TDS on Sale of Property by NRI

When it comes to the sale of property by an NRI, there are many terms and conditions that come into play. For instance, the buyer is responsible for deducting Tax Deducted at Source (TDS) at a specific rate based on the property holding period, and the NRI seller needs to declare the capital gains in their income tax return. Let us explore the tax implications for NRI selling property in India, with a focus on the TDS rate on sale of property by NRI.

What is the TDS on the Sale of Property by NRI in India?

TDS is mandatory when buying or selling property in India. The buyer deducts a portion of the sale price and deposits it with the Income Tax Department. This applies to both Indian residents and NRIs. However, TDS on NRI property might differ from property TDS for residents.

How are Gains from the Sale of Property in India Taxed to NRI?

Gains from the sale of property in India by NRIs are categorized into two types: short-term and long-term capital gains. If the property is sold within two years of purchase, it is considered a short-term capital gain and is taxed at 30% plus applicable cess. If the property is held for more than two years, it is considered a long-term capital gain and is taxed at 20% plus cess.

When dealing with inherited property, the original owner’s purchase date and costs are considered to determine the capital gain type. This ensures an accurate calculation and aligns with specific circumstances associated with inherited properties.

How Much Tax Will Be Payable?

The tax payable on the sale of property by an NRI depends on whether the gain is short-term or long-term. Here’s a simplified breakdown:

• Short-term capital gains: Taxed at 30% plus applicable cess.
• Long-term capital gains: Taxed at 20% plus cess.

However, these rates are subject to applicable surcharges and education cess. Moreover, the buyer is responsible for deducting TDS from the sale proceeds before transferring the remaining amount to the NRI seller.

How to Save Tax on Capital Gains?

NRIs can save tax on capital gains by availing exemptions under specific sections of the Income Tax Act. Here are the main exemptions that can be availed of:

Exemption under Section 54

Section 54 provides an exemption on long-term capital gains from the sale of a residential property if the proceeds are reinvested in another residential property.

• Eligibility: Available to both residents and NRIs.
• Applicability: Applies to long-term capital gains from the sale of a residential property held for at least 24 months.
• Reinvestment: The proceeds must be used to purchase another residential property within one year before or two years after the sale or to construct a property within three years.
• Conditions: The new property must be located in India. The exemption can be reversed if the new property is sold within three years of purchase.

Exemption under Section 54EC

Section 54EC offers an exemption if the gains are invested in specified bonds.

• Eligibility: Available to both residents and NRIs.
• Applicability: Applies to long-term capital gains from the sale of any asset.
• Investment in Bonds: The gains must be invested in bonds issued by the National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC) within six months of the sale.
• Exemption Amount: Limited to a maximum of INR 50 lakhs in a financial year.
• Lock-in Period: The bonds must be held for at least five years.

Exemption under Section 54F

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

• Eligibility: Available to individuals and Hindu Undivided Families (HUFs), including NRIs.
• Applicability: Applies to long-term capital gains from the sale of any asset other than a residential property.
• Reinvestment: The proceeds must be used to purchase or construct a residential property within the specified timeframes.
• Conditions: The taxpayer should not own more than one residential house (excluding the new property) on the date of sale. The new property must be held for at least three years.

How to Deduct TDS Amount?

The responsibility of deducting TDS from the sale proceeds lies with the buyer. Let us see how it is done:

• Obtain TAN: The buyer must apply for and obtain a Tax Deduction Account Number (TAN).
• Deduct TDS: The buyer deducts TDS at the applicable rate (20% for long-term gains, 30% for short-term gains) when making the payment to the NRI seller.
• Deposit TDS: The deducted TDS must be deposited with the Income Tax Department using an e-challan by the 7th of the subsequent month.
• File Form 27Q: The buyer files the TDS return in Form 27Q in the following quarter.
• Provide Form 16A: After filing the TDS return, the buyer provides Form 16A to the NRI seller.

How Can NRI Reduce TDS Amount on Sale of Property?

NRIs can reduce the TDS amount by applying for a lower deduction certificate from the Income Tax Department. This certificate specifies a lower TDS rate based on the actual tax liability of the NRI. Here’s how to obtain it:

• Apply in Form 13: Submit Form 13 to the Income Tax Department to request a lower deduction certificate.
• Assess Tax Liability: The income tax officer assesses the NRI’s tax liability and issues the certificate at the applicable lower TDS rate.
• Provide Certificate to Buyer: The NRI provides this certificate to the buyer, who then deducts TDS at the specified lower rate.

Consequences of Not Deducting TDS

Failing to deduct TDS on sale of property by NRI can have severe consequences for the buyers and sellers as well. Let us take a look at these impacts:

• Penalties: The buyer may face penalties equal to the TDS amount not deducted.
• Interest: Interest accrues on the defaulted TDS amount.
• Repatriation Issues: The NRI seller may face difficulties repatriating the sale proceeds to their foreign bank account.
• Legal Troubles: The transaction may come under the scrutiny of the Income Tax Department, leading to potential prosecution for misrepresenting tax residency status.

Repatriation of Sale Proceeds by NRI outside India

Repatriation plays an important role in the development of a country. Repatriation of the sale proceeds outside India involves a few steps:

• Obtain a Chartered Accountant’s Certificate: The NRI must get a certificate from a Chartered Accountant in Form 15CB.
• File Form 15CA: The NRI files Form 15CA with the Income Tax Department.
• Submit Documents to Bank: The NRI submits Form 15CA, Form 15CB, and other relevant documents to their bank.
• Repatriation: The bank processes the repatriation of funds to the NRI’s foreign bank account or NRE account.

FAQs on TDS on Sale of Property by NRI