Deduction of TDS on Sale of Property by NRI | 2023 Guide

 

Principle of Domestic Taxation	TDS (Tax Deduction at Source)
Type of Transaction	TDS on Sale of property by NRI – Situated in India
Parties to the Transaction	So, property may be sold by NRI to: – A resident; or A non-resident.

Where a Non-resident Indian “NRI” sells a residential or commercial property situated in India, the NRI is liable to pay capital gains tax in India @ 20% on long-term capital gains and 30% tax on short-term capital gains. If the NRI is a tax resident of another country, they can claim the beneficial provisions  of the Tax Treaty provision. This Article covers Deduction of TDS on the sale of property by an NRI , how TDS can be reduced through the application to the income tax office, and the process involved in obtaining such a certificate. TDS, or Tax Deducted at Source is a tax collection mechanism, which in essence, was introduced by the Indian Government to ensure that taxes are paid in advance on specified transactions. When there is a sale of property by an NRI (Non-Resident Indian), TDS is applicable as per the Income Tax Act, 1961. The buyer of the property is required to deduct TDS at the time of making payment to the NRI seller and deposit it with the government on behalf of the NRI seller.

Why should the buyer deduct TDS on the sale of property by NRI?

The rationale behind making the buyer responsible for deducting TDS on the sale of property by NRI is to ensure that the tax is collected in advance and that the NRI seller does not evade tax. By making the buyer responsible for deducting TDS, the government can ensure that taxes are paid upfront and that the NRI seller does not default on their tax payments. In addition, it may be challenging for the government to collect taxes from NRI sellers who are not residing in India. Therefore, by making the buyer responsible for deducting TDS, the government can ensure that taxes are collected at the time of the transaction. To understand the TDS on the sale of property by NRI, you can Watch our Video:  –

Applicability of TDS on Sale of Property by NRI

Every time, a non-resident sells a property, TDS must be deducted by the buyer. TDS or Tax Deducted at Source is applicable on the sale of property by NRI (Non-Resident Indian) as per section 195 of the Income Tax Act, 1961. So, the buyer of the property is required to deduct TDS at the time of making payment to the NRI seller. The buyer then deposits this TDS with the government on behalf of the NRI seller. The procedure for deduction of TDS on the purchase of property from NRI will be as per Sec 195 of the Income Tax Act, 1961. Such a buyer may be a resident or a non-resident. The buyer will deposit such TDS to the Income Tax Department. TDS will appear as a tax credit in the income tax account of the seller, which he can offset against his tax liability/ or claim a refund if the total tax deducted is higher than his tax liability. The rate of TDS on the sale of property by an NRI would increase due to an increase in the rate of surcharge if the value of the property increases. The following aspects will be covered in respect of the Deduction of TDS on the sale of property by NRI in this Article: –

• Rate of TDS deduction ;
• Amount on which TDS will be deducted ;
• Process of obtaining lower TDS certificate from Income Tax office ;
• Reduction of tax on Capital Gains .

Applicability of tax deduction on sale of property by NRI

TDS on the sale of property by NRI would vary depending on the following aspects: –

• Sale Consideration of the property – Higher the value at which the property is sold, the higher the capital gains;
• Cost of Acquisition of the property – Higher the cost of acquisition of property, the lower the capital gains;
• Period of ownership of the property – The tax rate changes if the property is a long-term capital asset;
• Expenditure incurred on transfer of property – This reduces the capital gains arising on the sale of property;

The capital gains arising as above are taxable in India.  If you want to compute the taxes on the sale of property, Talk to our tax expert. Key aspects The provisions dealing with the deduction of TDS on the sale of property by NRI, when such property is situated in India are as under: –

What is the Rate of TDS on the Sale of Property by NRI ?

The rate of TDS depends on the period for which the property is owned by the NRI.

Nature of Capital Gains	Duration	TDS
Long-term capital gains	Property held for more than 2 years	20%
Short-term capital gains	Property held for less than or for 2 years	30%

Note:  The TDS computed as above, will be further increased with the Surcharge and Cess, depending on the tax slab of the seller. So, the effective rate of TDS for long-term capital gains arising to an NRI shall be as under: –

Particulars	LTCG Tax Rate	Surcharge	Total Tax	Health & Education Cess	Applicable TDS Rate
Sale Consideration is less than Rs. 50 Lakhs	20%	Nil	20%	4%	20.8%
Sale Consideration is more than Rs. 50 Lakhs but less than Rs. 1 Crore	20%	10%	22%	4%	22.88%
Sale Consideration is more than Rs. 1 Crore	20%	15%	23%	4%	23.92%

The surcharge rate on capital gains has been capped at 15%. Surcharge and cess would be applicable as per income tax slabs, in case of short-term capital gains.

