With the robust growth in the Indian real estate market there is enhanced interest to own a residential property and benefit from increasing property prices or to simply earn passive incomes.
If you are among those individuals who are involved in a property transaction (either as a buyer or a non-resident seller) where the seller of the property is a NR, then it would be imperative for you to be aware of the compliance provisions relating to Tax deduction at source (‘TDS’).First and foremost, it will be pertinent for the buyer of the property to ascertain whether the seller is a NR or not as per the specific provisions of the Income Tax Act, 1961 (‘the IT Act’). This can be done by requesting stay details of the seller in India for the relevant financial year (‘FY’).
This article focuses on TDS compliances which need to be complied with by a buyer while buying a property in India from a NR taxpayer.
Compliances to be undertaken by the Buyer of property
As per the provisions of the IT Act, person responsible for making payment to a NR, any sum chargeable to tax, is required to deduct appropriate TDS at the time of such payment. Accordingly, buyer of the property is required to comply with the following:
- Obtaining a Tax Deduction Account Number (‘TAN’) – Buyer is required to apply with the Indian Revenue Authorities (‘IRA’) and obtain a TAN for deduction and deposition of TDS amounts.
- TDS Deduction – Deduct appropriate TDS at the time of making any and every payment to the NR seller. This is independent of the quantum of the sales consideration or whether the payment is made to NRO/ or any other bank account of the seller.
- TDS Deposition – TDS deducted as above should be deposited to the government treasury within 7 days from the end of the month in which such tax is deducted. In case the taxes are deducted in the month of March then TDS is required to be deposited on or before 30th April.
Practically, the concerned Registrar while registering the sale deed of the property may sometimes verify the TDS deducted on the sale of property, hence one needs to have the TDS deposited before proceeding with execution of the sale deed.
- Filing of TDS Return – Buyer is required to file quarterly withholding tax Return (in Form 27Q) within the prescribed timelines [i.e., On or before 31st of the month immediately succeeding the quarter in which TDS is deducted. In the case of the last quarter (Jan-March), the due date is 31st May].
- Issuance of TDS certificate – Issue the TDS certificate (in Form 16A as downloaded from the TRACES portal) to the NR seller within 15 days from the due date of filing of the TDS return.
Applicable rate of TDS
The buyer of the property is required to deduct TDS at the time of making payment to the NR seller at the following prescribed rates:
*TDS rates would be further increased with applicable surcharge (subject to a maximum of 15% in case of LTCG) and applicable education cess.
Technically speaking the buyer of the property is required to deduct TDS on the income element (i.e. computed capital gains) and hence is required to review the quantum of the taxable capital gain income. Considering the practical difficulties associated for the buyer to verify all of this (as the seller may claim capital gains exemption basis proposed re-investment in another property, actual computation may result in loss due to cost of acquisition/ improvements, Tax treaty benefits etc.), as a prevalent market practice TDS is deducted at the aforesaid rates on the total sale consideration.
The same may significantly impact the cash flow of the NR seller as a portion of the sale consideration gets blocked in the form of TDS, which can only be claimed as offset against the advance tax/ self-assessment tax liability (if any) against the other income of the NR seller or as a refund (if applicable) in the India tax return for such year.
Certificate for Lower or Nil deduction of tax
To provide clarity for the buyer and ease the TDS burden for the seller, there are prescribed provisions under the Act wherein the income-tax officer can issue a lower / nil TDS certificate basis the specific facts of the case.
As per the provisions of the IT Act, either the buyer or seller of the property, may file an application for obtaining a certificate for lower or nil deduction of tax along with prescribed documents and information. Upon receipt of such certificate, the buyer is required to deduct TDS at the rates prescribed in the certificate only. Process of obtaining certificate needs some time, hence you should appropriately factor the same in the agreed payment terms / completion of transaction.
In a summary, either if as an NR you are selling a property in India or as a buyer you are purchasing a property from an NR, you need to be mindful of TDS compliances and related issues, to ensure a smooth transaction and correct compliances.
Also, if the NR seller intends to remit money outside India, he/ she would need to evaluate the provisions of Foreign Exchange Management Act, 1999 (‘FEMA’) in terms of permissibility as well as take note of other prescribed compliances such as filing of Form 15CA, 15CB, etc., as may be applicable at the time of making the remittance.
The author is National Leader, Global Mobility Services – Tax, KPMG in India
