TDS on purchase of property from NRI

Introduction:

Whenever a property is purchased in India, TDS must be deducted from sale proceeds. The buyer should deduct this TDS amount while paying to the seller and then deposit the TDS amount with the Income Tax Department. The amount of TDS to be deducted depends on the residential status of the seller:

1. Residents:TDS deducted at the rate of 1% on the purchase price if purchase price is above 50 lakhs as per section 194-IA of Income tax act, 1961.
2. Residents:Non – Residents (NRI): TDS on property sale rate varies depending on the amount the seller receives from the transaction, seller's total income from Indian sources etc. In this newsletter, we will understand TDS implications on purchase of property from Non-Resident Individuals (NRI)

Income Tax implications in Hands of NRIs

Before understanding TDS implications, it is important to understand how gains on such sale are taxed in hands of NRI. NRIs who sell a Property in India are required to pay capital gains tax. The amount of tax payable depends on whether the gains are short-term capital gain (STCG) or long-term capital gain (LTCG):

1. LTCG: When a property is sold after holding it for more than 24 months, the gains arising from such property will be treated as LTCG and will be taxed at 12.5% (after budget 2024) effective from 23-July-2024 as per section 112 of Income tax act,1961. Before budget, it was taxed at 20%. Further the indexation benefit will not be available on the acquisition cost and cost of improvement of the said property.

Note: The relaxation has been given by government on transfer of land and / or building on or after 23 July 2024 and acquired before 23 July 2024. Taxpayers shall have an option to pay tax at the lower of (i) 20% on capital gains with indexation, or (ii) 12.5% on capital gains without indexation

The above relaxation is only available to Resident Individual and HUF. So, the relaxation is not available for Non-residents.

2. STCG: When a property is sold within 24 months of acquiring it, the gains arising on such property will be treated as STCG and taxed at the applicable income tax slab rates for NRIs based on the total income taxable in India for NRIs. Indexation benefit will not be available in case of STCG.

TDS implications on purchase of property from NRI

As per section 195 of Income tax act, 1961 - TDS rate on such purchases depends on whether such transaction is falling under STCG or LTCG as discussed above:

Note: Applicable surcharge and Cess @ 4% will be added on above TDS rates.

However, above TDS rates may vary on below factors also:

1. Lower TDS/No TDS certificate - NRI can reduce TDS rates mentioned above by filing an application for Lower TDS Deduction with the Income Tax Officer through application in form 13. In such cases, TDS will be deducted as per rate in Lower TDS certificate.
2. DTAA Relief –NRI can avail benefit of Double Taxation Avoidance Agreements (DTAA) entered between India and NRIs country of residence by submitting his/her Tax residency Certificate (TRC) and other relevant documents. In such cases, Buyer will deduct TDS at beneficial rate to the deductee (NRI) i.e., at the Rate as per DTAA or as per Finance act whichever is lower. It is to be noted that surcharge and cess are not added to the rates given under DTAA.

It is to be noted that most of DTAA agreements like USA and UK etc. do not provide any concessional rate and India retains right to tax such income as per domestic laws. Hence, it is suggested to consult a Chartered Accountant (CA) before claiming any DTAA benefit.

Compliance to be taken care by purchaser after deducting TDS

After deducting TDS, Purchaser of property should ensure below compliances:

1. Buyer should have a Valid TAN Number for deduction and remittance of TDS deducted
2. TDS deducted in the month of purchase must be deposited to income tax department by 7th of Subsequent month. For example, TDS gets deducted in June month must be deposited to the Income-tax Department on or prior to 7th July.
3. TDS return is to be filed in ‘Form 27Q’ within 31 days from the end of the quarter (61 days in case of Quarter 4) where the TDS gets deducted. For example, if TDS is deducted in month June, transaction falls under Q1 and 27Q needs to be filed by 31st July.
4. Within 15 days from due date of filing form 27Q, Buyer needs to submit Form 16A to the seller. For example, due date for filing of 27Q for Q1 is 31st July. So, Form 16A needs to be given by 15th August to seller.

Consequences for not complying the above Income tax provisions/rules by purchaser

1. Interest at the rate of 1.50% per month or part of month from date of deduction to deposit, should be paid if TDS is not paid within time as per section 201. Interest at the rate of 1% per month or part of month if TDS is not deducted at all.
2. Penalty equivalent to the TDS amount under Section 221 will be deducted, if TDS deducted and not paid
3. If TDS deducted is short, then penalty will be deducted which is equivalent between actual deductible and deducted amount u/s Section 271C.

Compliance to be taken care by purchaser after deducting TDS

After deducting TDS, Purchaser of property should ensure below compliances:

1. Buyer should have a Valid TAN Number for deduction and remittance of TDS deducted
2. TDS deducted in the month of purchase must be deposited to income tax department by 7th of Subsequent month. For example, TDS gets deducted in June month must be deposited to the Income-tax Department on or prior to 7th July.
3. TDS return is to be filed in ‘Form 27Q’ within 31 days from the end of the quarter (61 days in case of Quarter 4) where the TDS gets deducted. For example, if TDS is deducted in month June, transaction falls under Q1 and 27Q needs to be filed by 31st July.
4. Within 15 days from due date of filing form 27Q, Buyer needs to submit Form 16A to the seller. For example, due date for filing of 27Q for Q1 is 31st July. So, Form 16A needs to be given by 15th August to seller.

Few points to be noted

1.Is Tax residency Certificate mandatory for seller?

Yes, if TDS is getting deducted as per Double Tax Avoidance Agreement (DTAA).

2.Amount upon which TDS is deducted under section 195?

The TDS must be deducted on the ‘total sale price’ and not on the capital gains amount.

3.TDS implication if property sold is Inherited Property

In case of inherited property, holding period begins from the time the previous owner bought or acquired that property and not from date of inheritance by seller. Accordingly, TDS rate will apply based on whether it is STCG or LTCG.

4.Money Repatriation by NRI Outside India

To repatriate the money outside India obtained from property sale in India, the NRI needs to submit Form 15CA & Form 15CB obtained from Chartered Accountant to the Bank.