What is TDS and Why Does it Keep Changing for NRIs?
TDS, or Tax Deducted at Source, is an arrangement under which the tax is deducted at the time of making the payment by the payee and subsequently deposited into the government's account. It gives a constant inflow of income to the government and simplifies the collection of tax. Even Indian residents are liable to TDS in case of sale of property, but TDS on Sale of Property by NRI are separate and are stricter in nature.
For resident sellers, Section 194-IA of the Income-tax Act mandates a 1% TDS in case of value of property exceeding ₹50 lakhs. It's just a deduction of entire sale consideration. But for NRIs, the TDS mechanism is governed by Section 195 of the Income Tax Act on "other sums" payable to non-residents. The purpose of this section is to ensnare possible capital gains tax at the source level, as it could be challenging later on to monitor the same after the actual tax burden of the non-resident. The TDS on sale of Property by NRI is of higher nature and is based on the nature of capital gains.
The Buyer's Burden: Responsibility and Compliance for TDS on Purchase of Property from NRI
The salient feature here is that the buyer of the property has to deduct TDS on purchase of property from NRI and remit the same with the government of India. This is a radical departure from resident transactions where the selling party is usually under an obligation to pay its own taxes. Default and failure to pay the TDS by a buyer can also be subjected to extreme penalties in the way of interest, penalties, as well as even prosecution. This speaks volumes about how seriously the buyers must be on their toes with things while going into a property transaction with an NRI seller.
Things a Buyer Should Do
- Confirmation of NRI Status: The purchaser's first and most important job is to confirm that the residence status of the vendor is established. Documentary evidence or factual recognition of NRI status must be made in order to facilitate the relevant TDS provisions.
- Obtain a Tax Deduction Account Number (TAN): A buyer should have a TAN for deducting and paying TDS on Sale of Immovable Property by an NRI, in contrast to that of a resident seller. A PAN (Permanent Account Number) would not be useful.
- Withhold and Calculate TDS: The buyer is required to ascertain the proper amount of TDS at prevailing rates (as specified below) and subtract the same from the consideration for purchase while paying to the NRI seller.
- Pay TDS to Government: The TDS so deducted must be deposited with the Government of India along with the necessary challan (Form 26Q or 26QB, as is required, and as is necessary in order to get a TAN allotted) within the given time limit.
- Issuance of Form 16A: After paying the tax, the buyer will issue a TDS certificate (Form 16A) to the NRI seller. The certificate will serve as proof of the tax deposited and deducted and is something that the NRI seller may use at the time when he/she files his/her income tax return in India.
Mitigating the Burden of TDS: Options for the NRI Seller
With probable high TDS on Sale of Property by NRI, vendors would obviously try to find ways to reduce their tax outgo. The Indian Income Tax Act does have provisions which would assist in making such relief feasible.
1. Lower Deduction Certificate (LDC) under Section 197
This would most likely be the optimal way for an NRI vendor to reduce actual TDS on Sale of Property by NRI. An NRI can request for lower tax rate from assessing officer under Section 197 of the Income Tax Act.The application will establish that the net tax liability, after considering the deduction, allowance, and relief of indexation, is lower than the otherwise due TDS for deduction.
Application for LDC (Form 13) will be accompanied by full documentation, including:
- Transfer details of property.
- Cost of purchase and improvement.
- Sale consideration.
- Evidences of NRI status.
- Details of other Indian income (if any).
- Any exemption under Sections 54, 54EC, etc.
The LDC decides the percentage at which TDS on Sale of Immovable Property by an NRI is to be deducted as soon as possible after the LDC is published. The selling NRI must deliver the certificate to the buyer before making the sale transaction effective.
2. Exemption on Capital Gains
NRIs are granted certain exemptions under the Income Tax Act to reduce their tax-paying capital gains, thereby indirectly reducing the TDS on Sale of Immovable Property by an NRI.
- Section 54 (Investment in a Residential House): Provided long-term capital gains arising from the transfer of a residential house are utilized for acquiring or constructing another residential house within India, the gains may be exempted subject to certain conditions. The new house must be acquired either one year before or two years after the date of sale or constructed within three years of the sale date.
- Section 54EC (Investment in Specified Bonds): Exemption of long-term capital gains can be made by investment in specified bonds, for instance, issued by National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC), within a period of six months from the sale date of property. According to this section, the limit for investment is ₹50 lakhs.
It is required that the NRI seller submits proof of such reinvestment or intention to reinvest to the Assessing Officer while making an application for an LDC in order to reduce significantly the TDS on Sale of Immovable Property by an NRI.
Conclusion
Sale of immovable property by an NDI is not a transaction; it's a legal and financial process with some tax implications. TDS on sale of immovable property by NRI is data vital to both buyer and seller. It is very important for the buyer to comply with the provisions as mentioned for TDS on purchase of Property from NRI in order to avoid future disputes. To the NRI seller, planning with caution, tax certainty on capital gains, and taking advantage of exemptions and certificates available like the LDC will lower their tax outgo and make fund repatriation hassle-free.
Since it is complicated to it, it is highly recommended that the parties seek the assistance of a professional tax consultant or Chartered Accountant. Professional assistance will ensure accurate computation of capital gains, accurate filing for LDT, accurate payment of TDS, and smooth repatriation, thereby making the entire process of TDS on Sale of Immovable Property by an NRI simple and compliant. The task can be accomplished with wise decisions and expert advice.