TDS applicability on property sale transactions by non residents (NRI’s)
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 12.5%, if property is Long Term Capital Asset. If the Property is Short Team Capital Asset the tax will apply as per regular slab rates maximum being 30%. Subject to, 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 the tax payer (non-resident seller) is lesser than the proposed TDS on that transaction, due to various factors.
- The pain of Non-Resident property seller can be understood by an example, E.g. An NRI agrees to sell a property @ 1 Crore, and property purchase cost (without indexation) in the hands of NRI is Rs 50 Lakhs. Hence, a capital gain arises for Rs 50 Lakhs. Now, as per Non-Resident TDS provisions (Sec 195), considering property is a long term asset (i.e. holding period exceeds 2 years) the applicable TDS is 13.80% (12.5% + SC 10% + CESS 4%) of sale amount i.e. Rs 13.80 Lakh. Though Actual Tax Liability is Rs 6.50 Lakh only i.e. 13% of Rs 50 Lakhs (12.5% + 4% cess; SC not applicable upto Rs. 50 Lakhs gain).
- Hence, in the above situation, as per applicable NRI TDS provisions 13.80 Lakhs TDS will be deducted against actual tax Liability of Rs 6.50 Lakhs. Though, NRI can claim the excess TDS refund (Rs. 7.30 Lakhs) through filing of ITR. However, it is a time taking process and no assurity of getting the said refund. If TDS deducted on full amount, Non Resident money will be blocked with Income Tax Department for a long time, which causes loss of Interest or Investment earnings 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 reviews the application and raises observations & further requirements if any.
- On satisfying all the concerns, the officer processes the certificate and allows 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.
Changes after July 2024 Budget.
After 23rd July 2024, as per new Budget, Resident Individuals have been granted 2 options while selling their property bought before 23rd July 2024, they can either calculate and Pay Capital Gains Tax @ 20% with Indexation Benefit or @12.5% without Indexation Benefit whichever is more Beneficial for them.
However after Budget 2024, The Benefit of Indexation is NOT available to NRI’s. They have to calculate the Capital Gain only as per New Scheme which is 12.5% without Indexation and hence opting for LTDC is the only relief to safeguard their interest and pay tax ascertaining real value of gain
Synopsis
To reduce TDS on property sale by NRI 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.
Anand Sham Chandak
Proprietor,
CA Anand Sham Chandak & Co.
Chartered Accountant
