Non-Resident Indians (NRIs) face unique challenges when selling property in India, particularly in the area of tax compliance. One of the most important aspects is the TDS on sale of property by NRI. Tax Deducted at Source (TDS) is a mechanism where the buyer deducts a specified percentage from the total sale amount before making payment to the seller and deposits it with the Income Tax Department.
For NRIs, especially those who may also have a loan against property, understanding how TDS impacts their financial and legal obligations is essential. Failure to comply can lead to penalties and complications in repatriating funds.
Being aware of the applicable TDS rates, calculation methods, possible exemptions, and the procedural steps involved can help ensure full compliance with Indian tax laws. Read on to explore a comprehensive guide on TDS on sale of property by NRI, helping you manage the process smoothly and efficiently.
What is TDS and its applicability to NRIs selling property in India?
Tax Deducted at Source (TDS)is a mechanism where the buyer of a property in India is required to deduct a certain percentage of the sale value and remit it to the Income Tax Department. This is done to ensure that taxes are collected in advance on income generated through property transactions. For NRIs, the TDS provision becomes applicable when they sell a property in India.
Under the Income Tax Act, 1961, if an NRI sells property, the buyer must deduct TDS at specified rates before making the payment to the seller. This provision ensures that NRIs, like residents, are subjected to tax on their capital gains arising from property sales. The TDS is generally considered a prepayment of tax liability, which can be adjusted against the seller's final tax liability.
TDS rates for NRIs: Long-term vs. Short-term capital gains
The TDS rates applicable to NRIs selling property depend on the nature of the capital gains—short-term or long-term. These rates are different for individuals, Hindu Undivided Families (HUFs), and companies.
| Capital gains type | TDS rate for NRI | Conditions |
| Short-Term Capital Gains (STCG) | 30% | For properties held for less than 2 years. |
| Long-Term Capital Gains (LTCG) | 20% with indexation | For properties held for more than 2 years. |
| Additional Surcharge | 10% | In cases where the sale amount exceeds INR 50 lakh. |
How are gains from the Sale of Property in India Taxed to NRI?
NRIs selling residential property in India are liable to pay capital gains tax. The nature and amount of tax depend on whether the profit qualifies as Short-Term Capital Gain (STCG) or Long-Term Capital Gain (LTCG).
LTCG:
If the property is held for more than two years before being sold, the resulting profit is classified as a long-term capital gain and taxed accordingly.
STCG:
If the property is sold within two years of acquisition, the profit is treated as a short-term capital gain and is taxed at slab rates.
In the case of inherited property, taxation still applies. However, to determine whether it qualifies as STCG or LTCG, the original owner's purchase date is considered. Additionally, the cost of acquisition for tax calculation is based on the amount paid by the original owner, not the inheritor.
Calculation of TDS on property sale by NRI
To calculate the TDS on a property sale by an NRI, the following steps are generally followed:
Determine the sale price: The TDS is calculated based on the total sale price, not the profit or gain. This means the entire consideration paid by the buyer will be considered for TDS deduction.
Determine the nature of capital gain: Whether the gain is short-term or long-term determines the applicable TDS rate.
Deduct the appropriate TDS: The buyer deducts TDS based on the capital gain type (30% for STCG, 20% for LTCG) and remits it to the Income Tax Department.
For instance, if an NRI sells a property for INR 70 lakh, and the capital gain qualifies as long-term (held for over two years), the TDS will be calculated at 20% on the sale price.
Particulars |
Resident seller |
NRI seller |
TDS rate |
1% of Sale Value (if > Rs. 50L) |
20%+ Surcharge + Cess on Capital Gains |
On what amount? |
Full Sale Consideration |
Capital Gains, not total sale value (with valid certificate) |
Section |
194-IA |
195 |
Steps for NRIs to obtain lower TDS deduction certificate
NRIs can apply for a lower TDS deduction certificate if they believe the TDS deducted by the buyer is higher than their actual tax liability. To do so, they must:
Apply to the income tax department: File an application to the Income Tax Department to obtain a lower or NIL TDS certificate under Section 197 of the Income Tax Act.
Submit relevant documents: Provide necessary documents such as proof of income, property documents, and tax payment history.
Wait for approval: If the application is approved, the NRI will receive a certificate specifying the lower TDS rate, which the buyer must apply to future payments.
Responsibilities of the buyer in deducting TDS from NRI seller
The buyer plays a crucial role in ensuring TDS compliance. Key responsibilities include:
Deducting TDS at the correct rate based on whether the NRI is selling a property with short-term or long-term capital gains.
