An NRI selling a property in India requires the buyer to deduct Tax Deducted at Source (TDS) at specified rates, ensuring tax compliance and reducing the risk of tax evasion. 

However, The Economic Times highlights concerns raised by NRIs regarding the disparity in TDS rates compared to those applied to resident sellers.

When calculating tax on long-term capital gains, resident taxpayers can avail of a basic exemption limit of ₹2,50,000 (₹3,00,000 under the new tax regime), which is not available to NRIs. As a result, even if an NRI earns a small capital gain, such as ₹10,000, they will still be taxed in India.

This blog examines the tax implications of selling a house property by NRIs, highlighting key tax liabilities and compliance considerations.

TL;DR

• NRIs selling house property in India face higher TDS rates compared to residents, with the buyer responsible for deducting the tax.

• TDS on long-term capital gains can reach up to 14.96% for NRIs, including surcharge and cess, while residents benefit from lower rates.

• NRIs should calculate TDS by determining capital gains, applying the correct rate (20% for long-term, 30% for short-term), and including surcharges and cess.

• Professional tax advice is crucial for NRIs to understand the complex tax and TDS regulations applicable to property sales.

What is TDS on the Sale of House Property by Non-Resident Indians (NRIs)

Tax Deducted at Source (TDS) is a critical component in property transactions involving Non-Resident Indians (NRIs). Under Section 195 of the Income Tax Act, 1961, TDS applies to payments made to non-residents, including property sales. 

This mechanism ensures tax compliance and facilitates the collection of taxes at the source of income. For NRIs selling property in India, understanding the TDS provisions is essential to ensure compliance and avoid potential legal complications.

TDS Rates for NRI Property Sales

The TDS rates applicable to NRIs selling property in India are determined based on the nature of the capital gains and the income of the NRI:

1. Long-Term Capital Gain (LTCG) 

For properties held longer than 2 years, the capital gain is considered long-term, and the TDS rate applies as follows:

Note: The holding period for determining LTCG or STCG includes the original owner's holding period when the property is inherited.

2. Short-Term Capital Gain (STCG) 

For properties held for 2 years or less, the gain is classified as short-term and taxed according to the applicable income tax slab. The TDS rate is determined based on the income tax slab, with surcharge and cess added in the same way as calculated for LTCG.

• STCG is taxed at 30% for gains on properties held for 2 years or less.

• Surcharge and cess are added based on the applicable income tax slab rates.

3. TDS Under Section 195

As per Section 195 of the Income Tax Act, TDS is deducted on any payment made to non-residents, including property sales.  This is in contrast to Section 194-IA, which applies to resident sellers, where TDS is deducted only when the sale consideration exceeds ₹50 lakh. For NRIs, TDS is applicable regardless of the sale value.

When an NRI sells property in India, the buyer must deduct TDS on the full sale price, not just the capital gain.

Example: The table below illustrates the TDS calculation when an NRI sells a property for ₹3 crore bought for ₹1 crore (capital gain of ₹2 crore).

The buyer deducts ₹44.85 lakh as TDS on the full sale price. The NRI can claim a refund of the excess ₹15.85 lakh by filing an income tax return or applying for a lower TDS certificate.

Moving on, the buyer plays a significant role in the TDS deduction process, ensuring compliance and avoiding penalties.

Buyer's Responsibility for TDS Deduction

In transactions involving NRIs, the buyer is responsible for deducting TDS on the capital gain portion of the property sale, not the entire sale price. The buyer must ensure the accurate deduction and timely deposit of TDS with tax authorities to avoid penalties.

Buyer’s Obligations:

• Obtain a Tax Deduction and Collection Account Number (TAN).

• Deduct TDS on the capital gain portion.

• Deposit TDS using Challan No. ITNS 281 within seven days of the month-end.

• File a TDS return through Form 27Q and provide the NRI seller with Form 16A.

Failure to comply can lead to significant penalties, including interest on delayed TDS payments, penalties for non-filing of returns, and fines up to ₹1 lakh for severe non-compliance.

If you're an NRI facing tax complexities, BCD India can provide expert guidance on compliance and financial structuring, ensuring a smooth process and helping you maximise returns.

Also Read: Differences and Advantages of Investing in REITs and Real Estate Funds

NRIs may apply for a Lower Deduction Certificate (LDC) to reduce the TDS rate, provided certain conditions are met.

TDS Exemptions and Lower Deduction Certificates (LDC)

NRIs can apply for a Lower Deduction Certificate (LDC) under Section 197 of the Income Tax Act if they anticipate that their actual capital gain will be substantially lower than the sale consideration. 

This certificate allows the buyer to deduct TDS based on the net capital gain, rather than the entire sale price, thereby preventing over-deduction.

