Any person purchasing the property in India is required to comply with the Tax Deduction at Source (TDS) provisions. However, the TDS rate and provision is different if the property is purchased from Resident vis a vis purchased from Non Resident.

Property Purchased from Resident:

TDS provisions are simple if the property is purchased from resident as compared to Non Resident. TDS is simply required to be done u/s 194-IA @ 1% only if the sale consideration exceeds Rs. 50 Lakh. [Rate of 1% is reduced to 0.75% during the period starting from 14th May, 2020 to 31st March, 2021].

Property Purchased from Non-Resident:

Complying with the TDS provision in such cases is a bit complicated. While purchasing a property from NRI, TDS is required to be done u/s 195 of the Income Tax Act, 1961 & it is required to be done at the “Rate in Force” for the income of the NRI.  This “Rate in force” depends on whether the asset is short term capital asset or long term capital asset. For land & Building, Short term capital asset is a capital asset held for a period of not more than 2 years. If such asset is held for a period exceeding 2 years then it is treated as Long Term Capital Asset. The tax rates in case of sale of land & building shall be as under:

Rate in Force for LTCG of Land & Building:

The applicable rate in force in case of Long Term Capital Gain (i.e., if the property is sold after a holding period of more than 2 years) shall be as under:

Particulars If capital gain is less than Rs. 50 Lakhs If capital gain is between Rs. 50 Lakhs to 1 Cr If capital gain is  More than 1 Cr
Long Term Capital Gains Tax 20% 20% 20%
Surcharge Nil 10% 15%
Health & Ed. Cess (w.e.f. 1.4.18) 4% 4% 4%
Applicable TDS Rate (incl. Surcharge & Cess) 20.8% 22.88% 23.92%

Rate in Force for STCG of Land & Building:

The applicable “Rate in force” in case of Short Term Capital Gain shall be according to the applicable income slab of such NRI seller.

In short, a buyer is required to do the TDS u/s 195 @ 20.80% or 22.88% or 23.92% of the capital gain amount if the property purchased is a Long Term Capital Assets. In case of Short Term Capital Assets, it is required to be done at the applicable tax slab of NRI.

In most of the cases, buyer cannot ascertain, compute or certify the amount of capital gain of NRI and so to avoid disputes, complications & future litigations prefer to do TDS on the “sale consideration” and not on the amount of LTCG/STCG as discussed above. In such situations, Buyers do TDS on the sale value whereas the seller becomes liable to pay Capital gains tax on the amount of capital gain. It results in unnecessary fund blockage.

To illustrate, a buyer Say Mr. X purchases a property located in India from NRI Seller Say Mr. Y for Rs. 2 Cr.  Mr. X may do TDS on the whole amount of Rs. 2 Cr before payment to Mr. Y. Considering that the property is a long term capital asset & the indexed cost of acquisition &  improvement is Rs. 1.60 Cr, LTCG in the hands of Mr. Y would be Rs. 40 Lakh. Capital gain tax to be paid by Mr. Y would be 20.80% * 40 Lakh = Rs. 8.32 Lakh. However, TDS by Mr. X may be on Rs. 2 Cr @ 23.92% i.e., Rs. 47.84 Lakh, resulting in excess TDS of Rs. 39.52 Lakh.

In such scenario, NRI have two options

1. Claiming Refund by filing ITR: NRI seller can claim refund of Rs. 35.92 Lakh by filing the Income-tax return after the end of the relevant financial year. The problem here is that this amount gets blocked till the refund is issued.

2. Apply for Certificate for lower deduction of tax under Section 197:
NRI in such cases can make an application to the Income-tax department in the prescribed form for getting the certificate of lower deduction of tax. This application has to be backed by the working of capital gain computation as discussed above. After getting satisfied, the Assessing Officer can instruct the buyer to deduct tax at a lower rate & it can save the money getting unnecessarily blocked with the income tax department.

Few Other compliance & Caution while purchasing a property from NRI: 

1. TDS on purchase of Property from NRI is required to be done irrespective of the value of the transaction. Even if the value of property is less than Rs. 50 Lakhs, TDS is required to be done.

2. A buyer has to obtain TAN (Tax Deduction Account Number) to deduct TDS. TAN is not required in case the property is purchased from a Resident Indian but is required in case the property is purchased from a Non Resident Indian.

3. After deduction, buyers have to deposit TDS in the Government Treasury within 7 days from the end of the month in which the TDS is done, file TDS return in Form 27Q  and issue Form 16A on or before the due dates specified.

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Qualification: CA in Practice
Company: H F & Associates
Location: Malad West - Mumbai, Maharashtra, IN
Member Since: 20 Jul 2020 | Total Posts: 2
I am a practicing Chartered Accountant since 2 years having varied knowledge in the field of Direct Taxation, Indirect Taxation, Accounts and Audit. Currently Partner at H F & Associates. View Full Profile

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November 2020