TDS on Sale of Property by NRI in India

Join DBS Treasures

Key Takeaways

If you are selling property in India, you are liable to pay capital gains tax. However, you can invest it in specific ways to reduce your tax liability. You can also repatriate the proceeds abroad but within limits. Our tax guide to selling property tells you all that you need to know.

Like many NRIs, you may have invested in real estate in India during the property boom. Now, you have a good offer from a buyer and you decide to sell it. One of the crucial things for you to consider is your tax liability.

What is the TDS on sale of property by NRI in India?¹

As an NRI, if you sell a property in India, the buyer deducts 20% as Tax Deducted at Source (TDS) as Long Term Capital Gains Tax for properties sold after two years. For properties sold before 2 years, the TDS rate is 30%, deducted as Short Term Capital Gains Tax.

Tax deducted at source (TDS)*

When a resident buys property from an NRI, she/he must deduct TDS at 20% if the property has been held for more than two years and at 30% if the property is being sold within two years. The deduction must include TDS plus surcharge, health and education cess³ .

Ready reckoner for LTCG TDS rates

• Properties valued less than INR 50 lakh: Total tax 20.8% (including surcharge and cess)
• Properties valued between INR 50 lakh and INR 1 crore: Total tax 22.88%
• Properties valued above INR 1 crore: Total tax 23.92%

W.e.f. FY 2018-19,  the finance ministry has announced a higher surcharge on properties valued above INR 2 crore. The applicable LTCG TDS rates are 25% and 37% for properties valued above INR 2 crore and INR 5 crore respectively.

TDS at a lower rate

If tax deducted at source is more than your tax liability, then you can opt for a tax refund at the end of the year for the excess TDS. However, if you wish to avoid this cumbersome process, you can apply for a certificate that allows you to file for a lower TDS rate⁴ . Please note that you must apply before you execute the sale agreement. The assessing officer will determine the TDS after calculating the capital gains. This will put the money in your hands instantly instead of waiting for a refund.

Reducing the TDS liability with LDC

The Section 197 Certificate, also known as the Lower Deduction Certificate (LDC), is an important provision under the Income Tax Act that allows taxpayers to benefit from either a Nil or reduced Tax Deducted at Source (TDS) on their income.

While your total tax liability remains unchanged, as an NRI, you can reduce the amount deducted as TDS by applying for a lower TDS rate, thus minimizing the TDS payout.

Before a sale transaction, you can register on the TRACES portal and apply online for an LDC through Form 13, submitting the required documents to the Income Tax Assessing Officer (AO) in India. You'll need to demonstrate to the AO that you have a lower tax liability by providing:

• Details of any long-term or short-term capital gains from the sale transaction; and
• Your estimated total income in India for the current financial year.

Once the AO approves the application, they will issue the LDC for a specific period covering the transaction. It is essential to ensure the certificate is valid throughout the duration of the sale.

Tax exemption

Capital gains made through the sale of a property can be reinvested in India to reduce tax liabilities. If you invest the capital gains in buying another property within two years, then the profit generated from the sale is exempted from tax. Similarly, under section 54EC, you can invest the profit from the sale of property in Capital Gains Bonds within six months to get an exemption. These bonds offer an interest rate of around 5.75% p.a.* and have a lock-in of five years.⁵

Ensuring TDS Compliance as a Seller

As a seller, it's important to ensure your compliance with tax regulations when TDS is deducted by the buyer. Key steps include:

1. Declare Your Residential Status

   Clearly state your residential status (resident or NRI) at the time of sale, as it determines the applicable TDS rate.

2. Obtain the TDS Certificate (Form 16A)

   Request Form 16A from the buyer within 15 days of them filing the TDS return to confirm the deduction and payment of TDS.

3. Reconcile TDS with Form 26AS

   Cross-check the TDS in Form 16A with your Form 26AS to ensure accurate tax credits and avoid discrepancies.