Amount on which TDS will be deducted

The TDS rate (as previously mentioned) shall be applicable on gross sale consideration of the sale property. The following points should be noted in this regard:

• TDS at a lower rate is not deducted on the gross sale consideration unless a lower withholding tax certificate is obtained;
• TDS will be deducted on any part payment/ advance payment / full payment in respect of the sale transaction of the property.

TDS Deduction Certificate under Sec 197

Previously we mentioned the concept of a lower withholding tax certificate.  So, let us discuss a little bit about it in this section of the article. In order to get a lower TDS deduction, an NRI can apply to the TDS Assessing Officer in Form 13. Based on such an application, the AO can pass an order specifying the TDS to be deducted. The details which are required to be submitted to obtain a Nil or Lower Tax Deduction Certificate are as under: – 

• Copy of Passport of the NRI;
• Copy of Agreement to sell the property ;
• Copy of Purchase Agreement under which the NRI purchased the property;
• Copy of last ITR of NRI ;
• Lastly, Any other document required by tax authorities

Thereafter, once the details have been evaluated the Income Tax Department issues a certificate, specifying the rate at which TDS has to be deducted. The seller provides such a certificate to the buyer, who is required to deduct tax accordingly.

TDS on Sale of Property by NRI Form 27Q

Form 27Q is a TDS (Tax Deducted at Source) return form that is used to report the TDS deducted on payments made to non-residents. This form is also used to report TDS on the sale of property by NRI. Once the TDS is deducted, the buyer is required to file Form 27Q, which is a quarterly statement of TDS, with the Indian Income Tax Department. When TDS is deducted on the sale of property by NRI, Form 27Q needs to be filed within 30 days from the end of the quarter in which the TDS was deducted. Form 27Q needs to be filled with details such as the name and address of the deductee (NRI), the TAN (Tax Deduction and Collection Account Number) of the deductor (buyer), and the amount of TDS deducted. So, it is important to note that failure to deduct TDS or to file Form 27Q can result in penalties and interest charges. Therefore, it is advisable to comply with the TDS regulations and file the required forms on time.

Implications of wrong/ no deduction of TDS for the seller and the buyer

There may be instances when the requisite TDS is not deducted appropriately or the seller fails to make the payment of TDS. So, in such a case, the requisite amount of TDS has to be paid by the buyer. Buyer must obtain TAN number The buyer has to mandatorily obtain a TAN for deduction of TDS for a property purchased from a Non-Resident Indian.

Can the income of NRI from the Sale of property situated in India be exempt from tax under the Treaty?

When any income is derived by an NRI from the sale of property situated in India, it is generally liable to tax in India, even under a Tax treaty.

How can a person save Capital Gains Tax arising from the sale of a property?

There are certain exemptions available to Non-resident Indians when they sell a property, under which they can reduce their tax liability: A.  Exemption under Section 54 on purchase of property from sale proceeds of a residential property Section 54 Exemption is available when an NRI has long-term capital gains on the sale of a residential house property, and such NRI purchases another property, within 2 years from the sale of the property. There are additional conditions on the amount exempt from tax, lock-in on the transfer of new property acquired, etc. These conditions should be carefully evaluated before taking a final position on the availability of the exemption. B. Exemption under Section 54EC on investment in bonds from sale proceeds of a residential property Section 54EC Exemption is available, when an NRI, on the sale of a residential house, earns long-term capital gains, and such NRI invests in certain Bonds issued by NHAI and REC. There are additional conditions on the amount exempt from tax, lock-in on the transfer of Bonds acquired, etc.  They should be carefully evaluated before taking a final position on the availability of the exemption.

Interest on excess TDS on Sale of Property by NRI

Where the TDS deducted by the buyer is more than the tax liability of the Seller, the seller shall receive interest from the Government of India on such excess from a specified date, at the time of receiving the refund.

Conclusion

In conclusion, TDS is an important aspect to consider while buying or selling property in India, especially for NRIs. Buyers of property from NRIs are required to deduct TDS at the applicable rates. Furthermore, such an amount is to be deposited with the government within the stipulated time frame. When the buyer fails to comply with the requisite TDS provisions, it can result in various consequences. This may include penalties such as interest, disallowance of expenses, prosecution, and even delay in property registration. Therefore, it is crucial for buyers and sellers of property to understand the TDS provisions and comply with them to avoid any legal or financial consequences. You can talk to one of our experts to discuss your specific facts at Talk to our tax expert.