Lower Deduction Tax Certificate in Case of Property Sale by NRI

blog, Real Estate, Taxation

There is an incidence of Capital Gains or Capital Loss at the time of selling of a property. Selling of property by NRI is taxable under u/s 195 of the Income Tax Act, 1961. This post is dedicated to our NRI friends, who would like to know about their TDS liability at the time of sale of Property in India. Let us clarify the most common confusion first though; TDS of 1% u/s 194IA is not applicable if the NRI is the seller. TDS u/s 194IA is only applicable for resident Indian sellers. It is quite unfortunate, since, many people are not aware of the previously mentioned provisions and therefore many NRIs have lost their money, as TDS was deducted under two sections i.e. section 194IA and 195.

When any NRI plans to sell a property in India, there are three key points that he/ she should keep in mind:

Capital Gain Tax from Sale of Property: Long-term capital gain tax will be 22.66%, if a NRI is selling a property in India after holding it for more than 3 years. In case, holding period is less than 3 years then Short-term Capital Gain Tax will be applicable as per income tax slab. In case of short-term capital gains, TDS applicable will be 33.99%, irrespective of tax slab of the NRI. Not many people know that Capital Gain Taxation is same for both Resident Indians and NRI’s but only difference is in calculation and deduction of TDS.

One has understand why the TDS provision for NRIs has come into force. The key concern of Income Tax department is that any capital gain arising out of sale of property in India then corresponding income tax should be paid in India. For resident Indian seller, as he is staying in India therefore he does not have any other option but to comply with income tax rules and regulations. Since NRI is staying outside India, therefore, it is very difficult to ensure capital gain tax compliance after the property transaction is completed. In order to ensure compliance, Income Tax Department came out with an innovative idea to ensure that buyer deduct TDS at the time of making payment to NRI seller. TDS u/s 195 is deducted only to ensure capital gain tax compliance.

TDS u/s 195: In case of sale of property by NRI, it is mandatory for buyer to deduct 22.66% TDS on the sale price of the property if capital gain is long term capital gain. In case of short-term capital gain, TDS will be 33.99% irrespective of income tax slab of NRI as i mentioned earlier also. Buyer will deposit TDS with Income Tax Department. TDS is applicable even if value of property is less than 50 lakhs. For resident Indian seller TDS of 1% is applicable only if the property value is more than 50 lakhs. Now anomaly in this rule is that NRI is liable to pay Capital Gain Tax only on the Capital Gain arising out of sale of the property but unfortunately, TDS is deducted on the total Sale Value of the property. Therefore, in most of the cases there are no GAINS as such from the sale of property and actually NRI incur LOSS from the sale of the property if TDS refund is not claimed. As a result, NRI has to go through the process of claiming TDS refund from Income Tax Department.

Re-Investment of Capital Gains: In order to save capital gain tax a NRI can re-invest the capital gain arising from sale of one property by purchasing another property. Long-term Capital Gain can be invested in either property or tax-exempt bonds to save long-term capital gain tax. In such cases, NRI can apply for Tax Exemption Certificate from Income Tax Department under section 195 of the income tax act, 1961.

Now even if TDS is deducted then under following 3 possible scenarios NRI’s can claim TDS refund:

TDS Refund by NRI’S

1. If your country of residence has Double Taxation Avoidance Agreements (DTAA) with Indian government i.e. lower rate of TDS is allowed. NRI need to submit a tax residency certification from the country of his residence. it will certify that you are a tax paying resident in that country and that tax on this income is paid in that country, it ensure no tax leakage for either countries.
For example, In US, the tax residency certificate is called Form 6166. You can make application to the Internal Revenue Service (IRS) in Form 8802. In UK you need to get the tax residency certificate from the HM Revenue and Customs.

2. If your total income in India is less than basic exemption limit of 2.5 Lac, you can apply for TDS waiver with Income Tax officer under whose jurisdiction your case will fall.

3. You can either buy another house in India or invest in capital gains bonds u/c 54EC. You should submit an affidavit stating that you will invest the capital gain amount in capital gain bonds. For property purchase, you can produce allotment letter or payment receipts. Instead of claiming refund, which is a more tedious process, it is always advisable to apply for NIL Tax Deduction / Tax Exemption / Lower Tax Deduction Certificate. It requires some intelligent planning before sale of property and a proactive approach.

If you want to get the Advance TDS Certificate for the Property Sale, get in touch with us and we will arrange the same for you.