India's Direct Tax Code 2025: A Guide for US NRIs on Real Estate Tax

Key Takeaways

• Shift in Residency Rules: The proposed Direct Tax Code (DTC) 2025 is expected to modify residency rules for Non-Resident Indians (NRIs). For instance, high-income NRIs with Indian income over ₹15 lakh may be considered 'Resident but Not Ordinarily Resident' (RNOR) if their stay in India is 120 days or more, a change from previous thresholds.
• DTAA Remains Foundational: Despite domestic law changes, the Double Taxation Avoidance Agreement (DTAA) between India and the USA will continue to govern the taxation of capital gains. India retains the primary right to tax gains from property situated in India. The US will provide a foreign tax credit for taxes paid in India, preventing double taxation.
• Simplified Tax Structure: The DTC aims to simplify the complex Income Tax Act of 1961 by reducing exemptions, unifying tax rates, and making compliance more straightforward for all taxpayers, including NRIs.
• Documentation is Paramount: To claim DTAA benefits under both the old and new legal frameworks, NRIs must possess a valid Tax Residency Certificate (TRC) from the US and submit a self-declaration in Form 10F.

PART 1: EXECUTIVE SUMMARY

This guide provides a professional compliance analysis of the transition from the Income Tax Act, 1961, to the anticipated Direct Tax Code (DTC) 2025, focusing on US-based Non-Resident Indians (NRIs) with real estate investments in India. While the DTC 2025 aims to overhaul and simplify India's direct tax laws, the core principles of international taxation established under the India-US DTAA are expected to remain the bedrock for tax relief.

• The Old Law (1961): Under the Income Tax Act, 1961, capital gains arising from the sale of property in India are taxed in India based on the holding period (short-term or long-term). US NRIs are subject to Tax Deducted at Source (TDS) on the entire sale consideration. To avoid double taxation, the NRI can claim a foreign tax credit in the US for the taxes paid in India, as per the India-US DTAA. This system, while functional, is often criticized for its complexity and numerous amendments.

• The New Law (2025): The proposed DTC 2025 is designed to simplify and modernize the existing tax framework. For NRIs, key changes may include a rationalization of capital gains tax rules and modifications to residency determination criteria. For example, the concept of "Resident but Not Ordinarily Resident (RNOR)" may be redefined, impacting NRIs who have extended stays in India. The DTC's primary goal is to create a more transparent system with fewer exemptions, which could streamline tax calculations for property sales.

• Who is Impacted: This transition will most significantly affect US-based NRIs who own and transact in Indian real estate. This includes those selling property, earning rental income, and planning repatriation of funds. Individuals with Indian-sourced income exceeding ₹15 lakh who also spend considerable time in India (over 120 days) will need to pay close attention to the revised residency rules to understand their global tax obligations.

PART 2: DETAILED TAX ANALYSIS

1. Background for Non-Resident Indians

Under the current regime, the tax liability for a US-based NRI on the sale of Indian real estate is determined by several factors. The income is categorized as a capital gain, and the tax is levied in India as it is the country where the property is located (source country).

• Capital Gains Taxation: The holding period of the property determines its tax treatment.
  • Long-Term Capital Gains (LTCG): If the property is held for more than 24 months, the gain is taxed at a rate of 20% with indexation benefits.
  • Short-Term Capital Gains (STCG): If held for 24 months or less, the gain is taxed at the individual's applicable income tax slab rates.
• Tax Deducted at Source (TDS): The buyer is legally obligated to deduct TDS at the time of payment to the NRI seller. For LTCG, the TDS rate is 20% (plus applicable surcharge and cess), and for STCG, it is 30% (plus surcharge and cess) on the gain. This TDS is deducted from the total sale price, which often results in a higher deduction than the actual tax liability. NRIs can apply for a lower or nil deduction certificate (Form 13) to mitigate this.
• Role of the DTAA: The India-US DTAA is the critical instrument that prevents the same income from being taxed in both countries. Article 13 of the treaty specifies that capital gains from the sale of immovable property may be taxed in the country where the property is situated. Consequently, India has the primary right to tax the gain. The NRI then reports this income on their US tax return and claims a foreign tax credit for the taxes paid in India using IRS Form 1116, thereby offsetting their US tax liability.

