Tax Deduction at Source – Sale of Immovable Property by Non-Resident Indians

Tax Deduction at Source – Sale of Immovable Property by Non-Resident Indians

Majority of Non-Resident Indians (‘NRIs’) have investments in immovable properties in India in form of residential house / flat, residential land, etc. In the current scenario, due to Covid and various other factors, there are a lot of such residential properties vacant which were previously fetching good rental income for NRIs. Due to such conditions, some NRIs are planning to sell their properties in India and repatriate the funds to their home countries instead of keeping the properties idle without any good returns.

Tax rules for NRI selling Property in India.

Under Indian Income Tax law, any sale consideration paid/ payable to NRI selling property in India is subject to India Income Tax deduction at source (‘TDS’). In simple terms, a specified percentage of the amount out of gross sale value needs to be deducted by the prospective buyer and remitted to Indian Income Tax Authorities in the form of TDS. Further, depending on the period of holding the properties by NRIs, the TDS

rate would be determined. The basic TDS rate would be 20% plus applicable surcharge and cess, if the property has been held by NRIs for more than two years; else the basic rate would increase to 30%. The NRI seller on filing their India Income Tax Returns for capital gains arising on sale of immovable property can claim credit for such TDS while computing the taxes due on such sale.

Things to consider before buying a property from NRI. All persons who intend to buy properties from NRIs have to also follow certain other specified Income Tax compliances such as obtaining Tax Deduction Account Number (‘TAN’), file applicable quarterly TDS returns, etc. A brief explanation of these aspects is discussed later in this article.

Let us understand the law with a few illustrations and scenarios.

Arun is an NRI staying in USA and has a residential flat in India, which he purchased in 2010 for INR 30 Lakhs. Varun, who stays in India is interested in buying this flat for INR 45 Lakhs and has approached Arun for the same. Since the flat has been held by Arun for more than two years, the flat is treated as a long-term capital asset and Varun needs to deduct basic TDS @ 20% plus applicable surcharge and cess on INR 45 Lakhs and remit the same to Income Tax Authorities and pay the balance sale amount to Arun.

In the above illustration, suppose Arun had bought this flat only in 2020, then the flat would have been treated as a short-term capital asset and liable for basic TDS @ 30% on the gross sale price as a period of holding is less than two years.

Suppose in the above illustration, if Varun was also NRI purchasing property, still same tax provisions are applicable and required to be followed as under Income Tax provisions there is no distinction or difference in compliance requirements for a resident buyer or an NRI buyer while purchasing a property from NRI seller.

In case NRI seller wants the buyer to do TDS only on appropriate taxable gains alone instead of TDS on the entire gross sale price, the NRI can file an application to Tax Authorities and obtain a lower tax deduction certificate from jurisdictional Income Tax Authorities. Based on such a lower TDS certificate, the buyer can do TDS only to the extent provided as per such certificate.

In case the buyer fails to deduct TDS or short deducts TDS on the payments made to NRI seller, then Tax Authorities may levy interest on the TDS amount defaulted to deduct or short deducted on the buyer for non-compliance with the Income Tax provisions. They may also levy penalties equivalent to the TDS amount not deducted or short deducted.

Based on the above points, it is very important for each buyer while buying property from NRI sellers to consider the above-discussed Income Tax compliances to avoid any notice for non-compliance.

The above information is for general understanding and awareness purposes only. It is highly suggested that the readers discuss their facts specifically with their respective tax consultants to determine the appropriate compliances applicable to their specific case.

Senthil Kumar S B. Com, FCA S Senthil Kumar is a practicing Chartered Accountant handling Direct Taxation & FEMA consultancy for non-corporate entities and NRIs. He has previously worked Ernst & Young - India in Tax & Regulatory practice. He can be reached at senthils30@gmail.com.