Repatriating sale proceeds of Indian immovable property: FEMA Rule 5, the 2-property cap, and the inherited carve-out

When a non-resident Indian or Overseas Citizen of India sells a flat in Mumbai or a villa in Pune, the sale consideration is the easy part. The hard part is moving that money out of India without breaching the Foreign Exchange Management Act, 1999. Two mistakes recur in practice. The first is the assumption that any sale proceeds can be freely remitted abroad. The second is the assumption that nothing can. Both are wrong, and the regulatory line between them is drawn by Rule 5 of the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018 — known to professionals as FEMA 21(R)/2018.

This article unpacks the lifetime cap of two residential properties for full repatriation, the inherited-property carve-out routed through the USD 1 million per financial year scheme, Section 195 withholding, and the Form 15CA/15CB chain. Every figure ties back to the Income-tax Act 1961 or the FEMA notification on the RBI portal.

FEMA / DTAA Position

FEMA Section 6(3), as amended by the Finance Act 2015, gave the Reserve Bank of India regulation-making power over capital account transactions involving immovable property in India by persons resident outside India. The operative rule book today is FEMA 21(R)/2018, notified vide Notification No. FEMA 21(R)/2018-RB dated 26 March 2018, superseding the 2000 notification of the same name.

Rule 5 governs repatriation of sale proceeds. It permits an NRI or OCI to repatriate proceeds outside India provided three cumulative conditions are met. First, the property must have been acquired in accordance with the foreign exchange law in force at the time of acquisition. Second, the consideration must have been paid in foreign exchange received through normal banking channels or out of funds held in a Foreign Currency Non-Resident (FCNR) account or a Non-Resident External (NRE) account. Third, in the case of residential property, repatriation is restricted to not more than two such properties during the lifetime of the seller.

The third leg — the lifetime cap of two residential properties — is the most misunderstood limb. It does not cap how many residential properties an NRI can buy or sell. It caps how many sales can attract free repatriation under Rule 5(b). A third sale can still occur, but the proceeds must route through the Non-Resident Ordinary (NRO) account and qualify under the USD 1 million per financial year scheme governed by the Foreign Exchange Management (Remittance of Assets) Regulations, 2016.

For commercial property, no equivalent two-property cap applies. The first two conditions still bind, but Rule 5 imposes no numerical ceiling on shop, office or industrial-shed sales.

The DTAA position parallels the OECD Model. Article 6 of every Indian treaty assigns primary taxing rights over income from immovable property to the situs state. Article 13 — the capital-gains article — does the same for alienation. The India-USA treaty, signed 12 September 1989, follows this template at Article 13(1), with the United States granting a foreign tax credit under Article 25 for the Indian tax actually paid. India does not surrender taxing rights on Indian immovable property gains under any treaty in force.

Tax Treatment in India

Capital gains on the sale of Indian immovable property are computed under Sections 45 to 55A of the Income-tax Act 1961. The holding-period threshold for long-term classification was reduced from 36 months to 24 months for immovable property by the Finance Act 2017, with effect from 1 April 2017. A property held for more than 24 months therefore qualifies as a long-term capital asset.

The Finance (No. 2) Act 2024 made two structural changes for transfers on or after 23 July 2024. The long-term capital gains rate under Section 112 for land and buildings was reduced from 20 per cent with indexation to 12.5 per cent without indexation. A grandfathering option permits resident individuals and HUFs who acquired the property before 23 July 2024 to continue using the 20-per-cent-with-indexation method, but this option is not available to non-residents. NRIs are therefore taxed at a flat 12.5 per cent on long-term gains from Indian immovable property transferred on or after that date.

The headline rate is then loaded with surcharge and cess. The maximum surcharge in the new tax regime is capped at 25 per cent — a relief introduced by the Finance Act 2023 that displaced the earlier 37 per cent ceiling. The Health and Education Cess is 4 per cent on tax plus surcharge.

The buyer's withholding obligation is independent of the seller's tax liability. Section 195 requires any person paying a sum chargeable to tax to a non-resident to deduct tax at source at the rates in force. For long-term gains on immovable property, the rate is 12.5 per cent under Section 112, plus surcharge and cess. The buyer must deduct on the entire sale consideration unless the seller obtains a lower-deduction certificate under Section 197 directing deduction only on the embedded gains.

Cash dealing in property is constrained by Section 269SS, which prohibits the receipt of any sum of Rs 20,000 or more otherwise than by account-payee cheque, bank draft or electronic clearing system. Section 271D imposes a penalty equal to the cash so received. The NRI tax calculator walks through the residential-status grid and surcharge brackets; the rental income tax calculator handles taxation of the lease stream alongside an eventual sale.

Tax Treatment Abroad

The sale of Indian immovable property by a person tax-resident in another jurisdiction creates parallel exposure in the country of residence. The DTAA does not eliminate the foreign liability — it merely allocates primary taxing rights to India and obliges the residence state to grant credit. The credit is the lower of the Indian tax actually paid and the residence-state tax computed on the same gain.

For a US-resident NRI, the gain is reported on Form 1040 Schedule D. The federal long-term capital gains rate is 0, 15 or 20 per cent depending on bracket, plus the 3.8 per cent Net Investment Income Tax under Section 1411 of the Internal Revenue Code where applicable. Foreign tax credit is claimed on Form 1116 in the passive-category income basket.

For a UK-resident NRI, the gain is reported on the Self Assessment Capital Gains Tax pages. The UK CGT rate on residential property gains was 24 per cent for higher-rate taxpayers from 6 April 2024. The annual exempt amount fell to GBP 3,000 for 2024-25. Indian tax paid is creditable under Article 24 of the India-UK DTAA. For a UAE-resident NRI, there is no personal income tax on capital gains and the residence-state liability is therefore zero.

