Non-Resident Indians (NRIs) selling property in India are facing a significant tax burden following the removal of the indexation benefit by the Indian government. This change, which came into effect in July 2024, has left NRIs grappling with higher tax liabilities on long-term capital gains on property sale.

What is the Indexation Benefit?

In India, the sale of property often incurs capital gains tax on the realized profit. To mitigate the impact of inflation on this tax liability, the government previously offered an “indexation” benefit. This mechanism allowed taxpayers to adjust the original purchase price of the property to account for inflation over the holding period. Consequently, the taxable profit, and hence the tax burden, was reduced. However, in July 2024, the government discontinued this benefit.

Why was Indexation Revoked?
The availability of indexation typically favored the higher tax rate option (20%) for long-term capital gains, as it effectively offset the impact of inflation. Conversely, the lower tax rate (12.5%) did not incorporate inflation into the calculation, potentially resulting in a higher tax liability.

Following public criticism, the government introduced a revised tax regime. Taxpayers now have the option to choose between the higher tax rate with indexation or the lower tax rate without indexation. This provides taxpayers with greater flexibility in determining the most advantageous tax treatment for their specific circumstances.

Article 112(a) of the Income Tax Act, which provided the two tax rates options made it applicable to ‘an individual or a Hindu undivided family, being a resident.’ In this case, NRIs have been omitted, whereas the status of NRIs while purchasing properties under FEMA (Foreign Exchange Management Act) remains the same as residents of India. After the amendment to the Income Tax Act, NRIs are required to pay taxes on the full difference between the sale price and the original purchase price, even if a substantial portion of this difference is attributable to inflation.

This disparity in tax treatment has sparked concerns among NRIs, who argue that it unfairly discriminates against them. While resident Indians can still avail of the indexation benefit, NRIs are denied this crucial advantage.

In response to this issue, a legal petition has been initiated against the Union of India in the High Court of Kerala by Sreejith Kuniyil, a chartered accountant. He has taken the lead in this legal battle, aiming to safeguard the rights of NRIs and ensure equitable treatment, as he came across an Indian expat in Kuwait, who ended up paying a huge tax amount while selling her property last year in India. He said the disparity in the status of NRIs and residents cropped up as the government used the word “resident” instead of “citizen” and went silent about NRIs when it amended the act.

This development has prompted a call to action for NRIs across the globe. Individuals can support the legal challenge by contacting the organizers and offering their assistance. Furthermore, reaching out to local NRI associations and their local MPs in India to shine light on this discrimination against NRIs is crucial to amplify concerns. By working together, NRIs can fight for fair treatment and a level playing field when it comes to property sales in India.

Disclaimer: This article is for informational purposes only and does not constitute legal or financial advice.