2. Comparison: 1961 Act vs Direct Tax Code 2025

The transition to the DTC 2025 is expected to bring structural changes aimed at simplification. While specific sections of the final code are yet to be implemented, the following table outlines the anticipated shifts based on draft proposals and expert analysis, contrasted with the current 1961 Act.

3. Repatriation & DTAA Implications

The repatriation of property sale proceeds is governed by the Foreign Exchange Management Act (FEMA), not the Income Tax Act. However, tax compliance is a prerequisite for repatriation.

• The Process: Sale proceeds must first be credited to the NRI's Non-Resident Ordinary (NRO) bank account. From the NRO account, an NRI can repatriate up to USD 1 million per financial year.
• Documentation: Before a bank processes an outward remittance, it requires proof of tax compliance. This is achieved by submitting two key documents:
  1. Form 15CA: A self-declaration by the remitter.
  2. Form 15CB: A certificate from a Chartered Accountant verifying that all applicable taxes under the Income Tax Act have been paid.
• DTC and Repatriation: The DTC is unlikely to alter the fundamental mechanics of repatriation under FEMA. However, by simplifying the calculation of capital gains tax, it will make the process of obtaining Form 15CB more straightforward. A clear and undisputed tax calculation will lead to faster processing by Chartered Accountants and banks, reducing delays in the NRI receiving their funds abroad. The DTAA ensures that once the tax is paid in India and certified via Form 15CB, the NRI can avoid a second tax incidence in the US by claiming the foreign tax credit.

4. NRI Action Plan & Documentation

To ensure a seamless transition and compliance under both the current and future tax regimes, US-based NRIs should adopt a structured approach.

Documentation Checklist for Property Sale & Repatriation:

Compliance Action Plan:

1. Pre-Sale Stage:

   • Obtain a valid Tax Residency Certificate (TRC) from the US tax authorities for the financial year of the sale.
   • Ensure your Indian PAN is active and linked with Aadhaar, if applicable.
   • Engage a Chartered Accountant in India to plan the transaction, calculate estimated capital gains, and decide whether to apply for a lower TDS certificate (Form 13).

2. During the Sale:

   • Provide a copy of your PAN, TRC, and Form 10F to the buyer to ensure TDS is deducted at the correct rate as per the DTAA, where applicable.
   • Ensure the Sale Deed accurately reflects the sale consideration.

3. Post-Sale Stage:

   • Obtain the TDS certificate (Form 16A) from the buyer.
   • File your Indian Income Tax Return (ITR) to report the capital gain and claim a refund if excess TDS was deducted.
   • For repatriation, instruct your Chartered Accountant to prepare and file Form 15CA and 15CB.
   • Submit the required documents to your bank to remit the funds to your US account.
   • Report the capital gain on your US tax return and file IRS Form 1116 to claim the foreign tax credit for taxes paid in India.

5. Conclusion

The move towards the Direct Tax Code 2025 signals a commitment to simplifying India's tax laws, which will benefit NRI investors by providing greater clarity and reducing compliance burdens. However, the fundamental principles of international taxation concerning Indian real estate will remain anchored to the India-US DTAA. India will continue to tax the gains at the source, and the US will provide relief through the foreign tax credit mechanism. For US NRIs, the key to navigating this transition is not to focus on finding tax exemptions that may not exist but to prioritize meticulous documentation, proactive tax planning, and seamless coordination between tax advisors in both India and the US.

💡 NRI Tax Tip: Managing foreign assets or DTAA? Ensure you are compliant with the updated NRI taxation rules in 2025.