The Indian tax paid is the credit ceiling. A US-resident NRI in the 20 per cent federal bracket plus 3.8 per cent NIIT pays an aggregate 23.8 per cent; the Indian credit absorbs 13 to 16.25 percentage points, and the residual is paid to the IRS. No Indian DTAA exempts capital gains on Indian immovable property — the treaty preserves Indian taxing rights at 12.5 per cent and only the credit mechanism reduces the second-country bite.

Repatriation Mechanics

The mechanics of moving the post-tax sale proceeds offshore turn on three sequential checkpoints — credit of the proceeds to the correct rupee account, the lifetime-cap declaration to the authorised dealer bank, and submission of Form 15CA and Form 15CB to the Income Tax Department.

Step one is account routing. Sale proceeds of property funded originally from NRE or FCNR sources can be credited directly to the seller's NRE account up to the original foreign-exchange invested, with the balance routed to the NRO account. Sale proceeds of property funded from rupee resources, including resident funds during a prior period of Indian residence or rental savings, must be credited entirely to the NRO account. The bank will not credit a non-rupee account without documentary proof of the original inward remittance — typically the FIRC or NRE/FCNR debit advice from the time of purchase.

Step two is the lifetime-cap test. The authorised dealer bank requires the seller to file an undertaking confirming whether either of the two lifetime slots has previously been used. There is no central registry; the system relies on declarations and bank-level KYC. Misdeclaration is a contravention under Section 13 of FEMA punishable by penalty up to thrice the sum involved.

Step three is the Form 15CA and Form 15CB chain. Section 195(6) of the Income-tax Act 1961, read with Rule 37BB, requires the remitter to furnish Form 15CA online before any remittance to a non-resident. Where the remittance exceeds Rs 5 lakh in a financial year and is chargeable to tax, a chartered accountant's certificate in Form 15CB must be obtained before filing Form 15CA Part C. The CA certifies the nature of the remittance, the applicable DTAA article, the rate of TDS deducted and the gross-up computation where required.

The inherited-property carve-out warrants emphasis. A property inherited by an NRI from a person resident in India is acquired without any inward remittance, so the original-FX condition under Rule 5 cannot be satisfied. Such proceeds therefore cannot use the lifetime two-property route at all. They route exclusively through the USD 1 million per financial year scheme under Regulation 4(2) of the Remittance of Assets Regulations 2016, which expressly contemplates inheritance, legacy and settlement proceeds. No prior RBI permission is required where the inheritance is in compliance with applicable Indian succession law.

Agricultural land, plantation property and farmhouses sit in a separate compartment under Rule 4 of FEMA 21(R)/2018. NRIs and OCIs cannot acquire fresh agricultural land in India under any route. Existing holdings inherited from a resident or held since pre-FEMA times can be sold only to a person resident in India. Repatriation of such sale proceeds is permitted only under the USD 1 million per FY scheme.

The NRI repatriation calculator on Oquilia models the post-tax remittable amount across both routes. Returning NRIs should also factor in the RNOR window under Section 6(6), which can shelter foreign-source income for up to two financial years after the year of return.

FAQ

Does the two-property lifetime cap reset if I become resident again and then return to NRI status?

No. The cap is a lifetime cap on the seller, not on a particular period of NRI status. FEMA 21(R)/2018 Rule 5(b) refers to the lifetime of the person, with no provision for renewal upon a change of residential status. A second emigration after a return to India does not unlock additional repatriation slots.

Can I repatriate the proceeds of a property gifted to me by my father, a resident Indian?

A gift from a resident parent is not a foreign-exchange-funded acquisition. Rule 5 of FEMA 21(R)/2018 cannot apply because the second condition — payment of consideration through inward remittance — fails. The sale proceeds will route through the NRO account and must use the USD 1 million per financial year scheme. Form 15CA and Form 15CB will be required, and the bank may seek the original gift deed to verify chain of title.

What documentation does the bank need to confirm the original foreign-exchange funding?

Authorised dealer banks typically ask for the FIRC issued at the time of original purchase, the NRE or FCNR debit advice if funds were drawn from such accounts, and a copy of the registered sale deed showing the payment trail. Where the property was acquired more than 10 years ago and FIRCs are no longer retrievable, banks may accept a CA's certificate reconstructing the funding chain.

Is TDS under Section 195 applicable even if I do not plan to repatriate the sale proceeds?

Yes. Section 195 is a buyer-side withholding obligation triggered by payment to a non-resident, irrespective of how the seller intends to use the rupee proceeds. The buyer must deduct at 12.5 per cent plus surcharge and cess on the entire consideration, or on the embedded gain only if the seller furnishes a Section 197 lower-deduction certificate. Failure to deduct attracts disallowance under Section 40(a)(i) and interest under Section 201.

How does the USD 1 million per FY scheme interact with my other NRO outflows?

The USD 1 million ceiling is a per-person, per-financial-year aggregate that includes sale proceeds of immovable property, inherited assets, balance in the NRO account, and any other capital account remittance from NRO funds. A USD 700,000 property sale and a USD 400,000 inheritance in the same financial year together exceed the ceiling, requiring the residual USD 100,000 to wait for the next financial year or to seek RBI approval.

Does the buyer need a TAN to deduct Section 195 TDS on a property purchase from an NRI?

Yes. Section 203A requires every person deducting tax to obtain a TAN. There is no exemption for individual buyers in property transactions where the seller is a non-resident — the simplified Form 26QB regime under Section 194-IA applies only to resident sellers. The buyer must apply for a TAN in Form 49B, deposit the deducted tax through challan ITNS 281, file quarterly returns in Form 27Q and issue Form 16A to the seller.