Details

Overview:

For Non-Resident Indians (NRIs), the process for Tax Deducted at Source (TDS) on property sales in India significantly differs from that for Indian residents. Typically, a 1% TDS is applicable on the sale consideration for properties sold by resident individuals. In contrast, for NRIs, the TDS rate is 20% + surcharge (where applicable) + cess, which can result in substantial cash flow challenges. However, this tax rate can be reduced by utilizing TDS deductions available under the Income Tax Act of 1961.

TDS on sale of Property:

When purchasing property, the buyer is responsible for deducting and remitting the Tax Deducted at Source (TDS) to the tax authorities. The applicable TDS rate depends on the seller's residential status.

For sellers who are Indian residents, 1% of the sale consideration must be deducted as TDS under Section 194IA, provided the transaction value is Rs 50 lakh or more.

In cases where the property seller is a Non-Resident Indian (NRI), the buyer is required to deduct TDS at a rate of 20% + surcharge and cess on the sale consideration, regardless of the property's value. This requirement stands even if the sale consideration is below Rs 50 lakh. However, no surcharge amount is to be deducted in such scenarios.

After deducting the TDS, the buyer must deposit the amount with the Income Tax Authorities on behalf of the seller within prescribed time.

Example:

Residential Property Sold:
Sales Consideration: ₹60 lakh
Cost of Acquisition: ₹30 lakh
Indexed Cost of Acquisition: ₹45 lakh

Taxation of the above example:

* 22.88% = 20% + 10% surcharge (as sales consideration is above ₹50 lakh and up to ₹1 crore) + 4% Health and Education Cess (HEC).

Lower deduction certificate (LDC):

From the above example we can observe that due to the non-residential status, NRI has ₹13,12,800 (13,72,800 – 60,000) more blocked in TDS and ₹10,60,800 in net effect compared to a resident seller for more than a year until the NRI files ITR and claims refund.

To overcome this cashflow blockage, a Lower Deduction Certificate can be obtained from Assessing Officer under Section 197 of the Income Tax Act, 1961.

Using Lower Deduction Certificate, NRI can get a comparatively lower or NIL rate of TDS compared to the effective rate of TDS, based on the facts and features of different cases on which the application is made.

Taking the above example for reference, if the Lower Deduction Certificate is issued to the NRI then, the TDS rate which the assessing officer shall specify may be equal to effective tax rate on gain from sale of property which shall be 5.2% (₹ 3,12,000 / ₹ 60,00,000).

This way bringing down the TDS rate for sale of property by NRI from 22.88% to 5.2%.

Application Form for Issuance of LDC:

NRIs seeking a Lower Deduction Certificate under Section 197 of the Income Tax Act, 1961, must apply for a reduced or nil tax deduction by submitting Form 13 online.

Few documents required for application of LDC in Form 13:

1. Applicant's Email ID and phone number

2. Copy of ITR and Computation (last three years)

3. Copy of Form 26 AS (last three years)

4. Agreement to the Sale of Property

5. Purchase Deed of Purchased Property

6. Builder Statement (if any)

7. Relevant Proof of NRI (such as a Passport)

8. Additional Documents (if the applicant needs exemption under section 54)

Summary:

1. NRIs can pay TDS at a reduced or NIL rate by obtaining a Lower Deduction Certificate (LDC).
2. To obtain an LDC, the non-resident seller must apply to the Income Tax Jurisdictional Assessing Officer and submit Form 13 online.
3. The Assessing Officer must issue the LDC within 30 days from the end of the month in which the application is received.
4. The buyer of the NRI's property must deduct tax according to the rate specified in the NRI sellers LDC.
5. If two NRIs jointly own the property, both must fill out and submit Form 13 separately to benefit from the TDS reduction.
6. If the NRI seller does not obtainan LDC and has already paid TDS despite earning non-taxable income for the financial year, they must file an Income Tax Return (ITR) at the end of the financial year to claim a refund of the excess TDS paid.