If you purchase a piece of property from a Non-Resident Indian (NRI), you need to deduct tax (TDS) under Section 195 of the Income Tax Act, 1961 (ITA).
Tax must be deducted when you make any payment to the NRI for the purchase of a piece of property. This is also applicable in case an advance is being paid. As a buyer, you are liable to deposit the TDS with the Income Tax Department.
“TDS on the purchase of property from an NRI should be deducted from the sale value and the balance amount should be paid to the NRI seller. There is no threshold limit for tax deduction. In case the property is purchased from a resident, then tax is not required to be deducted if the sale value does not exceed Rs 50 lakh (Section 194IA),” says Archit Gupta, Founder and CEO, Clear.
How capital gains are computed on sale of property
The property that an NRI holds is categorised as a capital asset, which can be a long-term capital asset or a short-term capital asset. In cases where a property is sold after a period of two years from the date it was owned, it attracts long-term capital gains (LTCG) tax. On the other hand, in case it is held for less than two years, it attracts short-term capital gains (STCG) tax.
The TDS rates applicable on the sale of an NRI-owned property are as follows:
* LTCG tax on the sale of property held for more than two years: 20%
* STCG tax on the sale of property held for less than two years: According to the subjected Income Tax slab rates for NRIs
In addition, surcharges and cess are also applicable to capital gains.
Points Related to TAN No., TDS Payment, and TDS Return
The buyer of the property has to comply with Section 195 of the Income Tax Act and make other mandatory reporting compliances as below:
Obtain TAN: As a buyer of property from an NRI, you need to mandatorily obtain a Tax Deduction and Collection Account Number (TAN No.) for deduction of TDS.
Deduct TDS: When you as a buyer deduct TDS, it is required to be deposited with the Income Tax Department within seven days from the end of the month in which the deduction has been initiated.
Deposit TDS: TDS must be deposited using Challan No./ITNS 281. e-Payment of TDS can be initiated online through the following website: e-Payment for TIN (egov-nsdl.com).
File TDS Return: After payment of taxes, the buyer has to file a TDS return. It must be furnished in Form No 27Q prescribed by the Income Tax Department. For each quarter in which the TDS has been deducted, a separate Form No 27Q is required to be submitted. The return must be furnished to the government within 31 days from the end of the quarter during which the TDS had been deducted.
Issue Form No 16A: Finally, you as a buyer are also required to provide Form No. 16A to the NRI who is selling the property.
Lower deduction or Nil deduction of tax
“The NRI seller can avail of the facility of Tax deduction at lower rates to the Income Tax Jurisdictional Assessing Officer. The application can be made by the resident buyer of the property (under Section 195(2) of the Income Tax Act) to determine the portion of income liable for a tax deduction. The NRI seller can also apply in Form 13 to obtain a lower/ Nil TDS (under Section 197) for such receipts,” informs Gupta.
The Assessing Officer will issue a certificate mentioning the amount of tax deduction, the basis of which the buyer of the property would be liable to deduct TDS on total sale consideration.
If the buyer or the NRI seller makes no such application to determine the amount on which tax is deductible, the tax needs to be deducted on the entire sale consideration of the property.