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Deduction of TDS on sale of property by NRI | 2023 Guide.

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October 1, 2021 |

22 mins read

Deduction of TDS on sale of property by NRI | 2022 Guide

Principle of Domestic Taxation TDS (Tax Deduction at Source)
Type of Transaction Sale of property situated in India
Parties to the Transaction Sale of property by NRI to:

  • A resident, or;
  • A non-resident.

Where a NRI sells a property situated in India, they are liable to capital gains tax in India. If the NRI is a tax resident of another country , they can claim benefit of Tax Treaty provision , if they are more beneficial than the provisions of the Income Tax Act, 1961 .  In this article, we have discussed various tax aspects applicable  on sale of property by NRI’s,  Deduction of TDS on sale of property by NRI (by purchaser), how TDS can be reduced through application to income tax office, and the process involved in obtaining such certificate.

To understand this aspect in a short duration, you can Watch our Video :  –

Applicability of TDS on Sale of Property by NRI

Every time, a non-resident sells a property,   TDS is required to be deducted by the buyer, whether the buyer is a resident or a non-resident . The buyer will deduct  TDS  on purchase of property from NRI, before paying the seller   of  property. The buyer will deposit the TDS  on purchase of property from NRI to the Income Tax Department and it 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 total tax deducted is higher. The  rate  of TDS  on sale of property by an NRI , would vary, depending on  sale consideration, since higher consideration may increase the surcharge rate applicable to the NRI, and therefore increase the tax rate.

Following aspects will be covered in respect of Deduction of TDS on sale of property by NRI in this Article

  • Rate of TDS deduction , and the amount on which TDS will be deducted
  • Process of obtaining lower TDS certificate from Income Tax office
  • Measures to reduce tax on Capital Gains

Applicability of tax deduction on sale of property by NRI

Whenever there is a transaction for sale of property by a NRI to a resident or another non resident,  TDS is required to be deducted under the provision of the  Income Tax Act, 1961. In determining the deduction of TDS on sale of property by NRI, the following provisions are required to be evaluated : –

  • Residential status of the seller of the property – Residential status of the buyer is not considered for deduction of TDS;
  • Sale Consideration of the property;
  • Cost of Acquisition of the property;
  • Period of ownership of the property ;
  • Expenditure incurred on transfer of property ;

Such capital gains can be liable to be taxed in India as well as the State where the NRI is a tax resident, but any taxes paid in India are generally reduced from the tax payable by NRI in his State of residence. If you want to understand how taxes paid in India can be offset against your tax liability overseas, Talk to our tax expert .

Key aspects

We will explain the provisions dealing with the deduction of TDS on sale of property by NRI, considering the following important aspects in mind –

  • Seller of Property is a Non-Resident Indian ;
  • Property is situated in India ;

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

Nature of Capital Gains Duration TDS
LTCG Property held for > 2 years 20%
STCG Property held for ≤ 2 years 30%

Note: It is to be noted that Surcharge and Cess are to be levied on this amount.

The effective rate of TDS will be after considering surcharge and cess. The rate of surcharge and cess for long term capital gain to NRI are 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 Rs. 50 Lakhs to Rs. 1 Crore 20% 10% 22% 4% 22.88%
Sale Consideration above Rs. 1 Crore 20% 15% 23% 4% 23.92%

As per Union Budget 2022, the surcharge rate on capital gain has been capped at 15%.

In the case of short-term capital gains, surcharge and cess would be applicable as per income tax slab.

Tax rate will  depend on  Capital Gains  which can be either Long Term capital gains or Short Term capital gains . To decide this aspect, following criterion needs to be considered : –

 

Property  ownership Period Type of Capital Gain Rate of TDS
Property held for less than 2 years Short Term Capital Gain 30%
Property held for more than 2 years Long term Capital Gain 20%

Note – If the property is inherited, then for duration of capital gain, the date of purchase of property for the original owner has to be considered.

