TDS on Sale of Property by NRI - Tax Implications for NRIs Who Want to Sell Property in India

What is the TDS on sale of property by NRI in India?

TDS (Tax Deducted at Source) on the sale of property by Non-Resident Indians (NRIs) in India is a mechanism implemented by the Indian tax authorities to collect taxes at the time of property transfer. The buyer of the property is responsible for deducting TDS from the sale proceeds and depositing it with the income tax department within the time prescribed. After deducting the TDS the buyer is required to file deduction and payment details in Form 27Q.

How are gains from a property sale taxed for NRI in India?

NRIs who are selling property that is situated in India have to pay tax on the capital gains. As an NRI, if you sell a property in India, the buyer deducts 20% as Tax Deducted at Source (TDS) as Long Term Capital Gains Tax for properties sold after two years. For properties sold before 2 years, the TDS rate is 30%, deducted as Short Term Capital Gains Tax.

When dealing with inherited property, it is essential to take into account the original owner's purchase date to determine whether the capital gain is classified as long-term or short-term. In this scenario, the cost of the property should be assessed based on the expenses incurred by the previous owner. This consideration ensures a more accurate calculation of capital gains and aligns with the specific circumstances associated with inherited properties.

Income Tax Rules for NRI on TDS Deductible

As NRI (Non-Resident Indian), you need to be aware of specific income tax rules related to TDS (Tax Deducted at Source). Here are some key points regarding TDS deductions for NRIs:

TDS on Income:

• TDS is applicable to various types of income earned by NRIs in India, including salary, rent, interest, capital gains, etc. An NRI can file their taxes and claim the extra TDS refund with Tax2win. File here.
• The TDS rates can vary depending on the nature of income and the applicable tax rates.
• NRIs are required to provide their Permanent Account Number (PAN) to the deductor for proper TDS deduction.

TDS on Interest Income:

• For interest income earned by NRIs on fixed deposits, savings accounts, or any other interest-bearing instruments, TDS is deducted at a flat rate of 30% (plus applicable surcharge and education cess) by the payer.
• However, suppose the NRI qualifies for any lower tax rates or exemptions under the Double Taxation Avoidance Agreement (DTAA) between India and their resident country. In that case, they can submit the necessary documents, such as Tax Residency Certificate (TRC), to avail of the lower TDS rate.

TDS on Capital Gains:

• NRIs are subject to TDS on capital gains arising from the sale of property, shares, or any other capital assets in India.
• The TDS rates for capital gains can vary depending on the type of asset and the holding period.
• NRIs can claim a refund for any excess TDS deducted by filing their income tax returns.

TDS Exemptions:

• NRIs can apply for lower TDS rates or claim exemptions by obtaining a Certificate of Lower Deduction or No Deduction from a chartered accountant.
• This certificate is required for specific transactions and helps in reducing the TDS liability for NRIs.

In India, when a buyer buys a property from NRI, he is liable to deduct TDS (Tax Deductible at Source) at 20%. If a property is sold before two years, a TDS of 30% is applicable.

Who has to pay TDS while selling property?

The responsibility of deducting the Tax Deducted at Source (TDS) amount from the sale proceeds and transferring it to the Non-Resident Indian (NRI) seller lies with the property buyer. After deducting the TDS the buyer is required to file deduction and payment details in Form 27Q.

To facilitate this process, the buyer is required to apply for and obtain a Tax Deduction Account Number (TAN) in their name. In cases where two or more individuals jointly purchase the property, investing funds from their personal sources or through joint loans, each person involved must acquire a TAN.

Once the TAN is secured, the buyer is obligated to deduct the TDS amount during each transaction of transferring payment to the NRI seller. The deducted TDS amount must then be deposited with the Income Tax Department through an e-challan by the 7th day of the subsequent month in which the payment was made to the seller.

To fulfill their regulatory obligations, the buyer must file the TDS return in the following quarter after depositing the TDS amount. Upon successful filing of the TDS return, the buyer can obtain Form 16A, which is then provided to the NRI seller.

By adhering to these procedures, both the buyer and the NRI seller ensure compliance with tax regulations, fostering a transparent and legal property transaction process.

How can NRI save taxes on capital gains while selling a property?

NRI can save taxes as per income tax rules for NRI while selling a property under Section 54 , Section 54EC, and Section 54F.

