A sale transaction between a non-resident (NRI) seller and resident buyer needs planning by seller and buyer shall take abundant caution. In most of the cases, misconceptions in the minds of buyers resulting into serious non-compliances and lack of awareness among sellers resulting into liquidity crunch.

Through this article, I am making an effort to present the following,

A. How a non-resident seller can avoid liquidity crunch;

B. What are responsibilities of a buyer dealing with NRI Seller and consequences of non-complaince.

Planning by Seller

1. Liquidity planning – Most of the NRIs sell their property with a prospect to invest in equally important avenue. Hence, planning the liquidity is critical. One thing that seriously impact liquidity is withholding of sale consideration in the form Tax, which is our so called “TDS”.

Generally, TDS rate is 20% (excluding cess & surcharge), which means that the seller gets in hand only Rs. 8,00,000 out of every Rs. 10,00,000 and Rs. 2,00,000 will be withheld as TDS. Taxes withheld will be available for offset with taxes while filing income tax return but the taxes withheld is abnormally high as against the tax liability arising from the transaction.

Assuming the sale consideration of the property is Rs. 1 Crore and the cost to acquire the property is Rs. 80 Lacs. So, the capital gain is Rs. 20 lacs and the tax thereon is Rs. 4 lacs (20 lacs * 20%). However, the taxes with held is Rs.20 lacs. Hence, you would be eligible for a refund of Rs. 16 lacs subsequently after filing income tax returns. In most of the cases, taxes so araise on sale of property is computed on capital gain which is much lesser then at least 5% of Sale consideration.

Planning – In order to avoid higher deduction at 20% and subsequent claiming of refund, the seller shall assess the capital gain and compute the taxes payable. Identify the rate of taxes payable against sale consideration. If such rate is less than 20%, seller can apply for Lower Deduction Certificate in Form 13 online trough TRACES website. Considering the merits of the case, Income tax department issues a certificate instructing the buyer to deduct TDS at lower rate.

Responsibilities of buyer

General presumption is that the buyer needs to deduct tax at a rate of 1% and the buyer need not obtain Tax deduction Account Number (TAN), which is not true in case of a deal with NRI.

1. Rate of Deduction – Rate of deduction in case of NRI seller is governed by Section 195 of the Income-tax act (“the act”). Relevant Extract of Section 195 is as under,

“Any person responsible for paying to a non resident (company or non company) any sum which is chargeable under the provisions of the 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 issue of cheque or draft or by any other mode, whichever is earlier, deduct income –tax thereon at the rate in force.”

Normally, the rate of deduction is perceived as 20% of the Sale consideration or such lower rate certified by Income Tax Department allowing lower/non deduction.

2. As the tax deduction is governed by Section 195 of the Act, buyer needs to apply for TAN in Form 49B. TAN Application can be filed through tin-nsdl website.

3. Remittance of TDS – TDS shall be deducted as and when the buyer makes payment to NRI and remit the same within 7th of subsequent month. Upon remittance, buyer shall be able to generate payment challans.

 Consequences of non-compliance

√ Failure to deduct TDS

> Interest – liable to pay interest at the rate of 1% per month from the date on which it was deductible till the time it is deducted.

> Penalty – As per Section 271C of the Act, buyer shall be liable to pay a penalty as imposed by the Joint Commissioner subject to the maximum of the sum equal to the amount of tax which such person failed to deduct.

Failure to pay TDS

> Interest – Interest chargeable at the rate of 5% per month or part of the month from the date on which it was deducted till the date of payment.

> Penalty – As per section 221, the Assessing Officer may direct to pay for a penalty for non failure to pay TDS amount subject to the maximum of total amount of tax in arrears.

It may be noted that a reasonable opportunity of being heard will be given to the person before levying of the penalty.

4. Filing of TDS Returns – The buyer shall file quarterly TDS returns in Form 27Q linking the payment challans with PAN of the Seller.

Consequences of Non-compliance

Penalty for non-filing of TDS Returns – liable to pay Rs. 100 per day of default subject to the maximum of the total amount of TDS.

Disclaimer – The opinions expressed in this article are those of the author in general. They do not purport to reflect opinions or views and readers are advised to take professional recommendations based on the facts & circumstances of the transaction/s.  

Should you require any clarification, feel free to contact me on 88842 60807 or [email protected]

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Qualification: CA in Practice
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Location: Bangalore, Karnataka, IN
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  1. vswami says:

    To Repeat :

    1. ‘NRI’ is a special creature of FERA (now FEMA); and, is not really of much relevance to the topic chosen and shortly covered in the write-up.
    2. For an understanding, in proper perspective, one might have to necessarily go through, among others, mindfully, –
    a) the governing provisions of the IT Act; and
    b) the referred Form . No 13 itself.
    To be noted, if broadly stated, it is the ‘residential status ‘ of the seller wrt the ‘entire’ ‘previous year’, which is of relevance; and, that has to be determined by applying the Tests as enumerated in “Sec 6. Residence in India”.
    In a given case, – for instance, as is the common practice, – there could be two contract agreements- An agreement to Sell, and thereafter, the Sale Deed. In case these happen to be executed and signed, and sale price paid, in two different previous years, residential status would have to be determined wrt both the years.
    3. Look up Form No. 13, col. 2: That requires filling in, the particulars of income and other relevant details, as specified there under.
    Now, consider a case in which it is not possible to foresee or decide the residential status, at any point in time, until after the closing date (March 31) of the previous year(s) of relevance. If so, difficulty might arise, -rather rendering it impossible – to file Form No. 13, for claiming no deduction or lesser deduction of tax, as intended.
    4. More importantly, it is imperative to make a deep study of, inter alia, the true implications / ramifications of, say- the Explanation 2. (a deeming provision) , newly inserted under sub-sec ( 1 ) of sec 195, with retrospective effect.
    Presently could think of many more such fundamental but intricate points, which ought to be kept in sharp focus; without a proper study whereof, the discussion in the write-up may prove to be of no useful guidance; instead, be misleading .
    OVER to….
    TAIL note: As of now, it is anybody’s guess whether , and if so in what manner, all such problem areas, galore, the extant law on income-tax is replete with, are, as expected of, going to be simplified through the new tax code on the anvil – (in the process of making) !

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June 2021