TDS on Property Purchase from NRI Post-July 2024

Summary: Effective July 23, 2024, buyers of immovable property from Non-Resident Indians (NRIs) must deduct TDS at a revised rate of 12.5%, inclusive of a 15% surcharge and 4% health and education cess, totaling an effective TDS rate of 14.95%. Compliance with Section 195 of the Income Tax Act requires the buyer to deduct TDS on the full sale consideration unless a lower deduction certificate is provided by the NRI seller. For payments made in installments, TDS must be deducted on each installment, with quarterly reporting through Form 27Q. Payments to NRI sellers must comply with Foreign Exchange Management Act (FEMA) regulations, requiring the sale proceeds to be deposited into the seller’s Non-Resident Ordinary (NRO) account. While payment to a Power of Attorney (PoA) holder is an alternative, it must strictly follow conditions such as explicit authorization in the PoA, documentation in the sale deed, and immediate transfer of funds to the NRI’s NRO account. Non-compliance may attract regulatory scrutiny. For payments to the NRO account, the buyer must file Form 15CA and obtain Form 15CB from a Chartered Accountant to confirm tax compliance before remittance. Direct payment to the NRI’s NRO account is recommended as it ensures adherence to FEMA and tax regulations, minimizes risks, and allows for eventual repatriation of funds up to USD 1 million per financial year, subject to tax clearance. Buyers are advised to prioritize compliance with both Income Tax and FEMA provisions to avoid penalties and ensure smooth transaction processing.

TDS Deduction & Payment of Sale consideration for Property Purchased from NRI Post 23rd July 2024 and Whether Payment can be made to Power of Attorney Holder or to the NRI Seller.

Query 1 : Total TDS to be deducted for purchase of the property from the NRI Seller.

Relevant Provisions of the Act:

1. Section 195 of the Income Tax Act, 1961:

• • Section 195 mandates any person responsible for paying a sum to a non-resident, which is chargeable to tax under the Act, to deduct TDS at the prescribed rates.
  • In the case of purchase of immovable property, the buyer (payer) is required to deduct TDS on the sale consideration arising to the NRI seller.

2. Amendments in Finance Act, 2024:

• • Effective from 23rd July 2024, the TDS rate on the purchase of immovable property from an NRI has been revised to 12.5% on sale consideration subject to applicable surcharge and cess.

3. Surcharge and Health & Education Cess:

• • Surcharge:
    • For LTCG taxable under Section 112A and STCG taxable under Section 111A, the surcharge is capped at 15%.
  • Health and Education Cess:
    • Levied at 4% on the aggregate of income tax and surcharge.

Analysis:

1. Obligation of the Buyer:

• • The resident buyer is required to deduct TDS on the sale consideration to be made to the NRI seller or on the Lower TDS rate as ascertained by the Income Tax Department.
  • If the NRI seller does not provide a lower deduction certificate from the Income Tax department, the buyer is advised to deduct TDS on the full sale consideration amount to avoid default under Section 195.

2. Compliance and Reporting:

• • Normally the seller insists the payment of challan to be made on or before the date of the Registration of the property at the Sub registrar office. However, if the payments are made on instalment basis then the buyer is obligated to deduct the TDS on each and every instalment payment to the NRI Seller.
  • TDS – Filing in Form 27Q must be filed for reporting TDS on payments made to non-residents on quarterly basis.

Conclusion for Query 1:

Post 23rd July 2024, the resident buyer must deduct TDS while purchasing property from an NRI at the prescribed rate of 12.5% for LTCG. This TDS amount must include the applicable surcharge 15% and 4% health & education cess resulting to an effective rate of TDS @ 14.95%.

Query 2 :- Payment of Sale Consideration to NRI Seller or POA holder

When a resident buyer purchases a property from an NRI seller, compliance with Income Tax laws and FEMA regulations is mandatory.

1. Payment Destination: NRO Account or Power of Attorney Holder?

Preferred Approach: Direct Payment to NRO Account

• FEMA Requirement: FEMA mandates that proceeds from the sale of immovable property in India by an NRI must be deposited into their Non-Resident Ordinary (NRO) Account. This ensures the funds are properly accounted for and subject to necessary regulations.
• Tax Compliance: Direct payment to the NRO account simplifies compliance with Section 195 of the Income Tax Act, as the resident buyer deducts TDS and remits the net consideration to the NRI seller’s NRO account.

Alternative Approach: Payment to Resident Power Holder

• If the NRI seller has executed a valid Power of Attorney (PoA) authorizing a resident individual (e.g., a relative) to act on their behalf, the buyer can make payment to the PoA holder temporarily.
• Caution: This approach should only be adopted if:

1. The PoA explicitly authorizes the power holder to receive the sale consideration.

2. The sale deed and supporting documents record that the PoA holder is receiving the funds as an agent of the NRI seller.

3. The power holder immediately deposits the sale proceeds into the NRI seller’s NRO account without utilizing or holding the funds.

• Risk of Non-Compliance: Payment to the power holder may invite regulatory scrutiny under FEMA or raise questions from tax authorities if the funds are not properly transferred to the seller’s NRO account.

2. Key Regulatory and Tax Considerations

Form 15CA/15CB Filing:

• If the buyer is remitting funds to the NRO account, they must file Form 15CA and obtain a certificate in Form 15CB from a Chartered Accountant (where applicable) to confirm that all taxes have been deducted before remittance.

FEMA Compliance

• The sale proceeds must flow into the NRO account of the NRI seller as per RBI regulations. This ensures compliance with the Foreign Exchange Management Act.
• Funds in the NRO account can later be repatriated abroad up to USD 1 million per financial year (net of taxes), subject to tax compliance.

 Professional Recommendations

• Preferred Route: Directly pay the sale consideration into the NRI seller’s NRO account after deducting TDS. This route minimizes regulatory risks and ensures clear compliance with FEMA.
• Power Holder Route (if unavoidable): Ensure the PoA explicitly permits the power holder to receive and manage sale proceeds, and that funds are deposited into the NRO account without delay. Maintain comprehensive documentation to justify this arrangement in case of future scrutiny.

Conclusion for Query 2

• The sale consideration must ultimately be credited to the NRI seller’s NRO account to comply with FEMA regulations. This route minimizes regulatory risks and ensures clear compliance with FEMA.
• We would like to conclude that the resident buyer of the immovable property is required to mandatorily deduct TDS in the name of the NRI seller.

K.Balamurugan LLB.,FCA

Chartered Accountant