Buying property from a Non-Resident Indian (NRI) in India comes with tax implications, primarily the deduction of Tax Deducted at Source (TDS). The buyer is legally responsible for deducting and depositing TDS with the Income Tax Department. Understanding the TDS requirements helps avoid penalties and ensures smooth compliance with tax laws.

TDS Applicability on Property Purchase from NRI

As per Section 195 of the Income Tax Act, 1961, TDS on property purchase from NRI must be deducted when making payments to an NRI for property transactions. Unlike resident sellers where TDS is fixed at 1% (if property value exceeds ₹50 lakh), the TDS rate for NRI sellers varies depending on capital gains.

TDS Rates for Property Purchase from NRI

The TDS rate differs based on whether the property is categorized under long-term or short-term capital gains:

• Long-Term Capital Gains (LTCG) (Property held for more than 2 years): 20% + Surcharge + Health & Education Cess

• Short-Term Capital Gains (STCG) (Property held for 2 years or less): As per applicable tax slab rates of the NRI

The surcharge varies depending on the total sale value of the property:

• If the sale amount is between ₹50 lakh and ₹1 crore, a 10% surcharge is added.

• If the sale amount exceeds ₹1 crore, a 15% surcharge applies.

• Additionally, a 4% Health & Education Cess is charged on the total tax amount.

Example Calculation:

If an NRI sells a property for ₹1.5 crore after holding it for 3 years, the buyer must deduct TDS at 20% plus applicable surcharge and cess. This means the effective TDS rate can be around 23.92% or higher, depending on the surcharge and cess calculations.

TDS Deduction & Payment Process

1. Buyer Must Obtain a TAN (Tax Deduction Account Number)

   • A TAN is required to deduct and deposit TDS. This can be obtained from the Income Tax Department’s website.

2. Deduct TDS at the Time of Payment

   • The buyer must deduct TDS from the sale amount before transferring funds to the NRI seller.

3. Deposit TDS with the Government

   • Use Challan ITNS 281 to deposit the deducted TDS with the government within 7 days of the following month.

4. File TDS Return (Form 27Q)

   • A quarterly TDS return must be filed, mentioning the details of the transaction and tax payment.

5. Issue Form 16A to the NRI Seller

   • After successful deposit, the buyer must provide Form 16A to the NRI as proof of TDS payment. This helps the NRI claim tax credit while filing their returns.

Lower TDS Deduction: Certificate Under Section 197

NRIs can apply for a Lower TDS Certificate from the Income Tax Department if their actual tax liability is lower than the prescribed TDS rate. If approved, the buyer can deduct TDS at a reduced rate or even zero, depending on the certificate issued by the department.

Steps to Apply for Lower TDS Certificate:

1. The NRI seller must file an online application on the TRACES portal.

2. The Income Tax Department reviews the seller’s capital gains computation.

3. If eligible, the department issues a certificate allowing TDS at a lower rate.

4. The buyer must verify and submit this certificate while making the tax deduction.

Consequences of Non-Compliance

Failure to deduct or deposit TDS can lead to significant penalties:

• Interest Penalty: 1% per month for non-deduction, 1.5% per month for late deposit.

• Penalty: Equal to the TDS amount not deducted.

• Legal Action: In severe cases, non-compliance can result in prosecution by tax authorities.

Additionally, if the buyer fails to obtain a TAN or file TDS returns on time, they may also face penalties under Section 271C of the Income Tax Act.

Common Challenges & Practical Tips

• High TDS Deductions: Since TDS is deducted on the entire sale price and not just the capital gains, NRIs often face liquidity issues. Applying for a lower TDS certificate in advance can help mitigate this.

• TAN Requirement: Many buyers are unaware that a TAN is mandatory for TDS deductions, leading to delays in property registration.

• Delayed Refunds for NRIs: If excess TDS is deducted, the NRI seller may have to wait until the end of the financial year to claim a refund while filing their ITR.

• Incorrect Tax Deposits: Filing the wrong details in the TDS challan can cause compliance issues. Buyers should double-check all information before submitting the tax.

Conclusion

Proper selling nri property in india purchases from NRIs is crucial for tax compliance. Buyers should be aware of applicable rates, procedures, and potential penalties to ensure a smooth transaction. Consulting with tax experts can help both buyers and sellers navigate complex tax laws efficiently. For expert assistance in NRI tax compliance and property transactions, Dinesh Aarjav & Associates offers comprehensive advisory services.