How is the sale of ancestral land taxed for NRIs?

—Name withheld on request

Non-resident Indians (NRIs) can sell land located in India. The rules of taxation will be the same as that of a resident taxpayer. However, an NRI can transfer agricultural land that has been acquired through inheritance only to Indian citizens permanently residing in India. There are no such restrictions on the sale of other types of assets.

Since the asset is held for a period of more than 10 years, the gains from its sale will be taxed as long-term capital gains (LTCG). To calculate capital gains, you will need the acquisition cost of the land. You can consider the cost of acquisition to the original owner for this. You are also allowed to index the cost of acquisition using the cost inflation index for the year of acquisition. For this purpose, you can consider the same year of acquisition as the original owner from whom you have inherited the land.

Once this is determined and indexed, subtract it from the total sales proceeds. The resulting figure is your capital gain. LTCG is taxed at the rate of 20% with additional cess and surcharge applicable.

You are allowed to claim exemption on LTCG by investing in any other property or land as per the rules of section 54F. The property can be constructed or purchased within a year before or within two years and must be located in India. You should not have more than one residential house (other than new) on the date of transfer. You must not buy any residential house (other than new) within a period of 2 years or construct within 3 years of such date. If you invest a portion of the proceeds from the sale, the discount will be the ratio of the amount invested to the sale price or discount i.e. the cost of the new home x capital gains/net return.

Archit Gupta is the founder and CEO of Clear.in.

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