Are you an NRI facing huge TDS on sale of your immovable property located in India?
As an NRI, if you are selling a property located in India, you would have faced an assertion from the buyer that they shall deduct from your sale proceeds, a tax equal to 20% + surcharge + education cess of the entire sales consideration.
At the outset, you first need to assess whether or not you are an NRI. For that, the Act governs the criteria for determining the residential status of a person.
As per section 115C of the Act, Non-Resident Indian (NRI) means an individual being a citizen of India or a Person of Indian Origin (PIO) who is not a “resident”.
In Explanation to clause (e) of section 115C of the Act, A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grandparents, was born in undivided India.
As per section 6 of the Act, Any Person who stays in India in a Previous year for at least 182 days, or Any Person who stays in India for at least 365 days in preceding 4 years (prior to previous year) & stays for at least 60 days in the Previous year is a Resident
Exception – If a person(being a citizen of India, or a person of Indian origin) who being outside India, comes on a visit to India in any previous year then 60 days will be substituted as 182 days, however, if the total income from other than foreign sources exceeds 15 lakh during the previous year then 60 days will be substituted as 120 days.
Taxability of Sale of Immovable Property by NRI
Let’s understand this by an example, Rohit (NRI Seller) is selling an immovable property located in India to Sohit (Indian Buyer). Assuming that the residential status of both parties is indisputable.
Now the first question arises whether Rohit, the NRI seller, will have to pay tax in India on this transaction?
Yes, he will have to. Why?
An immovable property qualifies as a capital asset as per the definition under Section 2(14) of the Act. As per section 45 of the Act, Capital Gain is the profit or gains arising from the transfer of a capital asset.
As per section 2(47) of the Act, “Transfer in relation to Capital Asset, includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law.”
As per section 9 of the Act, “The following incomes shall be deemed to accrue or arise in India:
(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situated in India.”
Hence, the sale of immovable property in India by anyone including a non-resident results in capital gain which shall be taxable in India.
Computation of Capital Gain and Tax thereon
To compute how much tax is to be levied on the given transaction one more ground needs to be established: Whether the asset is a Long Term Capital Asset or a Short Term Capital Asset.
As per the third proviso to Section 2(42A) of Act, in case of an immovable property, being land or building or both, the Capital asset held by an assessee for not more than 24 months immediately preceding the date of its transfer is a Short term capital asset.
Hence, it implies that if the difference between the Purchase Date of Property and the Sale Agreement is more than 2 Years then it is considered a Long Term Capital Asset and if the said period is less than or equal to 2 years, it qualifies as a Short Term Capital Asset. The Capital Gain arising on transfer of Long Term Capital Asset is referred to as Long Term Capital Gain (LTCG) and the capital gain arising on transfer of Short Term Capital Asset is referred to as Short Term Capital Gain (STCG)
What is the need for bifurcation of Long Term and Short Term Capital Gain?
1. Difference between Tax rates:
LTCG is charged @ 20% plus surcharge plus education cess. On the contrary, Short term Capital Gain (STCG) is charged @ 30% plus surcharge plus education cess.
1. Indexation benefits* can be availed under LTCG but the same cannot be availed for calculating STCG.
2. Exemptions under sections 54, 54EC and 54EF of the Income Tax Act can only be claimed against LTCG.
The Capital Gain/Loss is computed by deducting Cost or Indexed Cost, as the case may be, from the Sale Proceeds.
Indexed Cost is a concept to give the benefit of inflation given by the government which allows a higher cost to be deducted for the purpose of calculation of Capital gain in case of Long Term Capital Gain and this higher cost is calculated on the basis of Cost Inflation Index(CII).
In our example, Rohit purchased the immovable property at Rs. 40 lakhs on 01-Apr-2008 and is now selling it to Sohit for Rs. 1.5 crores on 22-Feb-2023. Now the LTCG will be calculated as follows
Indexed Cost = 40,00,000 X 331/137 = 96,64,234
Long Term Capital Gain = 1,50,00,000 – 96,64,234 = 53,35,766
Tax Liability = 53,35,766 X 20% = 10,67,153 (+) Surcharge (+) Cess as applicable
TDS on the Transaction
According to section 195 of the Act, the buyer is liable to deduct tax at source (TDS) on the sale proceeds at the rates in force. It is a mechanism of collecting the tax on the capital gain arising on the sale of the asset in advance.
Section 195(1) of Act states that:
“Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) 92[or section 194LD] or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries”) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force”.
In other words Section 195(1) makes it mandatory for the buyer to deduct TDS when making payment to non resident out of consideration to be paid and deposit the same to the credit of the Central Government.
As per our example, the tax on the capital gain on the property sale amounts to 10.67 lakhs. BUT, this is where things take a turnaround.
If the seller is an NRI, the buyer is liable to deduct TDS on entire sale proceeds and not on the capital gain gain value.
Consequently, the buyer will deduct 20% on 1.5 crores which comes out to be Rs. 30 lakhs. (Ignoring Surcharge and Cess) Which means, there is an excess deduction of tax to the tune of Rs. 20 Lakh approx.
Although the seller is entitled to take the credit of excess tax deducted while filing his income tax return. But, this blocks his capital for a long period of time until he receives the refund from the income tax department. It is time taking and costs the seller, the opportunity cost of investing the money somewhere else.
Is there a method to avoid such blockage? Yes, there is.
To avoid deduction of tax of a higher amount, another viable method is to apply for a Lower Deduction Certificate.
Lower Deduction Certificate
Section 197 of the Act provides that the person whose tax is being deducted can apply to the income tax authorities for a certificate of lower deduction of tax by justifying the same with the supporting documents.
Upon such issuance, the buyer shall be liable to deduct TDS at the rate mentioned in the said certificate. In simpler words, it is the certificate issued by the IT Department on behalf of the seller to the buyer certifying to deduct the required tax only.
It is a certificate which is applied upfront before completing the transaction through an online process on the TRACES website by filing Form 13 stating detailed computation with supporting documents. Within a few days, the officer will either accept or reject the application and issue the certificate in case of acceptance of the application.
Conditions for Application of LDC:
1. The certificate is buyer-specific, the buyer must be identified by the seller and agreed to enter into a sales agreement.
2. The buyer must possess a TAN number.