income tax

TDS Deductions for Property Purchases from NRIs: A Comprehensive Guide

Overview of TDS Deductions for Property Purchases from NRIs

Effective from July 23, 2024, buyers of immovable properties from Non-Resident Indians (NRIs) are required to deduct Tax Deducted at Source (TDS) at a revised rate of 12.5%. This rate includes a surcharge of 15% and a health and education cess of 4%, culminating in an effective TDS rate of 14.95%. Compliance with Section 195 of the Income Tax Act mandates that buyers subtract TDS based on the entire sale consideration unless the NRI seller presents a certificate for a lower deduction.

For transactions involving installment payments, TDS must be deducted on each installment, accompanied by quarterly reporting via Form 27Q. Payments to NRI sellers should also adhere to the Foreign Exchange Management Act (FEMA), necessitating that the sale proceeds be deposited into the seller’s Non-Resident Ordinary (NRO) account. Though payments to a Power of Attorney (PoA) holder are permitted, specific conditions must be met, including explicit authorization in the PoA, documentation in the sale deed, and prompt transfer of funds to the NRI’s NRO account. Non-compliance may lead to regulatory scrutiny. When paying to the NRO account, the buyer must file Form 15CA and obtain Form 15CB from a Chartered Accountant to confirm tax compliance.

It is advisable for buyers to prioritize adherence to both Income Tax and FEMA regulations to avoid penalties and ensure the transaction process is smooth.

TDS Deduction for Property Purchase from NRI

Query 1: Total TDS Deduction for Property Purchase

Relevant Provisions of the Act:

  1. Section 195 of the Income Tax Act, 1961:
    This section requires any individual making payments to a non-resident that are subject to tax under the Act to deduct TDS at specified rates. Therefore, when purchasing immovable property, the buyer must deduct TDS on the sale consideration owed to the NRI seller.

  2. Amendments in Finance Act, 2024:
    From July 23, 2024, the TDS rate for such transactions is set at 12.5% on the sale consideration, subject to the relevant surcharge and cess.

  3. Surcharge and Health & Education Cess:

    • Surcharge: Capped at 15% for long-term capital gains (LTCG) taxable under Section 112A and short-term capital gains (STCG) taxable under Section 111A.
    • Health and Education Cess: Charged at 4% on the total which includes income tax and surcharge.

Buyer’s Obligations

The resident buyer must ensure that TDS is deducted either on the full sale consideration or the lower rate if confirmed by the Income Tax Department. If the NRI seller does not provide a certificate for lower deduction, the buyer should deduct TDS on the complete sale amount to remain compliant with Section 195.

Compliance and Reporting

Typically, sellers stipulate that TDS payment must be made before the property registration at the sub-registrar's office. If payment is structured in installments, TDS must be deducted from each installment. Quarterly reporting of TDS payments to non-residents should be done using Form 27Q.

Conclusion for Query 1

After July 23, 2024, buyers must deduct TDS at the prescribed rate of 12.5% for LTCG. Including the 15% surcharge and 4% cess, the total effective TDS rate will be 14.95%.

Sale Consideration Payment: NRI Seller or Power of Attorney Holder

Query 2: Payment of Sale Consideration to NRI Seller or POA Holder

When a resident buyer is purchasing property from an NRI seller, compliance with Income Tax laws and FEMA regulations is crucial.

Preferred Payment Method

Direct Payment to NRO Account

  • FEMA Requirement: It is mandatory under FEMA that the proceeds from the sale of property by an NRI must be directed into their NRO account. This ensures proper regulation and tracking of funds.
  • Tax Compliance: Direct payments to the NRO account simplify adherence to Section 195 since the buyer deducts TDS and transfers the net payment to the seller’s NRO account.

Alternative Payment Method

Payment to Resident Power of Attorney Holder
If the NRI has granted a valid PoA to a resident to act on their behalf, payments can be made to the PoA holder temporarily. However, this approach should only be considered if:

  • The PoA clearly authorizes the holder to receive the sale consideration.
  • The sale deed and supporting documentation confirm the PoA holder is collecting the funds on behalf of the NRI seller.
  • The power holder must deposit the funds directly into the NRI seller’s NRO account without delay.

Risks of Non-Compliance

Paying the power holder could lead to regulatory scrutiny under FEMA or inquiries from tax authorities if the funds are not appropriately transferred to the NRI seller's NRO account.

Key Regulatory and Tax Considerations

Form 15CA/15CB Filing:
For remittances to an NRO account, the buyer must complete Form 15CA and secure a certificate in Form 15CB from a Chartered Accountant to affirm that tax compliance is met prior to remittance.

FEMA Compliance:
Sale proceeds must be directed to the NRI seller's NRO account per RBI regulations, allowing for subsequent repatriation of up to USD 1 million per financial year, assuming tax obligations are fulfilled.

Professional Recommendations

Preferred Route:
It is advisable to directly transfer the sale consideration into the NRI seller’s NRO account after deducting TDS, which minimizes regulatory risks and complies with FEMA.

Power Holder Route (if necessary):
Ensure the PoA explicitly stipulates the power holder's authority to manage sale proceeds, and ensure prompt deposit into the NRO account. Maintain thorough documentation to support this arrangement in case of future audits.

Conclusion for Query 2

To comply with FEMA regulations, the sale consideration must ultimately be deposited into the NRI seller’s NRO account, thereby alleviating regulatory risks and confirming adherence to legal requirements. In summary, the resident buyer is obligated to deduct TDS in favor of the NRI seller when purchasing immovable property.