For Indians, Investing in a house property is common and popular. Many NRIs having own house properties in India and they also sell them. In such cases besides finding a buyer, it is also essential to understand the tax implications in case of sale of property by an NRI, particularly TDS (Tax deduction at source) provisions. If you don’t then a huge portion of sales consideration may get blocked in the form of TDS for months and sometimes for a year and more than that too.
In this article we will discussed the tax implications on sale of property located in India (who is also a non-resident under Income Tax Laws) for an NRI and how he/she can avoid huge amount of TDS.
How much tax is payable by NRI on sale of property?
The tax payable on sale of property depends on two facets –
- Time period of property; and
- Capital gain amount arising on sale of property
Time Period–
The property is considered as long term capital asset if the property is held for more than 2 year. Capital gains arising on transfer of such assets are liable to 20 % tax (plus surcharge & cess).
If the property is held for up to 2 years, it is counted as short term capital asset. Capital gains in such case are taxed according to the applicable slab rates (plus surcharge & cess).
How is capital gain amount calculated?
For calculating capital gains, the cost of total purchase of property is deducted from sales consideration amount.
In addition, any cost of improvement incurred on the transfer expenses on sale are deducted too. If the property is long term, the profit of increase in sales consideration due to inflation is available. This means that instead of deducting the actual purchase cost and improvement costs, indexed purchase cost and indexed improvement cost are deducted from sales consideration to calculate capital gains. Such indexed costs are calculated by applying cost inflation index notified by the Government.
When is the tax payable by NRI?
As per the IT laws, the buyer is needed to deduct tax at source from sales consideration and deposit the same to Indian Government Treasury. So the buyer deducts TDS and pays the balance amount to NRI seller.
However, if the tax is not deducted by the buyer, NRI seller is needed to pay the same as advance tax in the same FY in which the property is sold.
How much amount is required to be deducted as TDS?
If the property is held for up to 2 years, the tax is deducted according to the income tax slab rate applicable on the NRI (plus surcharge and cess);
If the property is held for more than two years then the tax is deducted at 20% (plus surcharge and cess)
Ideally, the TDS is needed to be deducted on the capital gains amount. Commonly the buyers deduct the TDS on the sale consideration amount. So the TDS amount could be higher than the actual tax liability of NRI arising on sale of property.
TDS amount is deducted whenever buyer made payment to the NRI. So even when any advance is paid for the property, TDS requires to be deducted.
What happens to the TDS amount? Can We get back the TDS amount?
The TDS amount deposited by the buyer is counted as income tax paid on behalf of the NRI. If the buyer has filed the accurate TDS return details then TDS will be appearing in NRI’s Form 26AS. Also, from the buyer, the NRI should take Form 16A which is a proof that TDS has been deposited by the buyer.
An NRI needs to calculate his/her income tax liability in India for a given FY. If the NRI’s total tax liability is less than total tax deposited, including TDS, then the excess amount can be claimed as refund from the IT by filing the ITR.
Can An NRI File The ITR Immediately After TDS And Claim The Refund For Excess TDS?
Under Indian IT laws, the ITR is filed annually for a given FY. So it may not be possible to file ITR immediately.
NRI will need wait while the completion of the FY to file the ITR has not been completed to claim the refund for excess TDS.
Is there any option available by which an NRI can request the buyer to deduct less tax at source?
An NRI may ask buyer to deduct TDS on the actual capital gains amount instead of sales consideration by showing the documentary evidence for costs incurred like conveyance deed.
However, the TDS provisions cast an obligation on the buyer to deduct TDS. If the buyer does not deduct TDS, the IT Department could scrutiny the buyer and may recover taxes too, interest and penalty from the buyer. So the buyer generally does not agree and insists on deducting TDS on sales consideration.
In this case, the NRI can file an application in Form 13 with the IT Department and request to issue a certificate for nil/lower deduction of TDS. If such certificate is issued by the Department and given to the buyer, the buyer will deduct the TDS at the specified rate in the certificate.
The rate is calculated by the IT Department after considering the documents, including income tax computation, filed by the NRI. An NRI can take help of a CA to get certificate for nil/lower deduction of tax at source.
How much time does it take to get lower/nil TDS certificate?
After submission of Form 13, generally it may take approx. 3-4 weeks to get a TDS certificate.
However, due to the current COVID situation, it may take long time. So, it is advice for an NRI to plan accordingly.
What are the documents required to be submitted with Form 13?
Form 13 requires certain documents. Like
- Conveyance deed for purchase of property,
- Agreement to sell,
- Proof for receipt of advance payment,
- Estimated computation of income for the FY in which property was sold.
Here, it is essential to note that TAN of the buyer is required to be filled in Form 13.
TAN is a unique 10-digit alpha-numeric number which is allotted by the IT Department to a person who is required to deduct TDS.
Can an NRI repatriate the sale consideration outside India?
Yes, an NRI is allowed to remit up to $1 million per calendar year out of sale proceeds of assets.
NRI needs to submit few documents with the remitting bank, including Form 15CA & Form 15CB.
Form 15CA and 15CB can be filed by the portal Income Tax e-filing portal. While Form 15CA is needed to be filed by the NRI to make information for payments to non-resident, Form 15CB is a certificate issued by a CA in case of such payments.
There are no need of any documents with these forms. Only details, like as NRIs information (for PAN, address, bank account details), amount of remittance, TDS amount etc. are important to be filled.
Is there any obligation on NRI post sale of property and deduction of TDS?
NRI is required to file ITR for the FY in which property was sold. The due date for filing the ITR is July 31st of the following FY.
If there was loss on sale of property and NRI does not have any other income taxable in India, he/she is not essentially required to file ITR in India.
For example – Assume that you have long term capital loss of INR 6 lacs from sale of property in FY 2020-21. You have sold another property in FY 21-22 on which you have long term capital gain of INR 10 lacs. If you have filed ITR for FY 2020-21 within the due date, you can claim set-off for the loss of INR 6 lacs against gain of INR 10 lacs. Amount of taxable capital gain in FY 2021-22 shall reduce to INR 4 lacs (10 lacs– 6 lacs).
Note – The date for filing ITR for the FY 2020-21 has been extended to September 30, 2021
Is there any legal way of reducing tax liability arising on sale of property?
If the capital gain is long term in nature, tax liability can be reduced by making some investments within a specified time limit. Such investments also require to be held for a specified time period. The reduction in tax liability depends on the amount of investment.
Such investments are-
- Buy one residential house in India – This option is available only if the property sold was a residential house too.
- Purchase of 2 residential houses in India – This option is available in two conditions (a) the property sold was a residential house too; (b) capital gain amount on sale of property does not exceed INR 2 crore. This option to buy two houses can be exercised for only one FY in the entire lifetime by the NRI.
- Investment in notified bonds issued by the NHAI) or REC redeemable after 5 years.