NRI Capital Gains on Indian Property: What Changed Under the Income Tax Act, 2025

Scope of this article

II. Determining NRI status — the starting point for all computations

Residential status in India is determined on a financial year-by-financial year basis. An individual is resident in India for a financial year if they are present in India for 182 days or more during that year, or if they are present for 60 days or more during that year and 365 days or more in the preceding four financial years combined. An individual who does not satisfy either condition is a Non-Resident for that financial year.

Two special rules are significant for NRIs. First, Indian citizens and Persons of Indian Origin (PIOs) who visit India earn an extended threshold: for them, the 60-day limit is expanded to 120 days — meaning they can visit for up to 119 days without becoming resident (assuming their aggregate stay in the preceding four years is below 365 days). Second, Indian citizens whose total income from Indian sources exceeds Rs. 15 lakh per financial year (excluding foreign-source income) and who are not liable to tax in any other country are deemed to be 'Not Ordinarily Resident' (RNOR) — a classification that carries its own specific tax treatment.

III. Classification of capital gains — short-term vs. long-term

Under the ITA 2025, immovable property — land and buildings — is classified as a long-term capital asset if held for more than 24 months from the date of acquisition. If held for 24 months or less, the gain is short-term. This holding period threshold has not changed under the ITA 2025; it was set at 24 months for immovable property under the Finance Act, 2017 and continues under the new statute.

One of the most practically significant judicial developments in NRI property taxation concerns the date from which the holding period commences. The Income Tax Appellate Tribunal (ITAT), Mumbai, in a 2025 ruling, clarified that the holding period for indexation purposes should be determined from the date of the registered agreement to sale — provided substantial payments were made by that date — and not from the later date of possession or registration. This is consistent with the Bombay High Court's position in PCIT v. Vembu Vaidyanathan and the Punjab & Haryana High Court's ruling in Madhu Kaul v. CIT.

For NRIs who purchased properties under construction agreements, made substantial payments at the agreement stage, but received possession years later, this judicial interpretation can materially reduce taxable capital gains by extending the indexed cost of acquisition from an earlier base year. Documentation of the original agreement date, payment schedule, and amounts paid at each stage is therefore critical evidence that must be preserved.

IV. The rate regime under ITA 2025 — the indexation choice and its implications

The Finance (No. 2) Act, 2024, effective from 23 July 2024, fundamentally altered the LTCG rate on immovable property. The ITA 2025 carries these rates forward as the applicable regime from 1 April 2026. The key distinction is based on the date of acquisition of the property:

The base LTCG rate of 12.5% or 20% is not the effective rate of tax. Surcharge is levied on the income tax computed, at rates that depend on the total income of the individual. For NRIs, the surcharge rates applicable to LTCG on immovable property are capped at 15% irrespective of the total income level — this surcharge cap was introduced to prevent effective rates from becoming prohibitive for high-value property sales. Health and Education Cess at 4% is then levied on the aggregate of tax and surcharge.

For properties acquired before 23 July 2024, the seller has a choice — to compute tax at 20% on indexed gains or at 12.5% on unindexed gains, and pay whichever is lower. This choice is exercised in the income-tax return. The critical judgment is whether the benefit of Cost Inflation Index (CII) indexation on a property acquired several years ago outweighs the reduction in rate from 20% to 12.5%.

As a general rule, properties held for more than 8 to 10 years — where the CII-indexed cost significantly reduces the nominal gain — will often benefit from the 20% with indexation route. Properties acquired 2 to 4 years before the 23 July 2024 date, where indexation provides only modest uplift, will generally benefit from the 12.5% flat rate. This is a computation that must be performed for each specific property using the actual purchase price, the applicable CII for the year of acquisition, and the year of sale.

Note: Add surcharge (15%) and cess (4%) to whichever tax figure is chosen. The illustrative CII of 380 for FY 2026-27 is for illustration only — verify the actual notified CII from CBDT before computing. This example shows that even for a 12-year-old property, the 12.5% route may produce a lower tax. Compute both before deciding.

V. TDS obligations on the buyer — Section 393(2), ITA 2025

When a resident Indian purchases immovable property from an NRI seller, the buyer is required to deduct Tax Deducted at Source (TDS) from the sale consideration before making payment. This obligation arises under Section 393(2) [Table: Sl. No. 17] of the ITA 2025 — the successor provision to Section 195 of the Income-tax Act, 1961. Unlike the Rs. 50 lakh threshold that applies to purchases from resident sellers under Section 394 of the ITA 2025, purchases from NRI sellers have no threshold — every rupee of payment requires TDS compliance regardless of the transaction value.

