With the strong growth in the Indian real estate market, there has been an increased interest in owning a residential property and benefiting from rising property prices or simply earning passive income.
If you are one of the 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, it will be imperative for you to know about the compliance provisions relating to Tax Deducted at Source ('TDS'). First and foremost, it would be advisable for a buyer of a property to ascertain whether the seller is a NR as per the specific provisions of the Income Tax Act, 1961 ('IT Act'). This can be done by requesting details of the seller's stay in India for the relevant Financial Year ('FY').
This article focuses on TDS compliance that needs to be followed by a buyer while purchasing a property from an NR taxpayer in India.
Compliances to be made by the purchaser of the property
As per the provisions of the Income Tax Act, the person responsible for paying any amount taxable to NR is required to deduct appropriate TDS at the time of such payment. Accordingly, the buyer of the property is required to comply with the following:
- Obtaining Tax Deduction Account Number ('TAN') – The buyer has to apply to the Indian Revenue Authorities ('IRA') and obtain TAN to deduct and deposit the TDS amount.
- TDS Deduction – Deduct appropriate TDS while making any and every payment to the NR seller. This is independent of the amount of sale consideration or whether the payment is made into the NRO/or any other bank account of the seller.
- Deposit of TDS – TDS deducted as mentioned above must be deposited in the government treasury within 7 days from the end of the month in which such tax is deducted. If tax is deducted in the month of March then TDS is required to be deposited on or before 30th April.
In practice, while registering the sale deed of a property the concerned registrar may sometimes verify the TDS deducted on sale of the property, hence it is necessary to deposit the TDS before execution of the sale deed.
- Filing of TDS returns – The buyer is required to file quarterly withholding tax returns (in Form 27Q) within the prescribed timeline [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 TDS Certificate (in Form 16A downloaded from TRACES portal) to the NR vendor within 15 days from the due date of filing of TDS return.
Applicable rate of TDS
The buyer of the property is required to deduct TDS at the following prescribed rates while making payment to the NR seller:
*TDS rates will be further increased with applicable surcharge (up 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. the calculated capital gain) and hence it is necessary to review the amount of taxable capital gain income. Keeping in view the practical difficulties associated with verifying all this for the buyer (since the seller may claim capital gain exemption on account of proposed reinvestment in another property, the actual calculation may lead to loss on account of cost of acquisition/improvement, tax treaty benefits, etc.), as a prevailing market practice, TDS is deducted at the above rates on the total sale consideration.
This may have a significant impact on the cash flow of the NR seller, as a portion of the sale price gets blocked as TDS, which can only be claimed as a set-off against advance tax/self-assessment tax liability (if any) against other income of the NR seller or as a refund in the India tax return for such year (if applicable).
Certificate for reduced or nil deduction of tax
In order to provide clarity to the buyer and reduce the TDS burden for the seller, there are provisions prescribed under the Act under which the Income Tax Officer may issue a reduced/nil TDS certificate depending upon the specific facts of the case.
As per the provisions of the Income Tax Act, the buyer or seller of a property can apply to obtain a certificate for reduced or zero deduction of tax along with the prescribed documents and information. On receipt of such certificate, the buyer is required to deduct TDS only at the rates prescribed in the certificate. The process of obtaining the certificate takes some time, so you should take it into account properly in completing the agreed payment terms/transaction.
In short, 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 compliance and related issues to ensure smooth transactions and correct compliance.
Further, if the NR seller intends to remit funds outside India, he would need to evaluate the provisions of Foreign Exchange Management Act, 1999 ('FEMA') with reference to permissibility, as well as other prescribed compliances such as filing of Form 15CA, 15CB etc., as may be applicable at the time of remittance.
The author is National Leader, Global Mobility Services – Tax, KPMG in India.