TAX MANAGEMENT September 2018

Pellentesque erat arcu

Selling of property by NRI is taxable under u/s 195 of the Income Tax Act, 1961. Let me clarify most common confusion first, TDS of 1% u/s 194IA is not applicable if seller is NRI. TDS u/s 194IA is only applicable for resident Indian sellers.

Broadly speaking any NRI selling a property in India, there are 3 main points related to taxation as per income tax act, 1961

(a) Type of Capital Gain Tax from Sale of Property: Long term capital gain tax will be 22.66% if NRI is selling a property in India after holding it for more than 2 years. In case holding period is less than 2 years then Short Term Capital Gain Tax will be applicable as per income tax slab. In case of short term capital gain, TDS applicable will be 33.99% irrespective of tax slab of the NRI. Not many people know that Capital Gain Taxation is same for both Resident Indians and NRI’s but only difference is in calculation and deduction of TDS. Basically, the key concern of Income Tax department is that any capital gain arising out of sale of property in India then corresponding income tax should be paid in India. For resident indian seller, as he is staying in India therefore he does not have any other option but to comply with income tax rules and regulations. Since NRI is staying outside India therefore it is very difficult to ensure capital gain tax compliance after the property transaction is completed. In order to ensure compliance, Income Tax Department came out with an innovative idea to ensure that buyer deduct TDS at the time of making payment to NRI seller. TDS u/s 195 is deducted only to ensure capital gain tax compliance.

(b) TDS u/s 195: In case of sale of property by NRI, it is mandatory for buyer to deduct 20.66% TDS on the sale price of the property if capital gain is long term capital gain. In case of short term capital gain, TDS will be 33.99% irrespective of income tax slab of NRI as i mentioned earlier also. Buyer will deposit TDS with Income Tax Department. TDS is applicable even if value of property is less than 50 lakhs. For resident Indian seller TDS of 1% is applicable only if the property value is more than 50 lakhs. Now anomaly in this rule is that NRI is liable to pay Capital Gain Tax only on the Capital Gain arising out of sale of the property but unfortunately TDS is deducted on the total Sale Value of the property. Therefore in most of the cases there are no gains as such from the sale of property and actually NRI incur loss from the sale of the property if TDS refund is not claimed. As a result, NRI has to go through the process of claiming TDS refund from Income Tax Department.

(c) Re-Investment of Capital Gains: In many cases, i observed that to save capital gain tax my NRI clients planned to re-invest the capital gain from sale of property to save capital gain tax. Long term Capital Gain can be invested in either property or tax exempt bonds to save long term capital gain tax. In such cases, NRI can apply for Tax Exemption Certificate from Income Tax Department under section 195 of the income tax act, 1961.
TDS Refund by NRI’S
1.    If your country of residence has Double Taxation Avoidance Agreements (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.

2.    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.
3.    You can claim TDS refund if can show proof of reinvestment of capital gains in India. You can either buy another house in India or invest in capital gains bonds u/c 54EC. You should submit an affidavit stating that you will invest the capital gain amount in capital gain bonds. For property purchase you can produce allotment letter or payment receipts. Instead of claiming refund which is more tedious process it is always advisable to apply for NIL Tax Deduction / Tax Exemption / Lower Tax Deduction Certificate. It require some intelligent planning before sale of property and proactive approach.

How to apply for Nil / Lower Tax Deduction Certificate or Tax Exemption Certificate on Property Sale

NRI Seller can apply for Nil Tax Deduction or Lower Tax Deduction with Income Tax Assessing Office. In case, NRI seller is planning to re-invest capital gain he can apply for tax exemption certificate. Based on assessment by Income Tax Department, certificate will be issued to NRI seller for property sale. In this case, buyer will not deduct TDS u/s 195 on sale consideration value. NRI seller can handover original Nil Deduction Certificate to the buyer for his reference. In short, buyer need not to file any TDS in seller’s name as TDS will not be deducted in this case. Income Tax Department will issue separate certificate to NRI seller for TDS on capital gains. For Tax Exemption Certificate, NRI seller can submit application in Income Tax Department under whose jurisdiction his / her PAN belongs to along with required documents.

(Shubham is a Chartered Accountant and MBA (Finance). She is on the forum of “Economic Times” experts on Taxation.   She specialises in Individual Taxation and Taxation of Freelancers & Small businesses. She can be reached on for answering your tax related questions.)
Please mention “My Powai-Query” in the subject line of the email