Tuesday 13 August 2019

TDS on Sale of Property in Delhi

Know your TDS obligations if you are buying a property from NRI

When an NRI sells a property in India, the buyer needs to deduct TDS on the payment of purchase consideration.
  • In the recently announced Union Budget 2019, the surcharge on income-tax for individuals has been increased to a maximum of 37%.
  • The rate of TDS can be as high as 28.50% of the sale value on long term capital gain (property held for more than 2 years).
  • The rate of TDS can go up to 42.74% of sale value on short term capital gain (property held for less than 2 years), if the property value is more than INR 5 Cr.
  • Income tax law provides that a lower TDS certificate can be obtained from income tax authorities, considering the actual profit earned by NRI on the deal. Lower TDS certificate can be obtained at a rate as low as 3.12% of the sale value (as per present guidelines - July 2019)

Let me clarify most common confusion first, TDS of 1% u/s 194IA is not applicable if seller is NRI. TDS u/s 194IA is only applicable for resident Indian sellers.

Taxation on Sale of Property by NRI’s (Non Resident Indians) is bit confusing subject. This confusion is caused due to lack of information and improper explanation. Sometimes it is in the interest of few professionals to complicate things and confuse NRI clients to maximize their gains. In most of the cases, I observed that neither buyer nor NRI seller are aware of what to do.

Tax deduction at Sourse (TDS) on Sell of Property by NRI- Non Resident

Let me admit that Income Tax Act is not that complicated but it is in the hands of people who interpret it to make it complicated or simplified. To start with, Selling of property by NRI is taxable under u/s 195 of the Income Tax Act, 1961. I will discuss how to deduct TDS u/s 195!

NRIs who want to sell any house property that they may have in India. As the property situated in India, hence situs to tax in India this article elaborate how much tax is payable and TDS deductible in case of NRIs who want to sell property in India.

NRIs who are selling house property which is situated in India have to pay tax on the Capital Gain. The tax that is payable on the gains depends on whether it’s a short term or a long term capital gains.

When a house property is sold, after a period of 2 years from the date it was owned – there is a long term capital gain. In case it held for 2 years or less – there is a short term capital gain.

Tax implications for NRIs are also applicable in the case of inheritance. In case the property has been inherited, remember to consider the date of purchase of the original owner for calculating whether it’s a long term or a short term capital gain. In such a case the cost of the property shall be the cost to the previous owner.

Buying property from NRI check consequences of non deduction of tax (TDS) ?

How much tax is payable and deductible by buyer?

As per the Indian Income Tax Act, when a resident purchases any property from a non resident, he has to deduct income tax (TDS) and pay the balance amount to the seller.

Not many people know that Capital Gain Taxation is same for both Resident Indians and NRI’s but only difference is in calculation and deduction of TDS. Since NRI is staying outside India therefore it is very difficult to ensure capital gain tax compliance after the property transaction is completed. In order to ensure compliance, Income Tax Department came out with an innovative idea to ensure that buyer deduct TDS at the time of making payment to NRI seller. TDS u/s 195 is deducted only to ensure capital gain tax compliance.

When an NRI sells property, the buyer is liable to deduct TDS at the rate of:-

  • Long term capital gains are taxed at 20% {22.88%}, He has to deduct 20% of the sale consideration as tax before making the net payment to seller. and
  • short term gains shall be taxed at the applicable income tax slab rates i.e. 30% (31.20%)

Procedure aspect

Buyer should first obtain TAN under section 203A of the Income Tax Act, 1961 before deducting TDS. TAN can be obtained by applying buy filling up the Form 49B.

TDS must be deducted at the time of making the payment to the NRI. The information about the TDS being deducted and the rate at which it was deducted should be mentioned in the sale deed between the NRI seller and the buyer.

The TDS deducted by the buyer should be deposited through Form number or challan for TDS payment on or before the 7th of next month in which the TDS is deducted.

The TDS can be deposited through banks that are authorised by government of India or the Income Tax Department to collect Direct Taxes. The deposit has to be made by the buyer!

TDS Refund by NRI’s

You can claim TDS refund if can show proof of reinvestment of capital gains in India. You can either buy another house in India or invest in capital gains bonds u/c 54EC. You should submit an affidavit stating that you will invest the capital gain amount in capital gain bonds. For property purchase you can produce allotment letter or payment receipts of the builder.

Instead of claiming refund which is more tedious process it is always advisable to apply for NIL Tax Deduction / Tax Exemption / Lower Tax Deduction Certificate. It require some intelligent planning before sale of property and proactive approach.

197 NIL/ LOWER TDS Certificate by NRI Property Seller

How NRI’s can lower TDS on Property Sale?

As we discussed above basics of TDS on Property Sale by NRI. Now we understand how my NRI friends can lower the TDS on Property Sale. Before you decide to go ahead with property sale following 2 points should be considered

Type of Capital Gain from Property Sale i.e. Short Term Capital Gain or Long Term Capital Gain
Whether i am willing to pay capital gain tax or would like to save capital gain tax by Re-investment of capital gains- claiming exemption u/s 54/ 54F
Once these 2 points are clear then we are ready for property sale in India.

Illustration:- I will try to keep this illustration very simple as there is a common perception that this subject matter is complex!

This post is dedicated to my NRI friends who would like to know about their TDS liability at the time of sale of Property in India.

Mr. NRI who leave in India having a residential accommodation in Gurgaon!

