NRIs who wish to sell their property in India are often confused regarding the concepts of Tax Deducted at Source, the sections applicable, the percentage for the same, and any exemptions availabe.
- What is TDS?
The concept of TDS was introduced with an aim to collect tax from the very source of income. As per this concept, a person (deductor) who is liable to make payment of specified nature to any other person (deductee) shall deduct tax at source and remit the same into the account of the Central Government. The deductee from whose income tax has been deducted at source would be entitled to get credit of the amount so deducted on the basis of Form 26AS or TDS certificate issued by the deductor.
- How does it affect NRIs?
NRIs are subject to a Tax Deducted at Source (TDS). The Income Tax department requires that if there is capital gain arising out of sale of property in India, then the corresponding income tax should be paid in India.
Since NRIs stay outside India, it is fairly difficult to ensure Capital Tax Gain compliance after the property transaction is completed. Therefore, the Income Tax Department has set forth rules whereby it is mandatory for the buyer to deduct tax at source. This is done at the time of making payment to NRI seller. The procedure of TDS deduction is followed under section 195 of the Income Tax Act.
NRIs who sell purchased property after two years (Reduced from 3 years to 2 years in Budget 2017) from the date of purchase will incur long term capital gains tax 20%. (The gains are calculated as the difference between sale value and indexed cost of purchase. Indexed cost of purchase is nothing but the cost of purchase adjusted to inflation.)
If the NRI sells the property before two years have elapsed since the date of purchase of the said property, short term capital gains tax at his or her tax slab is incurred. (Short term capital gain is calculated as the difference between the sale value and the cost of purchase – without the indexation benefit). The NRI will be subject to a TDS of 30 % irrespective of his or her tax slab.
Note- Tax implications for NRIs are also applicable in the case of inheritance. In case the property has been inherited, remember to consider the date of purchase of the original owner for calculating whether it’s a long term or a short term capital gain. In such a case the cost of the property shall be the cost to the previous owner.
- Can NRI get waiver on sale proceeds?
There are certain instances when NRI can get a waiver of TDS. One such case would be 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 no TDS will be deducted either.
Exemptions under Section 54 and Section 54EC
NRIs are allowed to claim exemptions under section 54 and Section 54EC on long term capital gains from sale of house property in India.
Section 54 – This section stipulates that if NRI sells a residential property after three years from the date of purchase and reinvest the proceeds into another residential property (situated in India) within two years from the date of sale, the profit generated is exempt to the extent of the cost of new property.
Example– If the capital gains is Rs 10 lakh and the new property costs Rs 8 lakh, the remaining Rs.2 lakh are treated as long term capital gains. (The sold residential property may be either have been self-occupied property or given on rent. The new property must be held for at least three years.)
(NRIs cannot invest the proceeds on the sale of a property in India in a foreign property and still avail the benefit of Section 54. However, some recent hearings with the appellate authorities have held that exemption can be claimed under Section 54 even if the new house is purchased outside India. This has not been explicitly specified under the law, and it is advisable for an NRI to consult a lawyer/tax expert before making any investment decisions outside India to avail of tax benefits under Section 54.
Also, do remember that this exemption can be taken back if you sell this new property within 3 years of its purchase.)
Section 54EC – This section of the Income Tax Act states that if an NRI sells a long term asset (in this case, a residential property) after three years from the date of purchase and invests the amount of capital gains in bonds of NHAI and REC within six months of the date of sale, he or she will be exempt from capital gains tax. The bonds will remain locked in for a period of three years.
Others methods of getting TDS refund
- If the country of residence has Double Taxation Agreement (DTAA) with Indian government i.e. lower rate of TDS is allowed. NRI need to submit a tax residency certification from the country of his residence. it will certify that you are a tax paying resident in that country and that tax on this income is paid in that country, it ensure no tax leakage for either countries.
For example, In US, the tax residency certificate is called Form 6166. You can make application to the Internal Revenue Service (IRS) in Form 8802. In UK you need to get the tax residency certificate from the HM Revenue and Customs.
- If your total income in India is less than basic exemption limit of 2.5 Lac: In this case, you can apply for TDS waiver with Income Tax officer under whose jurisdiction your case will fall.
However, claiming refund is more tedious process and it is always advisable to apply for NIL Tax Deduction / Tax Exemption / Lower Tax Deduction Certificate. It requires some intelligent planning before sale of property and proactive approach.
- The onus of collecting the TDS and depositing with the Government lies with the buyer. Because since the buyer does not know how much capital gains NRI are making on such transaction, he deducts TDS on the entire sale consideration which is wrong.
What should be done?
There is way to avoid this deduction of TDS on entire sale proceeds. The buyer can get a certificate from Assessing Officer (under Section 195(2)) stating the portion of sale consideration which shall be liable to TDS. Alternatively, it is better that the NRI seller can arrange a certificate from Assessing Officer under Section 195(3) or Section 197 of the Income Tax Act specifying a lower rate of TDS. The buyer on receiving such certificate can deduct income tax at the rate specified in that certificate.
Unless such certificate is obtained, the buyer must deduct TDS on the entire sale consideration. If the buyer doesn’t deduct TDS, he stands in violation of Income Tax Act and the implications are serious. (Refer case: Syed Aslam Hashmi v. ITO)
The buyer must get a Tax Deduction Account Number (TAN) and issue TDS certificate to the seller (NRI) so that income tax return can be filed and refund claimed.
(Tax Deduction and Collection Account Number (TAN) is a 10 digit [9427583067] number issued to persons who are required to deduct or collect tax on payments (the buyer) made by them under the Indian Income tax Act, 1961. The TDS on payments made by assessees is deposited under the TAN to enable the assessees who have received the payments (i.e NRI seller) to claim the tax deducted in their income tax return.)
- How do NRIs get hold of a tax exemption certificate?
NRI selling their properties can apply to the income tax authorities for a tax exemption certificate under section 195 of the Income Tax Act. They must make this application in the same jurisdiction that their PAN belongs to and will be required to show proof of reinvestment of capital gains.
If the NRI is planning to buy another house, the allotment letter or payment receipt will need to be produced; if capital gains bonds are chosen instead, an affidavit to this effect will have to be prepared
Usually, buyers withhold the last installment of payment until the NRI produces a certificate of exemption. (A NRI has up to two years from the date of sale to invest in another property, or up to six months to invest in bonds.)