4. Claim TDS Credit When Filing

   Claim the TDS credit shown in Form 26AS when filing your tax return, adjusting your tax liability accordingly.

Consequences of Non-Deducting TDS

Here are the key penalties and consequences for failing to comply with TDS regulations:

1. Penalty for Non-Deduction of TDS

   Under Section 201(1A) of the Income Tax Act, penalties for not deducting or delaying TDS payments are as follows:

   • Interest for Late Deduction: If TDS is not deducted on time, a 1% interest per month (or part of the month) is charged from the date it was due until the deduction date.
   • Interest for Late Payment: If TDS is deducted but not deposited promptly, an interest charge of 1.5% per month (or any part of the month) will apply, calculated from the date of deduction until the payment date.

   Under Section 40(a)(i)/(ia), failure to deduct or deposit TDS results in disallowance of expenses when calculating taxable income:

   • For Domestic Payments: If TDS is not deducted, 30% of the expense will be disallowed.
   • For Payments to Non-Residents: The full amount of the expense, if TDS is not deducted, will be disallowed.

2. Penalty for Late Filing of TDS Return

   • Late Filing Fee: A fee of ₹200 per day is charged for delayed TDS return filing, up to the total TDS amount.
   • Penalty: As per Section 271H, a penalty ranging from ₹10,000 to ₹1,00,000 may be imposed for failure to file or incorrect filing of TDS returns. This is in addition to any interest charges.
   • Prosecution: Failure to deposit TDS within the prescribed time can lead to imprisonment for 3 months to 7 years, along with a fine.

Repatriation of funds

If you wish to repatriate the proceeds from the sale of a property, you will need to submit Forms 15CA and 15CB. While you can fill out and submit Form 15CA yourself, Form 15CB has to be signed and submitted by a chartered accountant. You can repatriate up to USD 1 million a year outside India.

Final Note:

Several professionally managed firms cater to international clients and provide property management services. You can avail end-to-end services from these experienced professionals who can help with taxation, regulatory compliances and money transfers.

An easy way to repatriate funds back to your country of residence is through NRI accounts. Specifically for income earned in India from a property sale, you will need an NRO account. Are you looking to open one immediately? Apply Now for DBS Treasures.

tax-implications-for-nris-selling-property-in-india

References: ^{1 2 3 4 5}

*TDS rates mentioned in this article are applicable as of April 2020 and will be subject to change as per changes in Indian Tax laws and regulations.

*TDS and interest rates mentioned in this article are applicable as of April 2020 and will be subject to change.

Disclaimer: This article has been shared purely from an information perspective and we recommend you conduct extensive research before proceeding.

Frequently Asked Questions

1. How can NRIs avoid higher TDS without a PAN?

   1. Opening Specific Bank Accounts

      NRIs can avoid higher TDS by opening NRO, FCNR, or NRE accounts in India. Interest earned from NRE and FCNR accounts is tax-exempt, while NRO account interest is subject to TDS.

   2. Mutual Fund Investments

      NRIs can start investing in mutual funds with as little as ₹5,000, or smaller amounts like ₹500 or ₹1,000, through NRO, NRE, or FCNR accounts. They can also opt for SIPs, which provide the flexibility to start, pause, or stop investments without penalties, similar to residents.

2. How to apply for lower TDS on sale of property by NRI?

   NRIs can apply for a lower TDS deduction by submitting a request to the Income Tax Officer using Form 13. This is particularly beneficial when there is no capital gain or when the actual capital gain is lower than the TDS amount that would otherwise be deducted. Along with the application, several supporting documents are required to justify the lower deduction request. These documents help demonstrate the actual tax liability, ensuring that the TDS deduction is reduced in accordance with the taxpayer's situation.

3. How to get refund of TDS deducted on sale of property by NRI?

   To claim a TDS refund as an NRI at the end of the financial year, you need to file your income tax return. By assessing your income and tax liabilities based on your applicable tax slab rate, you can prepare your return and ensure it's submitted by July 31st of the following financial year.