Investing in a house property is common for Indians. Many NRIs living abroad own house properties in India. Since it is difficult to manage a house property from another country, an NRI may contemplate selling such Indian house property. In such cases besides finding a buyer, it is also important to understand the tax implications in case of sale of property by an NRI, particularly TDS (Tax deduction at source) provisions. Otherwise, a huge portion of sales consideration may get blocked in the form of TDS for months and sometimes for more than a year.
Here, we have discussed the tax implications for an NRI on sale of property located in India (who is also a non-resident under Income Tax Laws) and measures that he/she can take to prevent huge amount of TDS.
How much tax is payable on sale of property by an NRI?
The tax payable on sale of property depends on two aspects –
1. Time period for which property was held; and
2. Amount of capital gain arising on sale of property
If the property is held for more than 2 years, it is considered as long term capital asset. Capital gains arising on transfer of such assets are liable to tax @ 20 percent (plus surcharge and cess).
However, if the property is held for up to 2 years, it is considered as short term capital asset. Capital gains in such case are taxed as per the applicable slab rates (plus surcharge and cess).
How is capital gain amount computed?
For computing capital gains, the total purchase cost of property is deducted from sales consideration amount.
Additionally, any cost of improvement incurred on the property (i.e., any addition or improvement to the property that increases its value) and transfer expenses on sale are also deducted. It may however be noted that routine maintenance expenses, such as paint, are not allowed to be deducted since they are not considered as costs of improvement.
If the property is long term, the benefit of increase in sales consideration due to inflation is available. This means that instead of deducting the actual purchase cost and improvement costs, indexed purchase cost and indexed improvement cost are deducted from sales consideration to compute capital gains. Such indexed costs are computed by applying cost inflation index notified by the Government.
When is the tax payable by NRI?
Under Income Tax laws, the buyer is required to deduct tax at source from sales consideration and deposit the same to Indian Government Treasury. Therefore, buyer deducts TDS and pays the balance amount to NRI seller.
However, if the tax is not deducted by the buyer, NRI seller is required to pay the same as advance tax in the same financial year in which the property is sold.
Note – The advance tax is paid quarterly in specified instalments within specified due-dates.
How much amount is required to be deducted as tax at source? Is it equal to the tax liability of NRI on sale of property?
If the property is held for up to 2 years, the tax is deducted as per income tax slab rate applicable on the NRI (plus surcharge and cess);
If the property is held for more than 2 years, tax is deducted at 20 percent (plus surcharge and cess)
Ideally, the TDS is required to be deducted on the capital gains amount. However, as common practice, the buyers deduct the TDS on the sale consideration amount (due to reason explained later). Therefore, the TDS amount could be higher than the actual tax liability of NRI arising on sale of property.
Also, TDS amount is deducted whenever payment is made by the buyer to the NRI. So even when any advance is paid for the property, TDS needs to be deducted.
What happens to the TDS amount? Can I get back the TDS amount?
The TDS amount deposited by the buyer (deducted from the sale consideration) is considered as income tax paid on behalf of the NRI. If the buyer has filed the TDS return reporting details accurately, the TDS should be appearing in Form 26AS of the NRI (Form 26AS is an annual statement of tax deducted or paid by a taxpayer, and can be downloaded from the income tax e-filing portal). Also, the NRI should take Form 16A i.e., a TDS Certificate, from the buyer which is a proof that TDS has been deposited by the buyer.
An NRI needs to compute his income tax liability in India for a given financial year (which begins on April 1st and ends on March 31st of the following year). If the total tax liability of the NRI is less than total tax deposited, including TDS, then the excess amount can be claimed as refund from the income tax department by filing the income tax return.
Can an NRI file the income tax return immediately after TDS and claim the refund for excess TDS?
Under Indian income tax laws, the income tax return is filed annually for a given financial year. Hence, it may not be possible to file the income tax return immediately.
NRI will have to wait till the completion of the financial year to file the income tax return to claim the refund for excess TDS.
Is there any option available through which an NRI can request the buyer to deduct less tax at source?
An NRI may ask buyer to deduct TDS on the actual capital gains amount instead of sales consideration by showing the documentary evidence for costs incurred, such as conveyance deed.