Amount on which TDS will be deducted

It is to be noted that the TDS will be deducted on the amount of sale consideration and not on the profit earned during the transaction. TDS will be deducted on any part payment/ advance payment / full payment made in the sale transaction of property

The procedure for deduction of TDS on purchase of property from NRI will be as per Sec 195 of Income Tax Act.

TDS Deduction Certificate under Sec 197

The facility of making an application for NIL deduction / Lower deduction of tax at source is provided by Sec 197 of Income Tax Act. For availing this facility, the assessee should make an application before the TDS Assessing Officer who has jurisdiction  in Form 13 to the Income Tax Department on the basis of which computation of capital gain is done for discharging final tax liability.

Details to be required for obtaining Nil or Lower Tax Deduction Certificate.

  • Copy of Passport ;
  • Copy of Sale Agreement ;
  • Copy of Purchase Agreement ;
  • Copy of last filed ITR ;
  • Any other document required by tax authorities

After ascertaining all the details from the form submitted by the seller, the Income Tax Department  will communicate the TDS amount which will be either NIL/ Lower deduction of TDS. This will entirely depend upon the capital gains arising on the purchase of property from NRI.  The mode of communication is the certificate given by the Income Tax Department, which is also called with-holding certificate.

The seller is required to give this certificate to the buyer who will in turn deduct the TDS amount as per the rates mentioned in the certificate given by the Income Tax Authorities.

Importance of obtaining this certificate by seller

This certificate can help seller to pay tax on capital gains arising on the transaction . If the certificate is not obtained by the seller, the tax will be paid on the full sale consideration. For example, if the property is sold for 75 lakh, TDS deducted by buyer would be Rs. 15 lakh (excluding surcharge and cess) . However, if a certificate is obtained at 4%, the total tax deducted will be Rs. 6 lakh.

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

If the TDS has been wrongly deducted or not deducted, the implications for the buyer will be as under : –

  • Property of the buyer can be held by Income Tax Department, if the Seller does not pay his taxes ;
  • Payment of TDS has to be done by the buyer

However at the same time there would not be any implication on the process of registration of the property.

Buyer must obtain TAN number

The buyer has to obtain TAN for deduction of TDS.  While TAN is not required in case the property is purchased from a Resident Indian, it will be mandatory if the property is purchased from a Non Resident Indian. It is pertinent to mention here that only buyer is required to obtain TAN and not seller.

Question: What is the Taxation of Income derived by a non-resident or NRI from Sale of house or immovable property or building situated in India and deduction of TDS on sale of property by NRI ?

Answer

Income derived by a non-resident or NRI from sale of house or immovable property or building situated in India can be taxed in India or the country, of which the non-resident or NRI is a tax resident.

Lets look at TDS on sale of property by NRI, who is a tax resident of USA : –

  • Step 1- Under the provision of Income Tax Act 1961, an NRI is liable to pay taxes in India under the head capital gains on sale of property situated in India ;
  • Step 2 – The buyer is under an obligation to deduct TDS on sale of property @ 20% / 30% (increase by the surcharge and cess as applicable) unless, a lower withholding tax certificate is obtained from the tax department.

To claim an exemption from such deduction of TDS on purchase of property from NRI, one can evaluate if any benefits are available under the Tax Treaty entered between India and their country of residence. For this purpose the following steps needs to be followed : –

  • Step 1 : – Determine whether you are a tax resident of USA or India ;
  • Step 2 : – If you are a tax resident of USA, look at Article 6 of the India USA Treaty ;
  • Step 3 : – If you are taxable in India as per Article 6, then the taxation cannot be escaped.
  • Step 4 – Obtain a Lower withholding tax certificate from the Indian Tax office and get the deduction of taxes accordingly. If the buyer has it, even better as you would be saved from lot of paperwork

Saving tax on Capital Gains

How to save tax on capital gains arising out of this transaction?