Now he want to sell his Gurgaon flat which is long back investment property at a sale consideration INR 2.50 crore and want to invest in another Flat in Bangalore!

Therefore 1st task is to calculate long term capital gain of Mr. NRI. Indexed cost of acquisition of property is approx INR 1.50 Crore and he is selling it for 2.5 Cr. Long Term Capital Gain from property sale is approx 1 Crore and corresponding Long Term Capital Gain Tax at 22.88% is 22.88 Lakh.

If in case of Mr. NRI, buyer deduct TDS at 22.88% u/s 195 then TDS will be deducted on sale consideration value i.e. 2.5 Cr. TDS u/s 195 will be approx INR 57.20 Lakh against Mr NRI Long Term Capital Gain Tax liability of 22.88 Lakh. In short, u/s 195 excess TDS to the extent of INR 34.32 lakh will be deducted assuming Mr NRI decided not to re-invest capital gains from property sale.

Further suppose he invested sale proceeds of Gurgaon flat into Bangalore Flat than excess TDS on account of LTCG of Gurgaon flat for which exemption u/s 54 is available in this context of excess TDS u/s 195 to the extent of INR 22.88 lakh deducted can be save by applying NIL/ Lower rate TDS Certificate from Income tax department.

Buyer Liable to deduct TDS on entire sale consideration. Now anomaly in this rule is that NRI is liable to pay Capital Gain Tax only on the Capital Gain arising out of sale of the property but unfortunately TDS is deducted on the total Sale Value of the property. Therefore in most of the cases there are no GAINS as such from the sale of property and actually NRI incur LOSS from the sale of the property if TDS refund is not claimed. As a result, NRI has to go through the process of claiming TDS refund from Income Tax Department.

The buyer of the flat liable to deduct 22.88% TDS on sale consideration i.e 22.88% of INR. 2.50 crore!

But for saving point of view he can claim Indexation benefit for which he NRI Seller can apply for Nil Tax Deduction or Lower Tax Deduction with Income Tax Assessing Office. In case, NRI seller is planning to re-invest capital gain as i mentioned earlier then he can apply for tax exemption certificate. Based on assessment by Income Tax Department, certificate will be issued to NRI seller for property sale. In this case, buyer will not deduct TDS u/s 195 on sale consideration value. In above example, if Mr NRI get certificate from Income Tax Department then buyer will pay full consideration i.e. 2.5 Cr to Mr. NRI without deducting any TDS. NRI seller can handover original Nil Deduction Certificate to the buyer for his reference. In short, buyer need not to file any TDS in seller’s name as TDS will not be deducted in this case. Income Tax Department will issue separate certificate to NRI seller for TDS on capital gains. For Tax Exemption Certificate, NRI seller can submit application in Income Tax Department under whose jurisdiction his / her PAN belongs to. To know the jurisdictional IT office of PAN.

In few cases I observed that TDS is not applicable on property sale as NRI seller obtained NIL Deduction or Tax exemption certificate but then buyer deducted TDS u/s 194IA just for the sake of deducting TDS. In such cases, full payment should be released to NRI seller for property sale and buyer should obtain Nil deduction certificate / Tax Exemption Certificate from NRI seller.

After point 1 i.e. calculation of capital gain, there are 3 possible scenarios

(a) Capital Gain is Zero or there is Capital Loss on Property Sale: In this case NRI Seller can apply for NIL Tax Deduction Certificate.

(b) NRI Seller is willing to pay Actual Capital Gain Tax i.e. if Actual Capital Gain Tax liability is less than TDS u/s 195: In this scenario, based on capital gain tax calculation NRI seller can apply for Lower tax Deduction Certificate. In above example, Mr. NRI can apply for Lower Tax Deduction Certificate as actual long term capital gain tax liability is only 22.88 lakh against TDS of 57 lakh u/s 195.

(c) NRI seller is willing to re-invest capital gain to save capital gain tax: In this case, NRI Seller can apply for Tax Exemption Certificate.

How to apply for Nil / Lower Tax Deduction Certificate or Tax Exemption Certificate on Property Sale

Documents Required:

(a) Passport and PAN
(b) Sale Agreement / Sale Deed
(c) Income Tax Returns
(d) Bank Statement
(e) Any other document deemed relevant
Entire process may take upto 1 MONTH time! In case, there is no tax liability then NRI can file form 15CA and 15CB online. These forms can be filed by CA. After filing form 15CA and 15CB, money can be transferred to country of residence else money can be retained in NRO account in India.

Disclaimer: The opinion given in the articles is the individual opinion of the author and it is up to the readers to evaluate their position taking the provision of law and applicable facts of their case and take the decision on the subject matter. Subject to taxability of capital gain rates, surcharge, cess or available of exemption u/s 54, 54F, 54EC etc. and DTAA provision. The author or me cannot be held liable for any of the decisions taken based on the above article. Before taking any decision it is best to hire professional advice.

Last but not the least, in many cases I observed that NRI seller insist buyer to not to deduct TDS. In specific cases, TDS is not deducted due to ignorance at buyers end. In all such scenarios, hefty penalty can be imposed on buyer or on NRI seller. It is always advisable to pay all taxes on time to buy peace of mind which is priceless.
Thanks & Regards
CA. Ashwani Rastogi
Partner, ARJS & Associates
Chartered Accountants 

Address- 2029, Bank St, Near Shreem Jewellers, Block 47, Beadonpura, 
Karol Bagh, New Delhi, Delhi 110005
Mobile Number+91-9990999281

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