Filing TDS returns: The buyer must file TDS returns with the Income Tax Department and issue a TDS certificate (Form 16B) to the NRI seller.
Pay TDS online: The buyer is responsible to pay TDS online with the government through the designated TDS payment portal.
Tax exemptions and reliefs available for NRIs on property sale
NRIs selling property in India may be eligible for certain exemptions and reliefs under the Income Tax Act, such as:
Exemption under Section 54: If the NRI reinvests the capital gains from the sale of a residential property into another residential property, they may be eligible for an exemption from long-term capital gains tax.
Indexation benefit: For long-term capital gains, NRIs can avail of the indexation benefit, which allows adjusting the cost of acquisition for inflation, thus reducing the taxable capital gain.
How to save on TDS on Sale of Property by NRI?
Non-Resident Indians (NRIs) selling property in India can reduce or save on TDS liability through legal provisions. The standard TDS rate on property sales by NRIs is 20% (plus surcharge and cess) on long-term capital gains. However, this can be reduced if the actual capital gain is lower than the sale value.
To save on TDS on sale of property by NRI, the seller can apply for a lower or nil TDS certificate under Section 197 of the Income Tax Act by submitting Form 13 to the Assessing Officer. Upon approval, the Income Tax Department issues a certificate directing the buyer to deduct TDS at a reduced rate.
Additionally, reinvesting capital gains in specified assets under Section 54 or 54EC can offer exemptions and reduce tax liability. Proper documentation, advance planning, and consulting a tax expert can help NRIs stay compliant while optimizing their tax outgo on property sales.
Recent amendments impacting TDS rates for NRIs
Recent amendments to the Income Tax Act have introduced provisions to reduce the burden on NRIs selling property. For example, the TDS rates for NRIs selling property may be lowered for those claiming benefits under Double Taxation Avoidance Agreements (DTAA) between India and their country of residence.
Common mistakes to avoid when dealing with TDS on property sales by NRIs
Incorrect TDS rate: Ensure the correct TDS rate is applied based on whether the capital gain is long-term or short-term.
Failure to obtain a lower TDS certificate: If applicable, failing to apply for a lower TDS certificate may result in excess TDS deduction.
Non-compliance with TDS filing: The buyer must ensure timely filing of TDS returns and issuance of Form 16B to the NRI.
Documentation required for TDS compliance in property transactions involving NRIs
The following documents are required for TDS compliance in property sales:
Sale deed: Proof of property transfer.
PAN of buyer and seller: Mandatory for TDS deduction.
TDS challan: Proof of TDS payment made to the Income Tax Department.
Form 16B: TDS certificate issued to the seller by the buyer.
How to claim refund on excess TDS deducted for NRIs?
If excess TDS is deducted, NRIs can claim a refund by:
Filing an Income Tax Return (ITR): The NRI can file their ITR for the relevant assessment year, declaring the excess TDS deducted.
Claiming refund: After processing the return, the Income Tax Department will issue a refund for the excess TDS.
Impact of Double Taxation Avoidance Agreements (DTAA) on TDS for NRIs
The Double Taxation Avoidance Agreement (DTAA)between India and the NRI’s country of residence may provide relief by reducing the TDS rates. NRIs can benefit from reduced TDS rates on capital gains if the DTAA agreement allows for preferential treatment.
Role of PAN and TAN in TDS deductions for NRI property transactions
The Permanent Account Number (PAN)of both the buyer and seller is mandatory for TDS deductions. Similarly, the Tax Deduction and Collection Account Number (TAN)of the buyer is required to file TDS returns. Without these numbers, the TDS deduction may not be valid.
Timeline and process for depositing TDS with the Income Tax Department
TDS deducted by the buyer must be deposited with the Income Tax Department within 7 days from the end of the month in which the deduction is made. This can be done through the online TDS payment portal.
Penalties for non-compliance with TDS provisions in NRI property sales
Failure to comply with TDS provisions can result in penalties, including:
Interest charges: For delay in TDS payment or filing returns.
Penalties: For failure to deduct TDS or for incorrect TDS deduction.
Conclusion
TDS on property sales by NRIs is a critical aspect of tax compliance. NRIs must understand the TDS rates, calculate the deductions accurately, and ensure timely payment and filing of returns. By obtaining a lower TDS certificate when applicable, claiming available exemptions, and avoiding common mistakes, NRIs can manage their property sales smoothly. Furthermore, understanding the role of pay TDS online ensures that the transaction complies with tax laws and avoids penalties. By following these steps, NRIs can avoid complications and ensure that their tax liabilities are correctly managed.
