TDS on purchase of property from NRI

What is Tax Deducted at Source (TDS)?

According to the Income Tax Act, any firm or individual making a payment must deduct tax at the source if the payment exceeds certain thresholds. TDS must be deducted at the tax department prescribed rates.

The firm or individual who makes the payment after deducting TDS is known as the deductor, whereas the company or individual who receives the payment is known as the deductee. Before making a payment, it is the responsibility of the deductor to deduct TDS and deposit it with the government. TDS is deducted regardless of the manner of the payment.

TDS is withheld from the following payment types:

  • Salaries
  • Banks’ interest payments
  • Commission payments
  • Rent payments
  • Consultancy charges
  • Professional charges.

However, persons are not obligated to withhold TDS when they pay rent or fees to professionals such as attorneys. TDS is one type of tax advance. Tax is required to be deposited with the government on a periodic basis, and the deductor is responsible for doing so on time. After filing their ITR, the deductee can claim a tax refund for the TDS that was deducted.

What is a TDS return?

The deductor must deposit the TDS with the government, and a TDS return must be completed with the relevant information. Quarterly TDS returns must be filed. Various types of TDS deductions must be reported using distinct TDS return forms.

What does Section 195 provides under the Income Tax Act, 1961?

Section 195 of the Income Tax Act of 1961 provides Tax Deducted at Source (TDS) for non-resident Indian citizens. This section concentrates on the tax deductions and tax rates applicable to any business transactions conducted by a non-resident Indian citizen.

Section 195 of the Income Tax Act imposes tax on all types of income. The act sets a means to prevent revenue loss resulting from a foreign resident’s tax burden by deducting the equal amount from payments made to them at the source.

Payer is the individual remitting funds to a non-resident payee. The payer may be an individual, a Hindu Undivided Family, a firm, a non-resident, a foreign company, a person with exempt income in India, or a juristic person regardless of whether or not that person earns taxable income in India. In accordance with Section 6 of the Act, the payee is a non-resident.

How to Determine the Seller’s Residential Status?

Determining the Residential Status of the Seller is essential when conducting a real estate transaction with a non-resident Indian, as the TDS rate to be deducted depends on whether the seller is a resident of India or a non-resident of India for income tax reasons. Based on the number of days a person spends in India, it is determined whether the Seller is an Indian resident or a non-resident Indian.

The Income Tax Act divides taxpayers into three categories based on their residential status:

  • Normal Resident.
  • Resident not Ordinarily Resident
  • Non-resident.

Normal Resident

An individual is considered an ordinary resident in India during any fiscal year if any of the following two conditions is met:

  • The individual is in India for at least 182 days in a given financial year, or
  • The individual has been in India for at least 365 days in the four years immediately preceding a given financial year and is in India for 60 days or more in the relevant financial year.

Resident but Not Ordinarily Resident (RNOR)

In any financial year, a person is deemed to be Resident but not ordinary Resident (RNOR) in India if he fulfils any of the below mentioned conditions:

  • a person who has been a non-resident in India for 9 out of the previous 10 years, or
  • he has been in India for a total of 729 days or fewer over the 7 previous years.

Non-Resident (NRI)

A taxpayer is non-resident in India for a given fiscal year if he or she does not satisfy any of the qualifications outlined above for a resident but not normally resident and an ordinary resident.

How capital gains are computed on sale of property?

A capital asset, which can be either a long-term capital asset or a short-term capital asset, is what is referred to as the property that an NRI owns. Long-term capital gains (LTCG) tax is applied when a property is sold after two years from the day it was purchased. However, if it is held for less than two years, it is subject to short-term capital gains tax (STCG).

The following are the TDS rates that apply to the sale of an NRI-owned property:

On the sale of property held for more than two years, there is an LTCG tax: 20% STCG tax on property sold after less than two years of possession: based on the applicable NRI income tax slab rates. Surcharges and cess are also applicable to capital gains, in addition.

Points Related to TAN No., TDS Payment, and TDS Return The buyer of the property has to comply with Section 195 of the ITA and make other mandatory reporting compliances as below:

  1. Obtain TAN: As a buyer of property from an NRI, you need to mandatorily obtain a Tax Deduction and Collection Account Number (TAN No.) for deduction of TDS.
  2. Deduct TDS: When you as a buyer deduct TDS, it is required to be deposited with the Income Tax department within seven days from the end of the month in which the deduction has been initiated.
  3. Deposit TDS: TDS must be deposited using Challan No./ITNS 281. ePayment of TDS can be initiated online through the following website: ePayment for TIN.
  4. File TDS Return: After payment of taxes, the buyer has to file a TDS return. It must be furnished in Form No 27Q prescribed by the Income Tax department. For each quarter in which the TDS has been deducted, a separate Form No 27Q is required to be submitted. The return must be furnished to the government within 31 days from the end of the quarter during which the TDS had been deducted.
  5. Issue Form No 16A: Finally, you as a buyer are also required to provide Form No. 16A to the NRI who is selling the property.

Amount from which TDS must be withheld

The TDS on the sale of property by a non-resident Indian (NRI) is required to be deducted under Section 195, and is ideally required to be deducted on the Capital Gains. This computation of Capital Gains, however, cannot be performed by the Seller and must be performed by the Income Tax Officer.

The seller must file Form 13 with the Internal Revenue Service and request that they compute his Capital Gains. The method for filing this form with the Income Tax Department is somewhat complex, and the seller may seek the assistance of a chartered accountant.

The Income Tax Department will compute the seller’s Capital Gains and issue a certificate for Nil/Lower TDS deduction based on the seller’s capital gains from the sale of property.

The seller must provide this certificate to the purchaser, who will then deduct TDS according to the rates listed on the certificate. If the seller does not get this certificate from the Department of Income Tax, the TDS should be deducted from the Total Sale Price and not the Capital Gains. Therefore, obtaining this certificate from the Income Tax Officer is crucial for the vendor.

It is recommended that the specifics of the TDS deducted be included in the Property Sale Contract. It should also be emphasised that the Property Registrar is not responsible for ensuring the TDS Deduction. The Registrar will record the Sale Agreement regardless of whether the TDS was deducted or calculated incorrectly.

If the TDS is incorrectly deducted or not deducted at all, the Income Tax Department will not pursue the seller but will contact the buyer of the property to collect the TDS. If the purchaser failed to deduct the TDS or deducted an insufficient amount, the Income Tax Department would reclaim the TDS from the purchaser.

Lower deduction or Nil deduction of tax

The NRI seller can avail of the facility of Tax deduction at lower rates to the Income Tax Jurisdictional Assessing Officer. The application can be made under Section 195(2) of the Income Tax Act to determine the portion of income liable for a tax deduction. The NRI seller can also apply in Form 13 to obtain a lower/ Nil TDS under Section 197 under the Income Tax Act for such receipts.

The Assessing Officer will issue a certificate mentioning the amount of tax deduction, the basis of which the buyer of the property would be liable to deduct TDS on total sale consideration. If the buyer or the NRI seller makes no such application to determine the amount on which tax is deductible, the tax needs to be deducted on the entire sale consideration of the property.

Conclusion

Any payment you make to the NRI for the purchase of a property must be deducted by tax. Buyer must deposit the TDS with the Income Tax department as a buyer. The sale price of a property purchased from an NRI should have the TDS subtracted from it, with the remaining money going to the NRI seller. The amount that can be deducted from taxes is not capped. If the property is bought from a resident, no tax deduction is necessary if the sale price is less Rs 50 lakh.

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