Where the buyer does not hold a Lower Deduction Certificate, TDS is deducted at the rate applicable to the income being paid — which, for LTCG on immovable property of an NRI, is 20% (or 12.5% depending on the acquisition date and computation), plus applicable surcharge and cess. In practice, without an LDC, TDS is typically applied to the full sale consideration — not just the capital gain — because the buyer has no basis to determine the actual gain.

This creates a significant cash flow problem for NRI sellers. If an NRI sells a property for Rs. 2 crore and the buyer deducts TDS at approximately 20% plus surcharge and cess (an effective rate of approximately 23.92%), the NRI receives only Rs. 1.52 crore at the time of sale. The excess TDS sits with the government until the NRI files a tax return and claims a refund — a process that takes months and may require follow-up with the tax department.

Section 395(1) of the ITA 2025 (successor to Section 197 of the 1961 Act) permits an NRI seller to apply to the Jurisdictional Assessing Officer for a Lower Deduction Certificate — formerly filed in Form 13, now filed in Form 128 under the ITA 2025. The LDC specifies the applicable TDS rate on the actual capital gain (rather than the full sale consideration), enabling the buyer to deduct TDS at a rate that reflects the true tax liability rather than a conservative worst-case estimate.

The buyer of the NRI-owned property must file a TDS return in Form 144 (the ITA 2025 equivalent of Form 27Q under the 1961 Act) for TDS deducted from NRI sellers. This is distinct from Form 141 (the equivalent of Form 26QB) used for TDS on purchases from resident sellers. After filing Form 144 and depositing the TDS, the buyer issues a TDS certificate to the NRI seller — Form 131 (the new equivalent of Form 16A) — which the NRI uses to claim TDS credit in the Indian income-tax return.

VI. The Chapter XII-A regime — special treatment for foreign exchange assets

Chapter XII-A of the Income-tax Act, 1961 — now carried over into the ITA 2025 under equivalent provisions — provides a special, concessional tax treatment for 'foreign exchange assets' acquired by NRIs. A foreign exchange asset is defined as any capital asset acquired or purchased with funds remitted to India from abroad, or with funds held in a Non-Resident (External) account — i.e., property purchased with foreign currency remittances through the NRE account route.

Under Chapter XII-A, the NRI may elect to compute LTCG on the sale of a foreign exchange asset using the foreign currency method under Section 48 — converting the purchase price into the original foreign currency in which it was denominated, comparing it to the sale proceeds converted into the same foreign currency, and computing the gain in that currency before converting back to Indian rupees for tax purposes. This method provides a natural hedge against rupee depreciation: where the rupee has depreciated against the NRI's home currency over the holding period, the taxable gain in rupee terms (after conversion) will be lower than if the entire computation had been in rupees from the start.

Chapter XII-A provides an additional exemption: where an NRI invests the net consideration received from the sale of a foreign exchange asset into other specified notified assets within 6 months of the transfer, the capital gain on the original asset is exempt. The reinvestment must be into assets notified by the Central Government under Chapter XII-A — historically, Government securities, NHAI bonds, and certain other specified instruments. Real estate, gold, and domestic mutual funds are not eligible for this particular exemption. The lock-in period for the reinvested asset is 3 years; premature transfer of the reinvested asset within 3 years results in the original exempted gain becoming taxable in the year of premature transfer.

VII. Reinvestment exemptions — Sections 84, 86, and 87 of ITA 2025

An NRI who sells a residential property and realises LTCG may claim exemption under Section 84 of the ITA 2025 (the equivalent of Section 54 of the 1961 Act) by purchasing or constructing one residential property in India. The new property must be purchased within one year before or two years after the date of sale, or constructed within three years of the date of sale. The exemption amount is the lower of the LTCG and the cost of the new residential property. The new property must be located in India — investment in a residential property abroad does not qualify.

A significant cap was introduced from FY 2023-24: the Section 54 exemption is limited to a maximum of Rs. 10 crore of LTCG. Where LTCG exceeds Rs. 10 crore, the excess is taxable even if the reinvestment amount covers the full gain. This cap continues under the ITA 2025 framework.

LTCG from the sale of any long-term capital asset — including property — is exempt up to Rs. 50 lakh if invested in long-term specified bonds within 6 months of the date of transfer under Section 86 (old Section 54EC). Currently, the qualifying bonds are issued by NHAI, REC, and other entities notified by the Central Government. The bonds carry a mandatory lock-in of 5 years — premature redemption or transfer forfeits the exemption.