Steps to Obtain a Lower Deduction Certificate:

1. Submit Form 13 to the Income Tax Department.

2. The application process typically takes 4 to 6 weeks, so it is recommended to apply well in advance.

3. Once approved, provide the LDC to the buyer, ensuring TDS is deducted at the reduced rate.

Impact of Double Taxation Avoidance Agreements (DTAA)

If the NRI seller resides in a country with which India has a Double Taxation Avoidance Agreement (DTAA), they may be eligible for exemptions or lower TDS rates. 

By submitting a Tax Residency Certificate and Form 10F, NRIs can avoid being taxed twice on the same income, ensuring they are only taxed in one country.

If excess TDS is deducted, NRIs can follow specific strategies to reclaim the overpaid amount and ensure financial accuracy.

Strategies for Reclaiming Excess TDS

NRIs can take several steps to reclaim excess TDS deducted during property sales. Here are some key strategies:

• File an Income Tax Return (ITR): The most direct way to reclaim excess TDS is by filing an income tax return. If the TDS deducted is higher than the actual tax liability, the excess amount can be refunded after processing the return.

• Apply for a Lower TDS Certificate: Before the transaction, NRIs can apply for a Lower TDS Certificate under Section 197 to reduce the TDS deduction at source, ensuring they are not over-deducted on the sale proceeds. This avoids the hassle of claiming a refund later.

• Reinvestment Under Section 54: If the capital gains are reinvested in another residential property in India within the specified timeframe, the LTCG can be exempt under Section 54. This strategy can help reduce the taxable amount while also meeting the exemption criteria.

• Invest in Bonds Under Section 54EC: For NRIs looking to invest their gains in bonds, Section 54EC offers exemption if the capital gains are invested in specific government-approved bonds within six months, up to ₹50 lakh.

Additional Considerations:

Interest on Delayed Refunds: If the Income Tax Department delays the refund beyond three months from the end of the financial year, the NRI is entitled to interest on the refund amount, as specified under Section 244A of the Income Tax Act.

Tax Residency Status: NRIs must ensure their residency status is correctly indicated in the ITR. Incorrect status reporting can lead to complications in processing the refund. If claiming benefits under the Double Taxation Avoidance Agreement (DTAA), the NRI should submit a Tax Residency Certificate (TRC) and Form 10F.

Also Read: NRI Investment Plans and Options in India

Furthermore, NRIs must file an income tax return (ITR) after selling property in India, even if TDS has already been deducted, to reconcile any discrepancies.

ITR Filing for NRIs

NRIs must file an Income Tax Return (ITR) after selling property in India, even if TDS has already been deducted. The ITR form must be selected based on the capital gains from the property sale, with the deadline typically falling on July 31 of the following financial year.

ITR Filing Essentials for NRIs:

• Use ITR-2 for property sales.

• Reconcile TDS deducted with records in Form 26AS.

• Ensure all necessary documentation is complete to avoid delays in refunds or potential scrutiny from the tax authorities.

Conclusion

Reclaiming excess TDS on house property sold by an NRI and TDS on immovable property involves filing an accurate Income Tax Return (ITR) with correct capital gains details and reconciling the TDS amounts from Form 16A and Form 26AS. 

By following the proper steps and seeking professional help when needed, NRIs can successfully recover any excess TDS deducted on the sale of immovable property and ensure compliance with Indian tax regulations.

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FAQs

Q: Is TDS applicable on property sold by an NRI even if the property is sold at a loss?
A: Yes, TDS is applicable even if the property is sold at a loss. The tax is based on the capital gains, and if there are no gains, no TDS should be deducted, but the buyer must ensure proper documentation for such a transaction.

Q: Can NRIs claim exemptions under sections like 54 or 54EC to reduce TDS?
A: Yes, NRIs can claim exemptions under Sections 54 (for reinvestment in residential property) or 54EC (for investment in specified bonds) to reduce capital gains tax liability, which may lower the TDS amount deducted on the sale of property.

Q: What if the buyer fails to deduct TDS on the sale of property by an NRI?
A: If the buyer fails to deduct TDS, the responsibility shifts to the NRI seller, who may be required to pay the taxes directly to the government. The NRI may also face penalties for non-compliance.

Q: How can NRIs verify if TDS has been properly deposited with the government?
A: NRIs can verify if TDS has been deposited through Form 26AS, which consolidates all tax credits, including TDS deductions made on their behalf. This form can be accessed via the Income Tax Department's e-filing portal.

Q: Are there any special provisions for NRIs selling agricultural land in India?
A: Yes, NRIs selling agricultural land may face different TDS rates compared to residential or commercial property. The specific tax treatment can depend on the location and usage of the land, so consulting a tax expert is advisable for accurate calculation and compliance.