TDS Guidelines for Buying Property from NRIs in India

Understanding TDS while Purchasing Property from Non-Resident Indians (NRIs) in India

While purchasing property from a Non-Resident Indian (NRI) in India, one needs to be aware of the latest Tax Deducted at Source (TDS) regulations, compliance procedures, and steps to ensure a hassle-free, penalty-free transaction. The article presents key TDS terms, with renewed emphasis on those effective from July 2024 for greater clarity.

What is TDS on NRI Property Sale?

In India, while a resident individual buys immovable property (agricultural land excepted) from an NRI, there is a need to withhold TDS prior to making payment to the seller. This has been provided for under Section 195 of the Income Tax Act, 1961, and governed further by the Foreign Exchange Management Act (FEMA).

Current TDS Rates and Calculation (Effective July 2024)

From July 23, 2024 onwards, the rate of TDS applicable on purchase from NRIs is 12.5%. The base rate consists of a 15% surcharge and a 4% health and education cess, which results in an effective TDS rate of 14.95% on sale consideration.

For Long-Term Capital Gains (LTCG): 12.5% (with surcharge and cess)
For Short-Term Capital Gains (STCG): At relevant slab rates (30% + surcharge + cess)

TDS is charged on the entire sale consideration unless a lower deduction certificate (Form 13) is procured from the Income Tax Department by the NRI seller.

Example:

For instance, if sale consideration is ₹1 crore, TDS deduction would be ₹14,95,000 (14.95%).

Step-by-Step Compliance Process for Buyers

Obtain a TAN (Tax Deduction Account Number): This is required for the correct deduction and deposit of TDS.
Deduct TDS on Each Payment: In the event of payment by installments for property purchase, TDS shall be deducted from each payment.
Deposit the So Deducted TDS with the Government: Utilize Challan ITNS 281 to deposit the deducted TDS with the Income Tax Department.
File TDS Return (Form 27Q): Quarterly returns are mandatory for TDS deducted from payments to NRIs.
Issue TDS Certificate (Form 16A):
Provide the TDS certificate to the NRI seller.
Transfer Net Sale Proceeds to the NRI’s NRO Account: As per RBI and FEMA regulations, sale proceeds must be credited to the seller's account in Non-Resident Ordinary (NRO) account. This follows guidelines and allows repatriation of funds (up to USD 1 million in a financial year after deducting tax).
File Form 15CA and Obtain Form 15CB: Prior to remitting money to the NRO account, the buyer must furnish Form 15CA (online return) and procure Form 15CB (certificate of Chartered Accountant) certifying the payment of tax.

Payments to Power of Attorney (PoA) Holders

Even better to pay a resident PoA holder directly, but in a situation where payment is allowed to be made to a resident PoA holder only if:

The PoA document specifically authorizes acceptance of sale proceeds.
The sale deed and original documents substantiate the agreement.
The PoA holder directly credits the money to the NRI's NRO account.

Note: Deviations from this procedure will invite scrutiny under FEMA and Income Tax laws.

Lower TDS Deduction Certificate (Section 197)

If the NRI seller's actual capital gains are less than the sale consideration, the seller may ask the Income Tax Department for a lower TDS deduction certificate (Form 13). The buyer will then deduct TDS at the lower rate only after receiving the certificate.

Penalties for Non-Compliance

Interest: 1% per month for late deduction or payment of TDS.
Late Filing Fee: ₹500 per day delay in submission of Form 27Q.
Disallowance of Property Cost: Not deducting TDS may result in not accepting the property cost as a deduction in case the property is to be sold in the future.
FEMA Violation: Non-compliance may result in action from the authorities and penalty.

Frequently Asked Questions (FAQs)

Can TDS be prevented when the property is sold at a loss? TDS must still be deducted other than when a lower deduction certificate is procured.
Is TDS applicable on land used for farming? No, TDS is not applicable for transactions involving agricultural land.
Do I need a TAN for a single transaction? Yes, TAN must be obtained for all TDS deductions, even if it is one-time.

Buyer's Compliance Checklist

Receive TAN from the Income Tax Department.
Deduct TDS at 14.95% effective rate (unless lower certificate is issued).
Deposit TDS and file Form 27Q on a quarterly basis.
File Form 15CA and obtain Form 15CB before remittance.
Credit net sale proceeds to the NRI seller's NRO account.
Maintain proper documentation for future reference.

This guide aims to simplify the TDS-related process of purchasing properties from NRIs to make it easier to comply and steer clear of potential legal issues.