However, the TDS provisions cast an obligation on the buyer to deduct tax at source. If the buyer does not deduct tax at source (i.e. TDS) appropriately, the Income Tax Department could probe the buyer and may also recover taxes, interest and penalty from the buyer. Therefore, buyer generally doesn’t agree and insists on deducting tax at source on sales consideration.
In such a case, the NRI has an option to file an application in Form 13 with the Income Tax Department and request to issue a certificate for nil/lower deduction of tax at source. If such certificate is issued by the Department and given to the buyer, the buyer will deduct the TDS at the rate specified in the certificate.
The rate is computed by the Income Tax Department after considering the documents, including income tax computation, filed by the NRI.
An NRI may consider taking help of a Chartered Accountant (‘CA’) to obtain nil/lower deduction of tax at source certificate.
How much time does it take to obtain lower/nil TDS certificate?
Usually, it may take around 3-4 weeks to obtain TDS certificate after submission of Form 13 with the required documents.
However, considering the current COVID situation, it may take longer time. So, it is advisable for an NRI to plan accordingly.
Are there any documents which are required to be submitted with Form 13?
Yes, Form 13 requires enclosure of certain documents. Such documents include conveyance deed for purchase of property, agreement to sell, proof for receipt of advance payment, estimated computation of income for the financial year in which property was sold.
Here, it is important to note that Tax Deduction and Collection Account Number (‘TAN’) of the buyer is required to be filled in Form 13. Therefore, NRI should ask the buyer to provide TAN. Sometimes, if the property is bought by an individual buyer, he/she may not have TAN and need some time to obtain it from the Income Tax Department.
TAN is a unique 10-digit alpha-numeric number which is allotted by the Income Tax Department to a person who is required to deduct tax at source.
Can an NRI repatriate the sale consideration outside India?
Yes, an NRI is allowed to remit up to USD 1 million per calendar year out of sale proceeds of assets.
NRI is required to submit certain documents with the remitting bank, including Form 15CA and Form 15CB.
Form 15CA and 15CB can be filed through Income Tax e-filing portal. While Form 15CA is required to be filed by the NRI to furnish information for payments to non-resident, Form 15CB is a certificate which is issued by a CA in case of such payments.
No documents are required to be attached with these forms. Only details, such as NRIs information (for instance – PAN, address, bank details from which funds are transferred), amount of remittance, TDS amount, are required to be filled.
Are there any obligations on NRI post sale of property and deduction of tax at source?
NRI is required to file income tax return for the financial year in which property was sold. The due date for filing the income tax return is July 31st of the following financial year.
If there was loss on sale of property and NRI does not have any other income taxable in India, he/she is not mandatorily required to file income tax return in India. However, it is advisable to do so in order to claim deduction of losses against future capital gains.
For instance – Assume that you have long term capital loss of Rs. 6,00,000 from sale of property in FY 2020-21. You have sold another property in FY 2021-22 on which you have long term capital gain of Rs. 10,00,000. If you have filed tax return for FY 2020-21 within the due date, you can claim set-off for the loss of Rs. 6,00,000 against gain of Rs. 10,00,000. Amount of taxable capital gain in FY 2021-22 shall reduce to Rs. 4,00,000 (10,00,000 – 6,00,000).
Note – The date for filing income tax return for the financial year 2020-21 has been extended to September 30, 2021
Are there legal ways of reducing tax liability arising on sale of property?
If the capital gain is long term in nature (property held for more than 2 years), tax liability can be reduced by making certain investments within a specified time limit. Such investments also need to be held for a specified time period. The reduction in tax liability depends on the investment amount.
Such investments are-
a. Purchase of one residential house in India – This option is available only if the property sold was also a residential house
b. Purchase of two residential houses in India – This option is available only if (a) the property sold was also a residential house; (b) amount of capital gain on sale of property does not exceed Rs. 2 crore
Also, this option to purchase two houses can be exercised for only one financial year in the entire lifetime by the NRI.
c. Investment in notified bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) redeemable after 5 years
The author is a Partner at Mohit Vijay and Associates, Chartered Accountant and can be reached at firstname.lastname@example.org.
Disclaimer: This article is for general information purpose only and does not constitute any advice. Please get in touch with your consultant before taking any step(s). We shall not be responsible for any loss incurred due to step(s) taken basis the information shared in this article.