When a Non-Resident Indian (NRI) sells immovable property in India, the buyer must comply with specific TDS (Tax Deducted at Source) requirements under Section 195 of the Indian Income Tax Act, 1961. Understanding these provisions is crucial for both parties to ensure compliance and avoid penalties. This guide provides a detailed analysis of TDS rates, implications for different transaction dates, and practical advice for seamless transactions.
1. Defining an NRI for Tax Purposes
An individual is considered a Non-Resident Indian (NRI) for tax purposes if:
- They have resided in India for less than 182 days in the current financial year (FY).
- Alternatively, they have resided in India for less than 60 days in the current FY and less than 365 days in the preceding 4 FYs.
- If an Indian citizen or Person of Indian Origin (PIO) leaves India for employment or as a crew member of an Indian ship and meets the above criteria.
- If an Indian citizen or PIO visiting India, with a total Indian income (excluding foreign income) of less than Rs. 15 lakh, resides in India for less than 182 days, or if their income exceeds Rs. 15 lakh, resides for less than 120 days.
2. TDS Provisions for Property Transactions
2.1 Transactions Before 23rd July 2024
For properties held by an NRI for more than two years (classified as Long-Term Capital Assets), the TDS rates before 23rd July 2024 are as follows:
| Sale Consideration | TDS Rate | Surcharge | Total Tax Rate | Effective TDS Rate |
|---|---|---|---|---|
| Less than Rs. 50 Lakhs | 20% | Nil | 20% | 20.8% |
| Rs. 50 Lakhs to Rs. 1 Crore | 20% | 10% | 22% | 22.88% |
| Rs. 1 Crore to Rs. 2 Crores | 20% | 15% | 23.92% | 23.92% |
| Rs. 2 Crores to Rs. 5 Crores | 20% | 25% | 25% | 26% |
| Above Rs. 5 Crores | 20% | 37% | 27.4% | 28.496% |
Example: For a property sold for Rs. 1,50,00,000 before 23.07.2024:
- TDS @ 20%: Rs. 30,00,000
- Surcharge @ 15% on TDS: Rs. 4,50,000
- Total TDS: Rs. 34,50,000
- Health & Education Cess @ 4% on Total TDS: Rs. 1,38,000
- Total TDS to be deducted: Rs. 35,88,000
The seller receives Rs. 1,14,12,000 after TDS deduction.
2.2 Transactions On or After 23rd July 2024
Revised TDS rates effective from 23rd July 2024:
| Sale Consideration | TDS Rate | Surcharge | Total Tax Rate | Effective TDS Rate |
|---|---|---|---|---|
| Less than Rs. 50 Lakhs | 12.5% | Nil | 12.5% | 13% |
| Rs. 50 Lakhs to Rs. 1 Crore | 12.5% | 10% | 13.75% | 14.3% |
| Rs. 1 Crore to Rs. 2 Crores | 12.5% | 15% | 14.375% | 14.95% |
| Rs. 2 Crores to Rs. 5 Crores | 12.5% | 25% | 15.625% | 16.25% |
| Above Rs. 5 Crores | 12.5% | 37% | 17.125% | 17.81% |
Example: For a property sold for Rs. 1,50,00,000 on or after 23.07.2024:
- TDS @ 12.5%: Rs. 18,75,000
- Surcharge @ 15% on TDS: Rs. 2,81,250
- Total TDS: Rs. 21,56,250
- Health & Education Cess @ 4% on Total TDS: Rs. 86,250
- Total TDS to be deducted: Rs. 22,42,500
The seller receives Rs. 1,27,57,500 after TDS deduction.
3. Handling Agreements and Execution Dates
In property transactions, the TDS rate applicable depends on the date of transfer of property rather than the date of the agreement. This distinction is crucial if the agreement is made before the new TDS rates come into effect but the execution occurs later.
Scenario 1: Agreement Before 23rd July 2024, Execution After
- Agreement Date: 01st June 2024
- Execution Date: 01st August 2024
Applicable TDS Rate:
- Since the transfer occurs after 23rd July 2024, the revised TDS rates apply, despite the agreement being before this date.
Example Calculation: For a property sold for Rs. 1,50,00,000, with an agreement on 01.06.2024 but executed on 01.08.2024:
- TDS Rate: 12.5% (new rate)
- TDS Amount: Rs. 18,75,000
- Surcharge @ 15% on TDS: Rs. 2,81,250
- Total TDS: Rs. 21,56,250
- Health & Education Cess @ 4% on Total TDS: Rs. 86,250
- Total TDS to be deducted: Rs. 22,42,500
Seller's Receipt: Rs. 1,27,57,500
Reasoning: The TDS rate is determined based on the date of property transfer. The revised rate applies because the execution date falls after 23rd July 2024.
4. Buyer’s Responsibilities
- Deduct TDS Correctly: Deduct TDS at the applicable rate based on the date of transfer of property. Ensure the correct rate is used to avoid penalties.
- Obtain TAN: Apply for a Tax Deduction Account Number (TAN) and ensure it is used for the TDS deduction process.
- Deposit TDS: Deposit the TDS amount using e-challan by the 7th of the following month. Ensure timely filing of TDS returns.
- Issue Form 16A: Provide Form 16A to the seller after filing the TDS return.
Consequences of Non-Compliance:
- Penalty: If TDS is not deducted correctly, the buyer faces a penalty equal to the shortfall in TDS.
- Interest: Interest under Section 201 will be charged on the defaulted amount.
Example of Penalty: If the buyer incorrectly deducts TDS at 1% instead of the correct rate of 12.5%:
- Shortfall: Rs. 34,38,000 (Rs. 35,88,000 - Rs. 1,50,000)
- Penalty: Rs. 34,38,000
- Interest: Charged on Rs. 34,38,000 from the date of payment to the date of correction.
5. Seller’s Considerations
- Disclose Tax Residency: Clearly inform the buyer of your tax residency status to ensure compliance with TDS rules.
- Repatriation of Funds: Non-compliance with TDS regulations may impact your ability to repatriate funds to a foreign account.
- Seek Tax Advisory: Engage a tax advisor for effective tax planning and to apply for a Lower/Nil Deduction Certificate if applicable.
Advice to NRIs:
- Consult Professionals: Hire a tax advisor to navigate tax laws and ensure compliance.
- Declare Tax Status: Transparency about your tax residency helps avoid legal issues and facilitates smooth transactions.
- Apply for Lower/Nil Deduction Certificate: This can reduce the TDS amount, aiding in liquidity management.
By adhering to these guidelines and understanding the implications of TDS rates based on the transaction date, both buyers and sellers can ensure compliance with Indian tax laws, avoid penalties, and manage their transactions effectively.