Exemption under Section 54

This section provides an exemption from long-term capital gains tax on the sale of a residential property of the NRI, if the proceeds are reinvested in another residential property. The key points to note are:

• Eligibility: The exemption is available to both residents and NRIs.
• Applicability: The exemption applies to long-term capital gains arising from the sale of a residential property held for a minimum of 24 months.
• Reinvestment: The taxpayer must utilize the proceeds from the sale to purchase another residential property within the specified timeframes.
• Conditions:
  - The exemption is available for one residential property only.
  - The new property should be purchased within one year before or two years after the date of sale or constructed within three years from the date of sale.it is mandatory that this new house property must be situated in India. The exemption under section 54 shall not be available for properties bought or constructed outside India to claim this exemption. (Do remember that this exemption can be taken back if you sell this new property within 3 years of its purchase).
• Exemption Amount: The amount of exemption is the lower of the long-term capital gains or the cost of the new residential property.

Exemption under Section 54EC

This section allows an exemption from long-term capital gains tax if the gains are invested in specified bonds. The key points to note here are

• Eligibility: The exemption is available to both residents and NRIs.
• Applicability: The exemption applies to long-term capital gains arising from the sale of any asset, including residential and non-residential properties.
• Investment in Bonds: The taxpayer can invest the capital gains in specified bonds issued by the National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC) within six months from the date of sale.
• Exemption Amount: The exemption amount is limited to the investment made in the specified bonds subject to a maximum of INR 50 lakhs in a financial year.
• Lock-in Period: The specified bonds have a lock-in period of five years.

Exemption under section 54F

Section 54F provides an exemption from long-term capital gains tax on the sale of any asset other than a residential property if the proceeds are invested in a residential property. Here are the key points to note:

• Eligibility: The exemption under Section 54F is available to individuals and Hindu Undivided Families (HUFs), including NRIs.
• Applicability: The exemption applies to long-term capital gains arising from the sale of any asset, such as land, building, or other capital assets, except for a residential property.
• Reinvestment: To avail the exemption, the taxpayer must invest the net sale proceeds in purchasing or constructing a residential property.
• Timeframes for Investment: a. Purchase: The new residential property should be purchased within one year before or two years after the date of the sale of the original asset. b. Construction: If the taxpayer chooses to construct a new residential property, it should be completed within three years from the date of the sale. This new house property must be situated in India
• Conditions: a. Ownership: The taxpayer should not own more than one residential house, other than the new property, on the date of sale of the original asset. b. Lock-in Period: The new residential property must be held for at least three years from the date of its acquisition. If it is transferred within three years, the exemption claimed under Section 54F will be revoked, and the capital gains will be taxed.
• Exemption Amount: The amount of exemption is determined based on the proportion of the investment made in the new residential property compared to the net sale proceeds. The long-term capital gains will be tax exempted if the entire net sale proceeds are invested. If only a portion is invested, the exemption will be calculated proportionally.

Note:- The NRI seller must submit Form 15CA and 15CB to repatriate the sale proceeds of a property. The form should be signed and submitted by a chartered accountant. Hire an Online CA.

Consequences of not paying TDS

In situations where the buyer fails to adhere to the prescribed TDS (Tax Deducted at Source) rates applicable to Non-Resident Indians (NRIs) or neglects to deduct TDS for any reason, they expose themselves to significant legal consequences. It is crucial for buyers to recognize their legal responsibility in deducting and depositing TDS according to the specified rates for NRI sellers, or as per the rates mentioned in the NIL/lower deduction certificate issued by the Income Tax Department.

When a buyer neglects to deduct TDS at the designated rates, they become liable for penalties equal to the TDS amount not deducted. Moreover, interest accrues on the defaulted sum. Non-deduction of TDS also impedes the seller's ability to repatriate the sale proceeds to their foreign bank account or NRE (Non-Resident External) account. Additionally, if the transaction comes under the scrutiny of the Income Tax Department and it is revealed that TDS was not deducted appropriately, the seller may face prosecution for misrepresenting their tax residency status.

Therefore, it is imperative for buyers to diligently follow the stipulated TDS guidelines to avoid legal repercussions and ensure smooth transactions with NRI sellers. This not only safeguards the interests of both parties involved but also upholds the integrity of the taxation system.

Consulting with a Tax2win tax expert can help NRIs make informed decisions, minimize tax liabilities, and avoid potential legal or financial issues related to the sale of property in India.

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