Sandeep Ahuja & Co.

Established in the year 1986, we are a leading chartered accountancy firm based in Delhi & NCR rendering comprehensive professional services which include statutory audit, internal audit, direct tax, transfer pricing, GST, bank audit, propriety audit, cost accounting, internal financial controls and risk advisory.

Monday, November 25, 2013

TDS on Purchase of Property from NRI

In case of  NRI (Non-Residents of India), TDS is explained as per section 195 of the Income Tax act  which says  any person responsible for paying a sum to a non-resident, not being a company, or to a foreign company, any interest (not being interest on securities) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries” shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force .

Therefore, the buyer of the property needs to deduct tax.

The important phrase in the section is “sum chargeable under the provisions of the Act”. This means that whatever be the amount paid, buyer has to deduct tax on that sum, not the profit earned by the seller on it. In other words, buyer cannot compute the Long term or short term capital gain and deduct the tax due on it.  The liability to deduct tax is on the gross amount paid.

As per Sec 195, tax has to be deducted at the ‘rates in force’. ‘Rates in force’ is defined u/s 2(37A)(iii) as the rate specified in the Finance Act. Currently the effective rate for long term capital gains is 20% + surcharge (if applicable) + E. Cess and SHE. Cess.

If there is no capital gain at all in the transaction or the tax payable on capital gain is less that the TDS deducted, then the payer can approach the assessing officer and get a certificate of lower or nil deduction of TDS. This is provided in subsection (2) of Section 195. Alternatively, u/s 195(3), payee also can approach the AO (Assessing Office) and get the certificate. If such certificate is not obtained, the payer has to deduct tax, even in case where the property is sold at a loss.

There are certain instances under section 54 in which NRIs can get a waiver of TDS. One such case would be if the NRI is planning to reinvest the capital gains of the property in another property or in tax exempt bonds. In such cases, the NRI will be exempt from tax in India, and no TDS will be deducted either.

NRIs selling their properties can apply to the income tax authorities for a tax exemption certificate under section 195 of the Income Tax Act. They must make this application in the same jurisdiction that their PAN (permanent account number) belongs to and will be required to show proof of reinvestment of capital gains. If the NRI is planning to buy another house, the allotment letter or payment receipt will need to be produced; if capital gains bonds are chosen instead, an affidavit to this effect will have to be prepared. Usually, buyers withhold the last instalment of payment until the NRI produces a certificate of exemption. A NRI has up to two years from the date of sale to invest in another property, or up to six months to invest in bonds.

The purchaser, before deducting income tax from such payment, should apply for and get a Tax deduction Account Number (TAN) as per section 203A of the Income Tax Act 1961. He must collect the Permanent Account Number (PAN) of the said Non-resident Indian before deducting the tax. The buyer should deposit, (by using challan for payment of TDS), the income tax so deducted, with the government (through banks authorized to collect direct taxes) within seven days from the end of the month in which such tax is deducted and then file the TDS return.

The new provision requires TDS to be deducted at 1% of the price being paid by the purchaser of an immovable property, irrespective of the quantum of capital gains. However, where the seller is a non-resident, these provisions would not apply, and the earlier TDS provisions applicable to purchase of property from non-residents would continue to be applicable.