Non resident Indians can claim certain set of exemptions of reducing their tax liability. The Income Tax Act allows following set of exemptions-

A. Exemption under Section 54

  • Available on long term capital gain on sale of a residential house property
  • House property can be self occupied or let out property
  • Reinvestment of the sale proceeds is not mandatory
  • Exemption is available on reinvestment of capital gain arose out of the sale transaction
  • If the purchase price of the new property is greater than the amount of capital gains, ten exemption will be limited to the total amount of capital gain on the sale
  • The new property can be purchased either one year or before the sale or 2 years after the sale of the property
  • If the reinvestment has to be done in the construction of property, then that construction must be completed within 3 years from the date of sale
  • Only one house property is eligible for reinvestment purposes.
  • The new house property must be situated in India
  • The new house property cannot be sold within 3 years of its purchase
  • If the capital gain is not utilized until the date of filing of return u/s 139(1), then seller has to deposit the gain in capital gain account scheme maintained with PSU or other bank.

B. Exemption under Section 54 F

  • Available on long term capital gain on any other capital asset other than on sale of a residential house property
  • House property has to be purchased by NRI within one year from the date of transfer or 2 years after the date of transfer
  • If NRI wants to construct, then construct one property within 3 years after the date of transfer of capital asset.
  • The new house property must be situated in India
  • The new house property cannot be sold within 3 years of its purchase
  • Only one house property is eligible for reinvestment purposes.
  • NRI cannot purchase within a period of 2 years or construct within a period of 3 years any other residential house
  • The reinvestment has to be made for the entire sale receipts
  • The exemption will be fully allowed on the basis of reinvestment done i.e. if full sale receipts are reinvested, then full exemption is allowed and if less, then proportionate exemption will be allowed

C. Exemption under Section 54 EC

  • Available on long term capital gain , if invested in certain bonds.
  • Two types of bonds have been identified for this purpose i.e. Bonds issued by NHAI and REC
  • These bonds cannot be sold before the lapse of 5 years from the date of sale of house property
  • 6 months time period is allowed for reinvesting the amount in these bonds
  • The reinvestment has to made before the date of filing of return.

Interest on excess TDS on Sale of Property by NRI

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

You can talk to one of our experts to discuss your specific facts Talk to our tax expert .

Arinjay Jain

Bio of author

Arinjay is a Chartered Accountant with more than 20 years of post-qualification experience. He worked as Director, in the M&A Tax Division at KPMG in India. Presently, he is advising several MNCs in UAE on Economic Substance Regulations and impact of the UAE Corporate Tax Law on their business and clients across globe on International Tax issues . He is a well recognised Trainer of International Tax and UAE Corporate Tax. The areas of service include the following : - Advise and Compliance relating to International Tax Issues; Advise relating to UAE Corporate Tax Issues; Advise and Compliance relating to UAE Economic Substance Regulations; Advise and Compliance relating to Indian Income Tax Issues; Other connected matters from a Regulatory perspective.

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FAQs

1. Who has to deduct TDS on sale of property by NRI ?

The buyer of property from the NRI has to deduct TDS

2. What is the rate of TDS, when property is purchased from an NRI  ?

TDS has to be deducted @ 20-30% of the gross sale amount, depending on period of ownership of the property. However, it can be reduced to the extent of tax on actual capital gains by making an application to the Tax Officer – Contact us for assistance in filing  Application to tax office – Talk to our tax expert

3. Is TDS deducted on capital gains or Sale consideration ?

TDS is deducted on sale consideration

4. Can the  rate of TDS be reduced ?

Yes, it can be reduced to Nil or a lower percentage (so that entire tax payable on property is paid upfront), by making an application to the Tax Officer, alongwith detailed tax computation , which shows actual tax payable on property .

5. Who can make an application to the Tax Officer ?

Seller has to submit all the details of the transaction in Form 13 to the Income Tax department – Contact us for assistance in filing Form 13 – Talk to our tax expert

6. If excess tax is deducted by the Buyer, can refund be claimed ?

Yes, refund can be claimed if excess TDS is deducted alongwith interest from tax office. However, the refund can be claimed only by filing ITR for the relevant Financial Year. Once the return is processed (assuming no Assessment), refund shall be granted

7. Can I save capital gains tax by making investment in specified instruments ?

Yes by making investment in certain specified assets (please refer Section 54, Section 54EC  and Section 54F above)