller. Income-tax guidance from the Mumbai department says that where the seller of immovable property, other than agricultural land, is a non-resident, the buyer must deduct tax under section 195, with treatment that differs depending on whether the gain is long-term or short-term.
The effect can be sharp. Buyers may deduct tax upfront, and the NRI seller may then have to seek a refund or adjustment through an Indian income-tax return if the actual liability comes in lower than the amount withheld.
Some sellers seek a lower or nil deduction certificate before the transaction closes. That step can matter in deals where the eventual tax liability, after deductions and exemptions, is materially below the amount a buyer would otherwise withhold under section 195.
Timing also matters because sellers often leave the calculation too late. Once the sale deed is executed, the sale price, payment schedule, buyer’s tax deduction, repatriation plans and reinvestment timelines may already be fixed.
A working computation prepared before signing can change the negotiation itself. It gives the seller a clearer sense of net proceeds after tax, helps assess whether an exemption claim should be built into the plan and shows whether the transaction structure creates a refund cycle that ties up cash.
That exercise usually starts with the purchase cost, or the inherited cost in family property cases, and the date of acquisition. It then pulls in the cost of improvement, the expected sale value, brokerage and transfer expenses, the applicable long-term or short-term treatment, the likely tax deduction under section 195, any lower deduction request, possible exemptions and the banking paperwork linked to repatriation.
Old properties remain the most sensitive examples. If an NRI sells a house or plot that was acquired many years ago at a low cost, the gain without indexation may sit close to the simple difference between the present sale price and that historical cost, even if the tax rate falls to 12.5%.
Under the earlier indexation model, inflation could lift the cost base and reduce the taxable gain. The lower rate therefore does not guarantee a lower tax bill, especially where the asset has been held for a very long period and the gap between historical cost and sale value has widened over time.
That point has become central in tax planning for NRIs weighing a sale of old Indian real estate. A reduced rate on a much larger gain can still produce a high liability, particularly where inherited or ancestral properties changed hands informally within families and paperwork must be rebuilt before filing.
Documentation can decide how smoothly the process runs. Sellers who plan to enter the market typically need the purchase deed or inheritance documents, earlier owner acquisition details where relevant, improvement bills, municipal tax records, PAN records, proof of NRI residential status, buyer details, a draft sale agreement, the capital gains computation, bank and repatriation documents, the tax deduction certificate or `Form 16A`, and evidence supporting any exemption claim.
Weak records can create problems beyond the final tax number. They can increase the risk of excess tax deduction at source, refund delays, mismatches in tax records and scrutiny during return processing.
The distinction between resident and non-resident treatment has become one of the most closely watched parts of the July 23, 2024 change. Resident individuals and HUFs have a limited comparison option in certain transfers of land and buildings acquired before that date and sold after it, while NRIs must check carefully whether that relief extends to them before relying on indexation-based expectations.
That has left many sellers looking beyond the headline rate and toward the mechanics underneath it. Capital gains tax now turns less on a simple percentage and more on the interaction of indexation, acquisition history, exemption planning, tax deduction at source and the final amount that actually reaches the seller’s bank account.
In high-value property sales, those moving parts can change the outcome by several lakhs of rupees. NRIs who calculate tax, TDS, exemption claims and net proceeds before signing are less likely to find that a rate that looked cheaper on paper leaves them with less cash after the deal closes.
