Ques 1: At what rate TDS is to be deducted at the time of purchasing a property in India from a non-resident? Is it 1% as stated in section 194IA? Please clarify.
Ans: Let us examine the relevant provisions of the Income Tax Act’1961 to get the answer to the above question.
(1) Any person, being a transferee, responsible for paying (other than the person referred to in section 194LA) to a resident transferor any sum by way of consideration for transfer of any immovable property (other than agricultural land), shall, at the time of credit of such sum to the account of the transferor or at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to one per cent of such sum as income-tax thereon.
(2) No deduction under sub-section (1) shall be made where the consideration for the transfer of an immovable property is less than fifty lakh rupees.
1. Sec 194-IA deals with TDS on sale of immovable property. Under this section TDS is to be deducted @1% on sale of immovable property at the time of credit of such sum to the account of the transferor or at the time of payment of such sum whichever is earlier.
2. The transferor or the seller referred to in this section should be a resident of India.
3. Therefore, this section only deals with sale of property by residents and TDS @1% is to be deducted on such sale by the buyer provided the consideration for sale of property exceeds Rs. 50 lacs.
4. Therefore TDS@1% is not applicable to sale of immovable property by Non-Residents.
Now let us examine relevant extracts of section 195 of the Income Tax Act’1961.
Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force:
[Explanation 2.—For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction there under applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has—
(i) a residence or place of business or business connection in India; or
(ii) any other presence in any manner whatsoever in India.]
(2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the [Assessing] Officer to determine, [by general or special order], the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable.
[(3) Subject to rules made under sub-section (5), any person entitled to receive any interest or other sum on which income-tax has to be deducted under sub-section (1) may make an application in the prescribed form to the [Assessing] Officer for the grant of a certificate authorising him to receive such interest or other sum without deduction of tax under that sub-section, and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long as the certificate is in force, make payment of such interest or other sum without deducting tax thereon under sub-section (1).
(4) A certificate granted under sub-section (3) shall remain in force till the expiry of the period specified therein or, if it is cancelled by the [Assessing] Officer before the expiry of such period, till such cancellation…..
Section 195 talks about sums payable to a non-resident which are chargeable to tax in India under the Income Tax Act’1961.
When a Non-resident sells an Immovable property in India, Capital gains income may accrue on such sale to the Non-resident which is chargeable to tax in India. Therefore, the consideration from sale of property in India by a non-resident is chargeable to tax in India and is covered by Section 195 and therefore tax has to be deducted at the time of payment of such consideration.
Now the question arises as to the rate of deduction of tax. Sub-section (1) of section 195 prescribes that tax is to be deducted at the rates in force.
Rates in force is the rate at which a particular type of income is taxable under the provisions of the Income Tax Act.
For the purpose of sale by a non-resident of an immovable property, we will have to see the rates prescribed for taxation of capital gains.
As per section 112, Long term capital gains on sale of a capital asset are to be taxed at the rate of 20%.
Short-term capital gain on sale of a capital asset (except on sale of equity shares and equity oriented mutual funds) is to be taxed at the slab rates prescribed under the Finance Act applicable to the year of sale.
Therefore, here we can draw the conclusion that the buyer/ transferee has to deduct tax on sale of immovable property by the non-resident at the slab rate prescribed in case property is sold within three years of its purchase and at the rate of 20% where property is sold after three years of its purchase i.e where LTCG accrues.
Ques 2: Does the residential status of the buyer matter in determining the applicability of Sec 194IA or 195?
Ans: No. The residential status of the seller is to be seen. If the seller is a resident then sec 194IA is applicable and if the seller is a Non-resident, then sec 195 is applicable.
Ques 3: Is there a more beneficial rate for the buyer at which tax can be deducted?
Ans: Let us examine section 90 of the Income Tax Act’1961.
As per section 90 of the Income Tax Act’1961, the rates of taxation on taxable income of a non-resident will be
Therefore, if the rates prescribed for taxation of capital gains in the DTAA are less than the 20% rate or the slab rate, then tax will be deducted at that rate.
However, for availing the benefit of lower rate of deduction of tax under the DTAA, the non-resident transferor will have to furnish a Tax Residency Certificate to the payer/buyer indicating the tax residency of which he is a resident.
Ques 4: Is there any other lower rate on which tax can be deducted?
Ans: The answer lies in sub-sections (2) & (3) of section 195. Under, the provisions of these sub-sections the payer or transferor/payee may make an application to the jurisdictional Assessing officer to issue a lower deduction certificate determining the rate at which the tax is to be deducted by the buyer and also determine the sum of capital gains on which tax is to be deducted. The application to the AO will be made in the prescribed form.
Ques 5: On what amount is the tax to be deducted?
Ans: After determining the rate of tax, now the question arises as to the amount on which the tax to be deducted:
Whether the tax is to be deducted on the amount of capital gains arising to the non-resident or on the full sales consideration?
If we say that the tax will be deducted on the amount of capital gains then how will the buyer/payer determine the amount of capital gains arising to the non-resident transferor.
The answer again lies in sub-sections (2) & (3) of section 195. Under, the provisions of these sub-sections the payer or transferor/payee may make an application to the jurisdictional Assessing officer to determine the sum of capital gains on which tax is to be deducted.
The application to the AO will be made in the prescribed form.
The amount determined by the AO will be the amount on which tax is to be deducted.
However, if no such application is made by the payer or the payee to determine the sum chargeable to tax, the tax will be deducted on the entire consideration for sale of immovable property.
Ques 6: How will the TDS on sale by Non-Resident be deposited to the Govt. Account?
Ans: Form 26QB is applicable where the seller is a resident. Therefore, Tax will not be paid in form 26QB. The tax will be deducted as per the normal procedure i.e in Form ITNS 281.
Ques 7: if Tax is to be deducted in normal procedure, then whether the buyer has to take a TAN?
Ans: Form ITNS 281 mandatorily asks for TAN of deductor. Therefore, the buyer has to take a TAN in order to deposit tax on sale of property by Non-resident.
Ques 8: If buyer has to take TAN to deduct tax, then whether he has to file tds return?
Ans: Yes, the buyer has to file TDS Return in form 27Q after deducting tax from the seller.
Ques 9: The buyer paid the tax@1% in 26QB by mistake. What should I do?
Ans: If you have paid the tax @ 1%, then first of all you need to pay the balance tax in form ITNS 281. Then, you could ask the CPC (TDS) and make an application to AO for credit of TDS wrongly paid. The application should be made to both AO of buyer and seller.
Ques 10: What would be the situation if the buyer is an NRI and seller is a Resident?
Ans: If the buyer is a non-resident and the seller is a resident. Then, TDS @ 1% will be applicable u/s 194IA as section 194IA states that ‘Any person responsible for paying to a resident seller’. The buyer will have to take PAN for deposit of TDS.
(The author is a Chartered Accountant in practice at New Delhi and can be contacted at E-Mail: firstname.lastname@example.org Mobile: +91-9953199493)