NRI taxation: Can benefit from reinvesting real estate capital gains?

I’m a US citizen holding an OCI (Overseas Citizen of India) card. I own three apartments in India that I purchased in the early 2010s. I plan to sell two of them—one in December and the other in February 2025. Against the sale of these two apartments, I plan to buy two new apartments. Can I get the benefit of reinvestment? And is there any limit for reinvestment?
-Name withheld on request.

Your apartments would qualify as ‘long-term capital assets’, whose threshold is defined to be a holding period of more than 24 months preceding the date of transfer.

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Vide Finance Act (No. 2) 2024, non-residents can no longer benefit from indexation, but the tax rate has been reduced from 20% to 12.5% (plus applicable surcharge and cess). However, you can still claim an exemption from tax on capital gains under section 54 if you reinvest the capital gains into a new residential property (either by way of a purchase or construction). Against each sale of a residential property, you can reinvest the proceeds up to the amount of capital gains into a new residential property. Section 54 does not limit how many times you can claim this exemption in a fiscal year, and hence the capital gains tax exemption for both the sale events (December and February) can be claimed together during 2024-25.

In order to claim the exemption, the prescribed time period to purchase a new residential property is one year before or two years after the date of sale. However, suppose you have not purchased the corresponding new residential properties by 31 July 2025. In that case, you will need to deposit the unutilized capital gains in a ‘capital gains account’ opened under the Capital Gains Account Scheme, which must be used within the prescribed two-year period. There is also a lock-in period of three years for the new residential property, failing which the amount of exemption earlier claimed will be taken back.

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The Finance Act 2023 has introduced a cap of ₹10 crore on the cost of the new property to claim the capital gains tax exemption. If the cost exceeds ₹10 crore, the excess capital gains will be taxed. This limit applies individually to each reinvestment.

The India-US double tax avoidance agreement does not provide any specific relief from capital gains tax in India. And despite claiming exemption under section 54, you may still be liable to pay tax in the US on the amount of capital gains computed as per US tax law. You are recommended to consult a qualified US tax professional to understand your US capital gains tax implications.

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Harshal Bhuta is partner at P.R. Bhuta & Co.