As the real estate market continues to attract Non-Resident Indians (NRIs), it is crucial for both buyers and sellers to understand the intricacies of Tax Deducted at Source (TDS) on property transactions. This comprehensive guide will provide valuable insights into the applicability, rates, and procedures associated with NRI TDS in India. Whether you are an NRI looking to sell property, or a buyer interested in purchasing from an NRI, this guide will equip you with the necessary knowledge to navigate the process smoothly.
Applicability of TDS on Sale of Property by NRI
When it comes to property transactions in India, TDS is a mandatory requirement. The buyer is responsible for deducting a specific amount, known as TDS, from the payment made to the seller and depositing it with the Income Tax Department. The applicable rate of TDS depends on the residential status of the seller. If the seller is a resident Indian, the TDS rate is 1% of the sale price. However, if the seller is an NRI, the TDS rate depends on the nature of capital gains.
What is the Rate of TDS on Sale of Property by NRI?
The rate of TDS on the sale of property by an NRI differs based on the duration of property ownership. For long-term capital gains (property held for more than 2 years), the TDS rate is 20%. For short-term capital gains (property held for less than 2 years), the TDS rate is based on the applicable income tax slab rates of the seller. Additionally, surcharge and cess are levied on the TDS amount, resulting in an effective TDS rate.
The following table illustrates the effective rates of TDS on long-term capital gains for different property sale prices:
Property Sale Price (Rs.) TDS Rate (incl. Surcharge & Cess) Less than 50 Lakhs 20.8% 50 Lakhs to 1 Crores 22.88% Above Rs. 1 Crores 23.92% Please note that the maximum surcharge has been capped at 15% from April 1, 2022, regardless of the property value.
In the case of short-term capital gains, the same surcharge and cess are added to the applicable tax rate as per the income tax slabs.
Amount on which TDS is required to be deducted.
TDS on the sale of property by an NRI is required to be deducted under Section 195 of the Income Tax Act. Ideally, TDS should be deducted on the capital gains. However, it is the responsibility of the Income Tax Officer to compute the capital gains, and the seller must file an application in Form 13 for this purpose. The form requires various documents such as purchase price, date of purchase, and any expenses on renovation or construction. Once the Income Tax Department computes the capital gains, they issue a certificate for nil or lower deduction of TDS. It is essential for the seller to obtain this certificate to ensure correct TDS deduction.
If the seller fails to obtain the certificate, TDS should be deducted on the total sale price instead of the capital gains. It is highly recommended to mention the details of TDS deduction in the property sale agreement. However, it is not the responsibility of the property registrar to ensure TDS deduction. The registrar will register the sale agreement irrespective of TDS deduction. In case of incorrect or missed TDS deduction, the Income Tax Department will hold the buyer accountable for depositing the TDS.
TDS Payment, TDS Return & TAN No.
Buyers involved in property transactions with NRIs must adhere to certain compliance requirements. Firstly, the buyer should possess a Tax Deduction and Collection Account Number (TAN) for TDS deduction. TAN is different from a Permanent Account Number (PAN) and is mandatory when purchasing property from an NRI. In case the buyer does not have a TAN, they should apply for one before deducting TDS. It is important to note that if there are multiple buyers, each of them must obtain a TAN.
TDS deducted by the buyer should be deposited with the Income Tax Department within seven days from the end of the month in which the TDS was deducted. The deposit should be made using Challan No./ITNS 281, which can be done online or through various bank branches. After depositing the TDS, the buyer must file a TDS Return in Form 27Q within 31 days from the end of the quarter in which the TDS was deducted. Additionally, the buyer should provide Form 16A, a TDS certificate, to the seller after filing the TDS Return.
How to Determine whether the Seller is a Resident or a Non-Resident?
Determining the residential status of the seller is crucial in property transactions involving NRIs, as the TDS rate depends on their residential status for income tax purposes. The residential status is determined based on the number of days the person spends in India. It is important to note that citizenship does not play a role in determining residential status. Even if a person is an Indian citizen residing abroad, they will be considered an NRI for income tax purposes based on the number of days spent in India. https://incometaxindia.gov.in/Pages/tools/residential-status-calculator.aspx
To determine the residential status of the seller, one can use the Residential Status Calculator provided by the Income Tax Department. This calculator considers the number of days spent in India and helps in determining whether the seller is a resident or an NRI.
