NRI travelling to India to sell property can claim flight expenses as tax deduction, rules ITAT

If you are a non-resident Indian (NRI) living abroad and have to fly to India to complete the sale of a property, your airfare could qualify for a tax deduction while calculating capital gains. However, simply travelling to India during the period of a property transaction does not make the entire trip tax-deductible. You must establish that the expenditure was incurred specifically in connection with the sale. The Income Tax Appellate Tribunal (ITAT), Bengaluru bench, has clarified this distinction while hearing an NRI's appeal against the income tax department's decision to disallow Rs 12.01 lakh claimed towards travel and accommodation expenses incurred for selling a house property in India.

The taxpayer, based in the US, had sold a property for Rs 2.63 crore through a sale deed executed on January 6, 2020. While calculating long-term capital gains, he deducted the travel expenses under Section 48(i) of the Income-tax Act, 1961. The assessing officer (AO) rejected the claim, arguing that the expenses were not incurred wholly and exclusively for the property sale. When can NRIs claim flight expenses against capital gains? Under Section 48(i) of the Income-tax Act, 1961, expenditure incurred wholly and exclusively in connection with the transfer of a capital asset can be deducted from the sale consideration while calculating capital gains.

Examining the travel records, the tribunal found that the taxpayer had undertaken a trip from the US to India in November 2019, nearly two months before the sale deed was executed. It held that the expenses incurred during this visit could not be treated as expenditure connected with the January 2020 property transfer. However, the tribunal took a different view of the January 2020 travel. The taxpayer had produced flight tickets for travel between Chicago and Delhi, along with a hotel bill of Rs 93,125 for his stay in Bengaluru between January 5 and January 8. The tribunal accepted that the taxpayer's air travel to India for registering the sale deed was connected with the property transfer.

However, it pointed out that the January travel tickets also included expenses for another family member. Therefore, the taxpayer had to establish that the expenditure was wholly and exclusively related to the property sale. The tribunal sent the matter back to the AO to examine the supporting documents, verify the eligible expenses and decide the deduction afresh. It did not allow the entire Rs 12.01 lakh travel claim. Divya Bhanushali, Chartered Accountant and Chief Product Officer at TaxBuddy, said the ruling highlights the distinction between travelling to India and travelling specifically to complete a property transaction.

"For NRIs, travelling to India to complete a property sale does not automatically make the entire airfare and accommodation expenses deductible. The taxpayer must demonstrate that the expenditure was incurred wholly and exclusively in connection with the transfer. Personal travel, family members' tickets and trips undertaken much before the registration date may not qualify," she said. What other expenses can NRIs include in property acquisition costs? The tribunal also ruled in favour of the taxpayer on three other disputed expenses. It allowed Rs 21.60 lakh paid as interest on a home loan taken to purchase the property as part of its cost of acquisition.

The taxpayer had submitted income tax return records from assessment years 2007-08 to 2020-21 to establish that he had not claimed the interest as a deduction under Section 24(b) in earlier years. The tribunal also allowed indexation on this amount. Further, it allowed a one-time maintenance deposit of Rs 2.29 lakh and an electricity and water deposit of Rs 1.71 lakh as part of the property's cost of acquisition. The tribunal observed that the maintenance deposit was necessary for obtaining possession of the flat and that there was no evidence that the taxpayer had separately recovered these deposits from the buyer.

What should NRIs keep in mind before selling property? The ruling highlights the importance of maintaining proper documentation when NRIs sell property in India. Flight tickets, hotel invoices, sale agreements, registration records and professional fee receipts can help establish the connection between an expense and the property transaction. NRIs should also maintain separate records of personal and family travel expenses. A visit involving multiple cities, family members or personal activities may make it difficult to establish that the entire expenditure was incurred exclusively for the sale.