Section 87 of the ITA 2025 (Section 54F of the 1961 Act) is particularly valuable for NRIs selling non-residential property (commercial property, land, etc.) — where Section 84 does not apply because the sold asset is not a residential property. Under Section 87, the entire LTCG is exempt if the full net consideration (not just the gain) is invested in one residential property in India within the prescribed timelines (one year before or two years after transfer; three years for construction). If only a portion of the net consideration is reinvested, a proportionate exemption is available.

Section 87 also applies where the sold asset is residential property but the seller owns more than one residential property at the time of sale — making them ineligible for the full Section 84 exemption. A critical condition is that the NRI must not own more than one residential property (other than the new one being purchased) on the date of transfer and for a period of two years after the transfer — a condition that requires careful planning for NRIs with multiple properties in India.

Where an NRI has earned LTCG but has not yet reinvested in the qualifying asset before the due date of filing the income-tax return, the undeployed amount may be deposited in a Capital Gains Account Scheme (CGAS) with a designated scheduled bank. The CGAS deposit preserves the exemption claim and gives the NRI additional time to identify and execute the qualifying investment. The amount must be utilised within the applicable time limit (2 years for purchase, 3 years for construction under Section 84). Amounts remaining unutilised after the time limit become taxable as capital gains in the year the time limit expires.

VIII. Double Tax Avoidance Agreement relief

India has comprehensive Double Tax Avoidance Agreements (DTAAs) with over 90 countries — including the United States, United Kingdom, Canada, Australia, UAE, Singapore, Germany, and the Netherlands. For NRIs resident in these countries, capital gains on Indian property may potentially be partially or fully relieved under the DTAA, depending on the specific treaty's capital gains article.

Most of India's DTAAs — including those with the US, UK, and Canada — assign exclusive or primary taxing rights on immovable property gains to India as the country where the property is situated. This means that DTAA relief for NRI property gains generally operates through a credit mechanism (in the country of residence) rather than exemption at source in India. The NRI pays tax in India at the Indian rate, and the home country provides a credit for the Indian tax paid against the home country tax liability on the same gain.

However, certain treaties — notably the India-UAE DTAA — may provide more favorable treatment. NRIs should review the applicable treaty capital gains article specifically before planning a property sale. The claim for DTAA benefit in the Indian income-tax return requires submission of a Tax Residency Certificate (TRC) from the home country's tax authority, along with Form 10F (the self-declaration of treaty benefit eligibility).

IX. FEMA and repatriation — taking the proceeds out of India

Sale proceeds from an NRI's Indian property are typically credited to the seller's NRO (Non-Resident Ordinary) account in India. Under the Foreign Exchange Management (Remittance of Assets) Regulations, an NRI may repatriate from the NRO account up to USD 1 million per financial year, subject to payment of applicable taxes in India and compliance with the documentation requirements.

For amounts within the USD 1 million annual limit, no RBI approval is required — the authorised dealer bank processes the remittance on the basis of the prescribed documentation. For amounts exceeding USD 1 million in a financial year, prior RBI approval is required — a process that involves a formal application to the RBI and can take several months.

When repatriating property sale proceeds from the NRO account to a foreign account, the NRI's bank requires the submission of Forms 145 and 146 — the ITA 2025 equivalents of the erstwhile Forms 15CA and 15CB. Form 145 is the NRI's own declaration (the equivalent of Form 15CA), filed electronically on the Income Tax Department's portal before the remittance is executed. Form 146 is the Chartered Accountant's certificate (the equivalent of Form 15CB), which certifies the nature of the remittance, the tax compliance position, the applicable TDS rate, and DTAA relief claimed if any.

Without Forms 145 and 146 filed and presented to the bank, the bank will not process the international wire transfer. This creates a practical sequencing requirement: the NRI must complete the income-tax filing, ensure TDS is fully deposited by the buyer, obtain the TDS certificate (Form 131), and prepare the tax computation — all before the Chartered Accountant can certify Form 146. Attempting to repatriate before these steps are complete will cause the remittance to be rejected by the bank.

X. Worked scenarios — three NRI property sale situations

The following scenarios illustrate indexation choice, Lower Deduction Certificate cash flow benefits, and inherited property with Section 87 planning.

XI. Documentation requirements — what must be in place

Frequently asked questions