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October 23, 2024
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TDS on Sale of Property by NRI

When an NRI (Non-Resident Indian) decides to sell property in India, taxation becomes a critical aspect of the transaction. One of the key points to understand is the concept of Tax Deducted at Source (TDS), which is a major factor in calculating the net amount the NRI will receive from the sale. This blog will help demystify TDS on Sale of property by NRI, covering all essential details.

If you are a Resident and are buying/ planning to buy a property in India from an NRI or You are an NRI, selling/ planning to sell a property in India to a Resident – This post is for you!

What is TDS?

TDS is a mechanism where tax is deducted at the time of making certain payments that result in income for the recipient, including the sale of property by NRI, by the buyer, and is deposited with the Indian government. For NRIs, the sale of immovable property in India attracts TDS, as it is considered capital gains income.

As per the Section 195 of the Income Tax Act, 1961, when a person purchases immovable property from a Non-Resident in India, the buyer is liable to deduct TDS on the entire Sale Consideration (on every payment made to the seller, irrespective of the capital gains made on the sale).

Is there any minimum limit to such deduction?

NO. All property transactions, irrespective of the Sale consideration, attract TDS provisions u/s 195 of the Income Tax Act.

How to calculate the rate of TDS?

Following are the revised TDS rates effective from 23rd July 2024 on sale of property by NRIs – Incase of transfer which took place after 23rd July 2024:

The rate of TDS depends upon the duration of holding the immovable property:

  • If duration of holding
  • If duration of holding > 24 months – It is classified as Long-Term Capital Gains

TDS Rate in case of Short-Term Capital Gains:

STCG is taxed at slab rates i.e. it depends on the taxable income in India for the seller. Hence, TDS is to be done at the highest tax bracket of 30% +surcharge +cess.

TDS Rate in case of Long-Term Capital Gains:

Particulars

Less than Rs.  50 Lakhs

Between Rs. 50 Lakhs to Rs. 1 Crores

Between Rs. 1 Crore to Rs.2 Crores

Between Rs. 2 Crore to Rs. 5 Crore

Above Rs. 5 Crore

 

 

 

 

 

 

TDS

12.5%

12.5%

12.5%

12.5%

12.5%

Surcharge

NIL

10% of above

15% of above

15% of above

15% of above

Health & Education Cess

4% of above

4% of above

4% of above

4% of above

4% of above

 

 

 

 

 

 

Effective TDS Rate

13%

14.3%

14.95%

14.95%

14.95%



 

 

 

 

 

 

 

 

 

How TDS is Calculated?

Unlike resident Indians, where TDS is deducted on the capital gain, for NRIs, TDS is typically calculated on the total sale value of the property. This can create a situation where the tax deducted is significantly higher than the actual tax liability.

Filing for Lower TDS Deduction

To avoid excess tax deduction, an NRI seller can seek guidance from NRI consultants to apply for a lower or nil TDS deduction under Section 197 of the Income Tax Act. The NRI must file an application with the Income Tax Department, and upon approval, the buyer will deduct TDS as per the lower rate specified.

The steps include:

  • Filing Form 13 with supporting documents (sale agreement, PAN, property details).
  • Obtaining a certificate from the tax department.
  • Providing the certificate to the buyer to apply the reduced rate of TDS.

Note: If an NRI is unable to obtain a lower TDS certificate and the4 TDS is deducted at a higher rate resulting into deduction of TDS> actual tax liability, the excess can be claimed as a refund at the time of filing the ITR.

Obligations of the buyer, if buying property from an NRI:

1. The buyer has to apply & get a TAN.

  • In cases where two or more individuals jointly purchase the property, investing funds from their personal sources or through joint loans, each person involved must acquire a TAN.
  • Once the TAN is obtained, the buyer is required to deduct TDS on every occasion of making payment to the NRI Seller and deposit the TDS amount with the Income Tax Department through e-challan latest by the 7th  day of the next month which the payment is made to the Seller.  After depositing the TDS, the buyer shall file TDS Return in the next quarter. Once the TDS return is filed, the buyer shall download form 16A and handover to the Seller.

2. The  buyer is responsible for deducting the TDS as per the rates mentioned above or as per the rate mentioned in the Lower TDS Certificate obtained by the seller, if any.

Implication on the Buyer if the TDS is not deducted as per the prescribed Rate:-

Many times the Seller does not disclose their Tax Residency Status to the buyer and completes the property transaction as a Resident Indian. This is illegal and has adverse ramifications for the Buyer. As discussed above, it is the legal responsibility of the buyer to deduct and deposit the TDS as per the prescribed rate or the rate prescribed in the Lower/Nil Deduction Certificate issued by the Income Tax Department. However, in a case, if the buyer did not deduct the TDS as per prescribed rates, the buyer shall be liable for a penalty for the equal amount of TDS, which was not deducted, u/s 271C of the Income Tax Act. The buyer shall also will be liable to pay interest u/s 201 of the Income Tax Act on the default sum.

Implication on the NRI Seller if the TDS is not deducted as per the prescribed Rate:-

In most cases, the NRI person sells their property to get the funds abroad for utilization. However, under NRI Taxation rules, if TDS is not deducted as per the regulations, the Seller will not be in a position to repatriate the amount of Sale Consideration received to their foreign bank account/NRE account. Further more, when the said transaction comes to the notice of the Income-Tax Department, the Seller can be prosecuted for misrepresentation of facts regarding their Tax Residency.

FAQs on TDS on sale of property by an NRI:

Q. Is PAN mandatory when NRIs sell their property in India?

A. Yes. Obtaining a PAN (Permanent Account Number) is mandatory for NRIs who sell property in India for the purpose of TDS (Tax Deducted at Source) on the sale of the property.

Q. How NRIs can lower TDS on property sales?

A. The NRI can reduce TDS by filing an application for Lower Deduction if there is no Capital gain or if capital gain is lower than TDS to be deducted with the Income Tax Officer. Various documents are required to be filed along with the application in Form 13.

Q. Who is responsible for deducting TDS on the sale of property by NRIs?

A. The buyer of the property from an NRI seller is responsible for deducting TDS (Tax Deducted at Source). Failure to comply can lead to penalties and interest for the buyer, so it's essential to handle the transaction diligently.

Q. Is it necessary for an NRI to file an income tax return in India for the year in which the property was sold?

A. Filing an ITR is necessary for NRIs for the year in which the property was sold, if the total income (including the capital gains from the property sale) exceeds the basic exemption limit as per the applicable income tax slab rates. Also, to claim any eligible deductions or exemptions and to comply with the tax laws of India.

Q. Can an NRI claim the refund for the excess TDS deducted?

A. Yes. The NRI seller must file income tax returns in India to claim a refund if the actual tax liability is less than the TDS deducted. It’s important to note that refunds may take time.