Due to vast provisions of Income Tax Act, 1961 regarding taxation of non-residents, most of the time NRI’s gets confused by the provisions of law governing the taxability of their income in India. Most of the NRI’s have immovable properties in India and they get puzzled about taxation on sale of the immovable property. Apart from seller, buyer who is resident also gets puzzled for compliances he has to complete for purchase of immovable property from NRI. Through this article, author has tried to end all the confusions and doubts that usually seller and buyer have in their minds.
What is Short Term Capital Asset and Long Term Capital Asset?
As per section 2(42A), immovable property is short term capital asset (STCA) if it is held by assesse for upto 24 months. So if the assesse has held property for more than 24 months, immovable property is long term capital asset (LTCA). This bifurcation is required because tax rates on gains of both assets are different.
Capital Gain Computation
Section 48 guides about the calculation of capital gain. As per the section, capital gain in context of immovable property is:
1. Sale Price
2. Less: Expenditure incurred exclusively for sale of property (Like brokerage etc)
3. Less: Purchase cost of immovable property (in case of STCA) and indexed purchase cost of immovable property (in case of LTCA)
4. Less: Cost of improvement (in case of STCA) and indexed cost of improvement (in case of LTCA)
5. Capital Gain (A-B-C-D)
(Indexation benefit as per 2nd proviso to section 48 is available only for LTCA.)
Tax Rate on Long Term Capital Gain
As per section 112, long term capital gain arising to NRI shall be taxable in India @ 20% plus surcharge (if applicable) plus health and education cess @4%.
Tax Rate on Short Term Capital Gain
Short term capital gain is taxed as per slab rates applicable to individuals plus surcharge (if applicable) plus health and education cess @4%.
| Net Income Range | Rate of Income Tax |
| Up to Rs. 2,50,000 | – |
| Rs. 2,50,000 to Rs. 5,00,000 | 5% |
| Rs. 5,00,000 to Rs. 10,00,000 | 20% |
| Above Rs. 10,00,000 | 30% |
Tax Compliances for buyer
1. Withholding of Tax under section 195
Buyer has to withhold tax from the payment to be made to NRI for purchase of immovable property. Rate of deduction of tax depends on the category of capital asset i.e. whether it is short term or long term. Please note tax is to be deducted from gross amount paid to NRI and not on amount of capital gain.
If capital gain is long term: Buyer has to deduct tax @20%.
If capital gain is short term: Buyer has to deduct tax at maximum marginal rate of tax @30%.
Apart from above tax, buyer have to deduct health and education cess @4% on tax plus surcharge as per slabs mentioned in finance Act. (Surcharge is applicable only if total income of NRI exceeds Rs.50 Lakhs)
Time limit for deposit of tax deducted
Buyer has to deposit the tax deducted with exchequer by 7th of the next month in which tax is deducted. Let’s say tax is deducted on 01st July then tax has to be deposited with exchequer by 7th of August. Failing to deposit tax by due date attracts interest @1.5% per month.
2. Furnishing of transaction with income tax department
After deduction of tax, buyer is mandatorily required to furnish the transaction with income tax department in form 27Q. Due date for filing of this form is 30th of the month following the quarter in which tax was deducted. Failing to file this statement by due date attracts late fees @ Rs.200 per day till the default continues.
For furnishing of this statement buyer must have Tax Deduction Account Number (TAN).
Tax Saving ways for NRI’s
1. Exemptions under section 54 and 54EC: NRIs can save their capital gain tax by taking benefit of exemptions available under section 54 and Section 54EC. Apart from these exemptions, NRIs should also refer the tax treaty between India and their country of tax residence. If the tax rates in tax treaty are less than rates defined in Income Tax Act, 1961 then rates as per tax treat will prevail.
2. NIL/Lower Deduction Certificate: As discussed above buyer has to deduct tax on the gross amount paid to NRI. Suppose sale value of property is Rs.50 Lakhs, cost of acquisition of property is Rs.40 Lakhs and considering the property as short term capital asset buyer has to deduct tax on Rs.50 Lacs @31.2% (30%+4%). TDS amount will be Rs.15.60 Lakhs. Net short term capital gain to NRI is Rs.10 Lakhs and he has to pay tax as per slab rates. Assuming he doesn’t have any other income in India, tax on short term capital gain comes to Rs.1.17 Lacs (as per slab rates for AY 2021-22). In this case, tax deducted is Rs.15.6 Lakhs whereas tax payable by NRI is only Rs.1.17 Lacs. So funds of Rs.14.43 Lakhs gets blocked with tax department.
To avoid this withholding of tax @31.20%, section 197 can help NRI. As per this section, NRI can apply for certificate of no deduction/ lower deduction with income tax department. This certificate can be applied online vide form 13. Assessing officer after considering the application in form 13 may issue certificate authorizing buyer to deduct tax at NIL or as per rate mentioned in certificate. So this certificate helps NRI to get more funds in their pocket on sale of property.
Is PAN mandatory for NRI?
To claim refund of tax deducted by buyer, NRIs have to file their tax return in India and to file tax return PAN is mandatory. Further to apply certificate of NIL/lower deduction of tax under section 197, PAN is mandatory and without PAN, application under section 197 can’t be filed.
So NRIs must have PAN in India to claim refund of their excess tax deducted.
Disclaimer: The contents of this article are for information purposes only and does not constitute advice or a legal opinion and are personal views of the author. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up. Author loves to answer your queries, so for any query, author can be reached at Saurabh.ghai@cawadhwaarora.com
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