Non-Resident Indian (NRI) are free to sell their property owned in India but if there is any capital gains arising on the sale of the property it would be taxable in India. Now the question arises on what rate and section should the TDS be deducted by the buyer and on what amount. Recently they have been confused because of the recent amendment in the Income Tax Act by CBDT in regard to sale of immovable property. CBDT has amended the Income Tax Rules by bringing in a new section 194IA for the deduction of TDS on sale of immovable property.

Let us take an example to understand the query better.

Example: Mr. A is a NRI, residing in USA since 2006, plans to sell his long owned property in Delhi. Mr. X, a resident in India and working as a salaried individual in a reputed company, wishes to purchase the property in his name. An agreement has been drafted on 01/08/2013 among the two parties for a consideration of Rs. 1.5 Crores to be paid by Mr. X against the property of Mr. A. Further, Mr. A had purchased the property in 2000 and its indexed cost of acquisition on the date of sale is Rs. 80 Lakhs.

Taxability of Income

Sale of an immovable property is a transfer of capital asset and thus chargeable to capital gain by way of short term if held for less than 3 years and long term if held for more than 3 years. An assessee is required to make payment of advance tax whenever the capital gains arise in the hands of the assessee. It is further the responsibility of the buyer to deduct TDS and make payment of the taxes to the government.

Section and Rate of TDS Deduction

It is very frequently noted that buyers have less knowledge of the laws and are confused on which section the TDS would be deducted. To clarify further, section 194IA is not applicable to NRI for deducting TDS i.e. when a resident purchases an immovable property from an NRI. For any payment made to an NRI, which also includes sale of immovable property, TDS on such payment has to be deducted u/s 195 at the rate in force. In case of sale of an immovable property taxes for long-term capital gains are 20% and for short term capital gains are as per normal tax slab rate. Thus the rate of TDS would also be applicable accordingly. In our case the property held by Mr. A is a long term property and TDS @20% needs to be charged.

Amount on which TDS to be Deducted

There may be questions on what amount should the taxes be deducted. Assessee’s are confused on whether the TDS has to be deducted on the sales consideration or on the capital gains arising on the hands of the seller. In our case, Mr. A is having a Capital Gains of Rs. 70 Lakhs and the sale consideration of the property is Rs. 1.5 Crores. Since Mr. A is a NRI and section 195 is applicable, TDS has to be charged on any payment made to a NRI. This further implies that the TDS has to be deducted on the sale consideration of Rs. 1.5 Crores and not on the Capital Gains of Rs. 70 Lakhs.

Deducting TDS

The buyer of immovable property must deduct TDS on the sales consideration amount before making payment to NRI. In the hands of Mr. A the capital gains is Rs. 70 Lakhs but TDS has to be deducted on the entire sales consideration of Rs. 1.5 Crore at a rate of 20% amounting to Rs.30 Lakhs.  Mr. X must hold PAN & TAN before he enters into any such transaction. Also before entering into transaction, Mr. A must ensure that Mr. X holds PAN card. It is the responsibility of the buyer to deposit the taxes so deducted (by using challan for payment of TDS) with the government (through banks authorized to collect direct taxes) within seven days from the end of the month in which such tax is deducted.

Once the TDS has been paid, Mr. X should file the TDS returns electronically, within the due dates (Click here for more details) as applicable by giving the details of Mr. A, his address, PAN along with self PAN and TAN details. After filing the TDS returns electronically, Mr. X shall issue the TDS certificate in Form 16A to Mr. A, within 15 days from the due date of furnishing TDS returns. Remember, if the Mr. X fails to deduct or fails to pay the amount deducted he/she will be treated as Assessee in Default as per section 201 of the Income Tax Act, 1961 and will be liable for payment of interest, penalties and prosecution.

Claiming of Refund of Excess TDS paid

It is very clear that if TDS has been deducted on the sales consideration, excess taxes has been made as a payment to the Govt. Mr. A is liable to claim refund of the excess taxes, deducted by Mr. X, from the govt. by mentioning the details of the sale and capital gain in his Income Tax Return for AY 14-15. He shall file his return within the due date to claim the refund of the excess taxes paid. Upon successful processing of the return, if all details are mentioned correctly, the refund amount would be paid to the Mr. A by the govt.

Obtaining Certificate for Lower Rate or Nil Deduction of TDS

Mr. A can also save taxes on the capital gains by reinvesting the sale amount in tax saving bonds or in any other house property in accordance with provisions of the Income Tax Act. If the capital gain amount is reinvested then Mr. A can reduce his capital gains amount. If the entire Capital Gains amount is reinvested then he shall have no tax liability and shall not be liable to pay any taxes. In such a case, Mr. A also has an option to ask Mr. X for not deducting TDS on the sale consideration.

As per the section 195(2) of income tax act, Mr. X can contact AO and can get a certificate for lower or nil deduction of TDS provided there are no capital gains or the tax payable on capital gain is less than the TDS deducted. Also as per section 195(3) of income tax act, Mr. A can also get the tax exemption certificate from the concerned AO provided reinvestment of capital gains in another property or to any tax saving bonds is produced before the AO of the jurisdiction of Mr. A as a proof.

Repatriation of Funds

NRI’s mostly want to reinvest the sale proceed received in a new property outside India or they simply want to take their funds along with them to a foreign bank account or their NRE account in India.  If Mr. A want to transfer the funds received by sale from his NRO account to his NRE or Foreign Bank account, he is required to submit a Certificate, Form 15CB signed by a Chartered Accountant, to the bank certifying that proper taxes has been deducted on the funds or the reason for non deduction of TDS. He is also required to file Form 15CA online with the details of the Form 15CB certificate (Click here to download). Upon submission of the form Mr. A can freely repatriate his funds outside India.

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