Applicability
When any person purchases an immovable property (like land, building, flat etc) from an NRI (Non-Resident), TDS is required to be deducted on the amount of the capital gain, arising to such non-resident as per Section 195 of the Income Tax Act.
Note: – TDS is required to be deducted on the whole sales proceeds if the buyer/seller does not have the lower TDS deduction certificate (more details later in this article). There is no minimum threshold defined for TDS deduction, meaning tax must be deducted on any payment made to a Non-Resident Indian (NRI) if it is taxable in India. Also, Section 194IA (TDS @1% on all the immovable property transactions where the consideration exceeds Rs. 50 Lakhs) is applicable only when the property is purchased from Indian Resident not from Non-Resident.
TDS Rates
The rate of TDS depends on the nature of capital gain arising to the non-resident which are as follows: –
Long Term Capital Gain – If the property is held for a period of more than 2 years, the gain arising to the NRI is a long-term in nature and taxable @ 12.5% without indexation benefit (plus surcharge and cess). However, if property is sold by NRI before 23rd July 2024 then the tax rate is 20% with indexation benefit (plus surcharge and cess).
The effective rate of TDS in case of long-term capital gain for properties sold on or after 23rd July 2024: –
| CAPITAL GAIN / SALES PROCEEDS | LESS THAN 50 LAKH | 50 LAKH TO 1 CRORES | MORE THAN 1 CRORES |
| Tax Rate | 12.50% | 12.50% | 12.50% |
| Add: Surcharge on Tax Rate | 0% | 10.00% | 15.00% |
| Total Tax including Surcharge | 12.50% | 13.75% | 14.38% |
| Add: Cess on Total Tax | 4.00% | 4.00% | 4.00% |
| Applicable TDS Rate | 13.00% | 14.30% | 14.96% |
The effective rate of TDS in case of long-term capital gain for properties sold up to 22nd July 2024: –
| CAPITAL GAIN / SALES PROCEEDS | LESS THAN 50 LAKH | 50 LAKH TO 1 CRORES | MORE THAN 1 CRORES |
| Tax Rate | 20.00% | 20.00% | 20.00% |
| Add: Surcharge on Tax Rate | 0.00% | 10.00% | 15.00% |
| Total Tax including Surcharge | 20.00% | 22.00% | 23.00% |
| Add: Cess on Total Tax | 4.00% | 4.00% | 4.00% |
| Applicable TDS Rate | 20.80% | 22.88% | 23.92% |
Note: The option of paying tax either at a tax rate of 12.5% without indexation benefit or a 20% tax rate with the indexation benefit, for properties acquired before 23-07-2024, is not available to NRI. The above option is available only to Resident Individual and HUF only on transfer of land or building or both (not on other long term assets) and which are acquired before 23-07-2024 as per second proviso to section 112(1)(a).
In nutshell for an NRI , date of transfer of asset will be criteria for deciding the tax rate, no matter whether property was purchased on/before/after 23-07-2024.
Short Term Capital Gain – If the property is held for a period of 2 years or less then the gain arising to the non-resident is short-term in nature and taxable according to the applicable income tax slab. The surcharge and cess shall also be added to the applicable tax rate as per the income tax slab in the similar manner as calculated above for the long-term capital gain.
Note: – TDS is required to be deducted at a rate of 30% (plus surcharge and cess) on the whole sales proceeds if the buyer/seller does not have the lower TDS deduction certificate (more details later in this article).
Calculation of the Amount on which TDS is Required to be Deducted
Section 195 requires deducting TDS only on the amount of income arising to the non-resident. In other words, the buyer is required to deduct TDS only on the amount of capital gain arising to the non-resident, not on the complete sale proceeds. However, such computation is required to be done by the Assessing Officer not the buyer himself.
As per Section 195(2), when the whole amount payable to the non-resident would not be chargeable to tax in the hands of the non-resident then he may make an application to his Assessing Officer for determination of the appropriate proportion of the amount chargeable to tax. The Income Tax Officer shall compute the capital gain and provide a certificate mentioning the amount of capital gain.
Other Important Point
- The computation of capital gain cannot be done by the seller/buyer and shall be done only by the Income Tax Officer.
- Application for obtaining certificate for lower/non deduction of TDS under can be made by either buyer under section 195 (2) or by seller under section 195(3). It means any of them can make such an application to Assessing officer before deducting TDS.
- In case the certificate is not available then it is advisable to deduct the TDS on the whole amount of the sale proceeds according to the applicable tax rate bracket (including surcharge and cess).
- Actual sale consideration shall be used for calculating the amount of TDS. Stamp duty value or circle rate is not relevant for the purpose of computation of TDS.
- One of the main reason for collecting the whole applicable taxes on the income of non-resident in the form of TDS is the complication in the recovery of taxes due to the inherent nature of residency. If there is any short-deduction or non-deduction then the Income Tax Department will force the buyer of the property to deposit the TDS.
- TDS is required to be deducted on each and every payment made to non-resident irrespective of the amount of sales consideration.
- The high rate of TDS is designed for preventing leakage of tax. Any excess TDS deposited can be claimed as a refund by the seller by filing a return of income.
- Section 206AA (TDS at a higher rate if PAN not provided) is not applicable in this case as per the notification issued by Government of India.
- Compliances for Form 15CA and Form 15CB may need to be fulfilled before remitting payment to a non-resident.
Other TDS Requirement for Buyer
A lot of compliances has been applied to the buyer at the time of purchasing the property from non-resident. These compliances are exactly similar which is required to be followed for filling a normal TDS return: –
- Buyer should have TAN (Tax Deduction and Collection Account Number).
- TDS deducted should have been deposited within 7 days from the end of the month in which TDS is deducted. For example, if TDS is deducted on 28th June then the deposit due date is 07thof July.
- TDS deducted is required to be deposited using Challan No./ITNS 281.
- TDS return is required to be submitted within 31 days from the end of the quarter in which TDS is deducted using TDS Form 27Q.
- TDS certificate is required to be generated after filing TDS return within 15 days from the due date of submission of TDS return.
Note: – It is advisable to surrender the TAN number once the transaction for the purchase of property has been completed in order to avoid notice for non-filing TDS return.
