Lower Tax Deduction Certificate in case of NRI’s selling property in India
TDS Applicability On Property Sale Transactions By Non Residents (NRIs)
- As per Indian Tax Laws, TDS provisions apply on various financial transactions in India.
- TDS is also applicable on Property Sale Transactions in India.
- In relation to property sale matter, If the seller is Resident Indian, TDS rate is 1% and governed by section 194IA. However, if the seller is Non-Resident (i.e. NRI, OCI, Foreign Residents), TDS is governed by Non-Resident TDS provisions i.e. section 195.
- Under the Non-Resident TDS Provisions i.e. Section 195, TDS rates apply at the maximum rates on the Sale amount of Property. This rate is 20% if property is long term capital asset. The rate is is 30% if property is short term capital asset. Applicable surcharge and 4% cess is extra.
TDS Rate and Difficulties On Non-Resident Property Seller
- Generally, in all property sale transactions, it happens that the actual tax liability in the hands of tax payer (non-resident seller) is lesser than the proposed TDS on that transaction.
- The pain of Non-resident property seller can be understood by an example. E.g. An NRI agrees to sell a property @ Rs 1 Crore, and property purchase cost (after indexation) in the hands of NRI is Rs 95 lakhs. Hence, a capital gain arises for Rs 5 Lakh only. Now, as per Non-Resident TDS provisions (Sec 195), considering property is long term asset (i.e. holding period exceed 2 years) the applicable TDS is 22.88% (20% + SC 10% + cess 4%) of sale amount i.e. Rs 22.88 Lakh. Though actual tax liability is Rs 1.04 Lakh only i.e. 20.80% of Rs 5 Lakh (20% + 4% cess; SC not applicable on below 50 Lakh Rs gain).
- Hence, in the above situation, as per applicable NRI TDS provisions 22.88 Lakh TDS will be deducted against actual tax liability of Rs 1.04 Lakh. Though, NRI can claim the excess TDS refund (Rs 21.84 Lakh) through filing of ITR. However, it is a time taking process. If TDS deducted on full amount, Non-resident money will be blocked with Income Tax Department for a long time, which causes loss of bank interest also.
- Hence, this is a Genuine Hardship on the Non-residents(NRIs, OCIs) in relation to their property sale matter transactions in India.
- To overcome this situation, Income Tax Act provides for Lower TDS Certificate (or also called as TDS Exemption Certificate) under section 197 of Income Tax Act
NRI Lower TDS Certificate or TDS Exemption Certificate – Section 197
- To seek relief in the Withholding Tax Rates, NRI/Foreign Citizen can apply for Lower TDS Certificate (TDS Exemption Certificate) with the Jurisdictional Income Tax Authority.
- On submission of documents, the application moves to the Jurisdictional TDS Certificate Officer. The officer review the application and raises observations & further requirements if any.
- On satisfying all the concerns, the officer processes the certificate and allow Lower TDS to the NRI/Foreign citizen in relation to the transaction.
- On receipt of the Lower TDS Certificate (or TDS exemption certificate) the buyer deducts the TDS as per Certificate.
- Hence, through this process NRI/Foreign citizen gets TDS relief before the sale transaction, and avoid blocking of their money with Income Tax Department.
Synopsis
To reduce TDS on a property sale by NRI he is needed to furnish the application within the income tax department to provide the certificate for Nil/ Lower Deduction of TDS. the same certificate assists the NRIs in reducing the TDS liability, and hence most NRIs chooses for the same certificate. But furnishing the form is a tough chore also Communication with Income Tax Authorities for getting Certificate is also tough task thus the majority of NRIs opt for the chartered accountant to furnish the application.
Author Details:
CA Anand Sham Chandak
Proprietor, CA. Anand Sham Chandak & Co. Chartered Accountant
