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Tax Implications on NRI on Sale of Property in India
Topic Covers:
1. Introduction
2. TDS (Tax Deducted at Source) deductible
3. Consequences of not paying TDS
4. Reporting requirement under Income Tax act for remittance
5. How NRI can claim a TDS refund
6. Non-Deduction / Lower Deduction of TDS
7. FAQs
Introduction
An NRI is permitted under Reserve Bank of India (RBI) rules to sell a property he owns in India. There could be any reasons to sell property in India.
So let us understand what we have to keep in mind while selling property in India.
NRI can sell his residential property to either Resident Indian, NRI (Non-Resident Individual), PIO (Person of Indian Origin), in these transactions there is no requirement of special permission from RBI.
TDS (Tax Deducted at Source) deductible:
Section 195 of the Income Tax Act requires withholding the tax on income earned by an NRI and which is chargeable to tax India. The gain on the sale of property in India is income liable to tax in India. Therefore the buyer of the property is responsible for deducting TDS at source while making the payment to the NRI seller.
Tax rates are-
• The TDS rate is:
o 20% for long-term capital gains.
o 30% for short-term capital gains.
When the gain from the sale of property is chargeable as a long-term capital gain, the buyer is liable to deduct TDS @ 20%.
In case the holding period of the property is less than 2 years then, it will be considered as short-term capital gains and TDS @ 30% will be applicable.
One thing should be kept in mind here the TDS is required to be deducted on the sale proceed and not on the net gain.
The sales proceeds will be received by the NRIs net of TDS. NRI must collect Form 16A (TDS certificate) from the buyer and cross-check the TDS amount with the tax credit mentioned under Form 26AS.
NRI can receive the sales proceeds only in FCNR or NRE/NRO bank account.
Consequences of not paying TDS:
In some cases, the buyer pay TDS at the rate applicable to residents instead of the rate applicable for NRI or does not deduct TDS. He will have to face adverse consequences. The buyer is legally bound to deduct and deposit the TDS as per the prescribed TDS rate for the NRI seller or at the rate the prescribed in the NIL/lower deduction certificate issued by the Income Tax Department.
Following are the consequences when the buyer does not deduct the TDS as per the prescribed rates
• A penalty of an equal amount of TDS not deducted can be levied.
• The buyer will be liable to pay interest on the default amount.
• The seller cannot repatriate the sale consideration amount or sale proceeds received to his/her foreign bank account/NRE account.
• For misrepresenting facts about his/her tax residency the seller can be prosecuted.
Reporting requirement under the Income Tax Act for remittance:
As per the provisions of the Income tax Act to repatriate the sale proceeds of a property the NRI seller must submit Form 15CA and 15CB. The Form 15CB must be signed and submitted by a chartered accountant. An NRI seller can repatriate up to USD 1 million in a year outside India.
How NRI can claim a TDS refund
To claim a TDS refund NRI can follow the following steps:
1. NRI is required to file an ITR for the financial year in which the property was sold.
2. Attach the Form 16A issued by the buyer.
3. Provide supporting documents if any exemptions or deductions on the capital gains are claimed from the property sale
4. Once the ITR is processed, the Income Tax Department (ITD) will refund the TDS amount.
Non-Deduction / Lower Deduction of TDS:
In some scenarios, the TDS amount might be more than the seller’s actual tax liability. In such a scenario, the assessees will have to face difficulties as they would be required to pay taxes in the form of TDS even if there is no tax liability for the year, which they end up claiming as a refund.
Such a situation leads to unnecessary blockage of funds till the refund is received. Furthermore, the NRIs have to comply with filing an income tax return to claim it even if NRI is not liable to do so.
To eliminate this unnecessary compliance burden on such NRIs, the NRI can obtain a certificate of Lower Deduction Certificate (LDC) from the Assessing Officer under the provisions of Section 197 of Income tax act, allowing either a lower rate of TDS compared to the effective rate or a NIL rate of TDS, depending on the facts and features of each case based on the application made.
Apply for a certificate to reduce TDS
To get the certificate for deducting TDS at a lower rate you need to apply the Jurisdictional Assessing Officer of the Income Tax department.
This certificate is issued usually within 30 working days of the application. After this certificate is received by the NRI seller, the buyer can deduct TDS at the rates provided in the certificate and deposit the same against the NRI’s PAN.
The application for such a certificate is required to be made before executing the sales agreement. Any advance or token money received before making such an application will continue to attract higher TDS rates.
Documents and information required for application:
• Mobile number of the applicant
• E-mail ID of the applicant
• Copy of ITR and computation of income of last three years
• Copy of Form 26AS of last three years
• Copy of bank statements reflecting payment for the purchase of property
• Agreement to the sale of property
• Purchase deed of the original property Builder statement Proof of NRI (Passport or any other document signifying the residence of the applicant abroad)
• Supporting documents if claiming exemption under section 54
• Power of Attorney (should be signed by the applicant and his/her authorized representative).
Once the application is filed successfully, the assessing officer will review the documents/information submitted and ask for further queries and documents before issuing the certificate/rejecting the application.
On being satisfied that a lower deduction of TDS is justified, he shall issue a certificate for the same under Section 197 of Income tax Act. On successful issuance of the lower deduction certificate, the TDS will be deducted as per the TDS Rate stated in the Certificate. This certificate would be issued online, and the taxpayer can download it from the Income Tax portal.
FAQs
• What is the TDS on NRI property?
TDS (Tax Deducted at Source) shall be deducted at the time of any property is sold/ purchased. The buyer needs to deduct TDS and pay the balance to the seller. The amount to be deducted depends on the residential status of the seller. In the case of an NRI seller, the amount of TDS to be deducted will depend on the quantum of money received by the seller.
• How can NRIs avoid paying TDS on property sales?
Withholding of tax is mandatory as per the provisions of the income tax act. However one can apply for deduction of tax at the lower rate.
• What is the TDS rate on sale of property by NRI?
Long-term capital gains on the sale of property held for more than 2 years: 20% TDS Rate Applicable.
Short-term capital gains on the sale of property held for less than 2 years: 30% TDS rate applicable.
• Do NRIs pay capital gains tax?
Yes, capital gains tax provisions for an NRI are similar to those for a resident individual except for the applicability of TDS provisions. Like resident investors, capital gains tax for an NRI depends on the holding period and the type of property sold.
