Unlike resident Indian, properties purchased from a non-resident Indian will be subject to TDS at prescribed rate. As per section 195 of Income Tax Act,“any person responsible for paying to a Non-Resident, not being a company or to a foreign company, of any interest 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”. Statement looks confusing! let me explain it in detail.
Understadning will be more clear if we dissect the above statement. If you look at the very first phrase which talks about if one is paying any “sum” to a Non-Resident, where such sum is chargeable under the Act, one is required to deduct tax. Hence it says the buyer is liable to deduct tax from the payment made to the seller. Now come to the second part of the statement i.e. 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. This clearly indicates that whether seller has any gains (whether long term capital gains or short term capital gains) or no gains, the buyer has to to deduct tax on that sum.
To clarify further; whether TDS under section 195 buyer has to be deducted on whole of the sale consideration or only on the amount of capital gains in case of purchase of immovable property situated in India from an NRI seller. Answer is; resident buying property from an NRI needs to deduct TDS from the whole sale consideration (not on gains) before making payment to the said NRI.
At what rate such TDS has to be deducted?
Selling of immovable property by a Non Resident Indian is taxable under the income tax under Chapter XII-A of the Income Tax Act, more specifically under section 115E of the Income Tax Act 1961. The rate of tax prescribed and in force is 20%. Further NRI needs to file his/her return of income in India to claim the refund of excess amount deducted if any.
How the buyer should deduct TDS?
Here the buyer of the property from an NRI should have a Permanent Account Number (PAN) before he/she enters into any such transactions. Also he/she have a Tax deduction Account Number (TAN) as per section 203A of the Income Tax Act 1961. Along with the same the buyer should collect the Permanent Account Number (PAN) of the said Non Resident Indian before deducting the tax. The buyer should deposit, (by using challan for payment of TDS), the income tax so deducted, 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, the buyer should file the TDS returns electronically, within the due dates as applicable (to be submitted in the Form No. 27Q) giving the details of the Non Resident Indian, his/her address, PAN along with self PAN and TAN details. After filing the TDS returns electronically, the buyer shall issue the TDS certificate in Form 16A to the said Non resident Indian, within 15 days from the due date of furnishing TDS returns. Remember, if the buyer 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.
Is there a way out to avoid the TDS?
There are certain instances when the NRI can get a waiver of the TDS such as; if the NRI is planning to re-invest the capital gains of the property in another property or in tax exempt bonds. In such cases, the NRI will be exempt from tax in India and would not like to have TDS deducted.
Even there is no capital gain at all in the transaction or the tax payable on capital gain is less that the TDS deducted, then the payer (buyer) can approach the assessing officer and get a certificate of lower or nil deduction of TDS. This is provided in subsection (2) of Section 195. Alternatively, u/s 195(3), payee (the NRI seller) also can approach the AO and get the certificate.
You might want to read: The must knows for NRIs while Buying/Selling properties in India
In such cases, the NRI can apply to the income tax authorities for a tax exemption certificate under section 195 of the Income Tax Act through an application in the same jurisdiction that his PAN belongs to. There he/she will have to show proof of reinvestment of capital gains. If he/she is planning to buy another house, then the allotment letter or payment receipt has to be produced. Even if he/she is planning to invest in capital gains bonds u/c 54EC, he/she would need to submit an affidavit stating that he/she would invest the capital gain amount in to bonds. Usually, the buyer holds back the last installment of payment until this certificate of exemption is furnished to him/her by the seller.
Please note that as per the Finance Act, 2013, TDS at the rate of 1% is applicable on sale consideration above Rs 50 lacs on transfer of immovable property (applicable to resident transferor/seller).
What happens if such TDS has not been deducted or not paid on time:
If the tax is not deducted, the assessee in default is liable to pay interest @ 1% p.m from the month in which the tax is sought to be deducted till the month in which such tax is deducted. Even if the tax deducted, but not paid within the due dates, the assessee in default is liable to pay interest @ 1.50% p.m from the month in which the tax is deducted till the month in which such tax deducted is paid.
In another scenario where the tax deducted at source and the interest, penalty etc are not paid the same can be recovered by the Government from the purchaser by attaching the moveable, immoveable property, attaching the salary & other receivables etc under Section. 222 and 226 of the Income tax Act 1961.
Failure to pay the tax deducted to the government as per the law can attract punishment of rigorous imprisonment of not less than three months but which may extend upto seven years and also a fine which may be decided by the Court as per section 276B of the Income Tax Act 1961.