Important Points while Determining Seller’s Residential Status:
- The seller’s citizenship does not impact their residential status.
- Possessing an Indian Aadhaar Card and PAN Card does not automatically make the seller a resident in India.
- The type of bank account held by the seller does not affect their residential status.
If the seller claims to be a resident in India, it is important to consider the implications. Becoming a resident in India means that the NRI will be subject to tax on their global income, including income earned outside India. This is why many NRIs strive to maintain their NRI status to avoid taxation on foreign income.
Things to be taken care of by the Seller.
Sellers involved in property transactions as NRIs should keep the following points in mind regarding TDS deduction:
- Seek a certificate from the Income Tax Department to compute capital gains and reduce the TDS liability.
- Submit relevant documents such as purchase price, date of purchase, and expenses on renovation or construction along with Form 13.
- If unable to obtain the certificate, TDS will be deducted on the sale value, leading to excessive TDS deduction.
- Collect Form 16A from the buyer along with the property registration documents.
- Consider reinvesting capital gains to lower TDS and tax liability.
- Alternatively, apply for a refund of excess TDS deducted at the end of the year.
- In case of co-owners, each co-owner should file Form 13 separately to reduce TDS rates.
- The provisions of lower TDS certificates also apply to OCI cardholders, who can avail the same benefits.
Things to be taken care of by the Buyer.
Buyers involved in property transactions with NRIs have several responsibilities, including:
- Deduct TDS at the time of each payment, not at the time of property registration.
- Deposit the deducted TDS with the Income Tax Department within the specified timeline.
- File a TDS Return in Form 27Q within the prescribed timeframe.
- Issue Form 16A to the seller after filing the TDS Return.
- Pay interest on late TDS payment at a rate of 1% or 1.5% per month.
- Pay a penalty of Rs. 200 per day for late filing of the TDS Return, with the possibility of additional penalties imposed by the Income Tax Officer.
- Note that TDS should be deducted on advance payments as well, regardless of the issuance of a lower TDS certificate.
- In the case of property purchased with a home loan, TDS should be deducted when making payments to the seller, not when paying EMIs to the bank.
How to avoid Double Tax on Sale of Property by NRI in 2 Countries
Double taxation, where both the country of residence and the country where the property is located levy taxes, is a concern for NRIs selling property in India. To avoid this, India has entered into Double Taxation Avoidance Agreements (DTAA) with several countries. These agreements allow NRIs to claim a tax credit for taxes paid in India, reducing their tax liability in the other country. Proper disclosures must be made in the country where the tax credit is claimed. For example, if an NRI residing in the US sells property in India, they must declare the gains/losses in their US tax return and deduct the taxes paid in India from their US tax liability.
Repatriation of money outside India by NRI
NRIs who wish to repatriate the money received from the sale of property in India must submit Form 15CA and Form 15CB to the bank. Form 15CA can be generated by the NRI or their Chartered Accountant, while Form 15CB can only be generated by a Chartered Accountant. These forms require various disclosures, including the source of funds to be repatriated and a declaration that all taxes on such funds have been paid in India.
NRIs are allowed to repatriate a maximum of $1 million (USD) outside India per calendar year, as per the RBI circular.
Reduce your TDS Liability by filing an application in Form 13
To reduce TDS on the sale of property by an NRI, the seller must file an application in Form 13 with the Income Tax Department to obtain a certificate for nil or lower deduction of TDS. This certificate significantly reduces the TDS liability for NRIs, making it a popular choice. However, filing this form can be complicated, and many NRIs prefer to engage a Chartered Accountant for assistance. Our services are available for filing applications for nil or lower deduction of TDS.
Conclusion
Navigating the complexities of TDS on property transactions involving NRIs is essential to ensure compliance and avoid any unnecessary hassles. In this comprehensive guide, we have covered the applicability of TDS, rates, computation of capital gains, TDS payment, and various considerations for both sellers and buyers. By understanding the procedures and requirements, NRIs can confidently engage in property transactions in India, while buyers can fulfill their obligations responsibly. For any further assistance with NRI TDS and property transactions, contact John Real Estate, a leading NRI-specialized realtor in Thane, Mumbai.
