As per Section 195, any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest on securities) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head Salaries) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.
In other words, when any person purchases an immovable property from a non-resident, TDS is required to be deducted on the amount of the capital gain (not on the sale proceeds) arising to such non-resident as per Section 195 of the Income Tax Act. However, such capital gain is required to be computed by the Assessing Officer (not by the purchaser or seller himself). If the seller do not want to reach Assessing Officer for the computation of the capital gain, then the TDS is required to be deducted on the sales proceeds not on the actual capital gain.
Note: – Section 194IA (TDS @1% on all the immovable property transaction where the consideration exceeds Rs. 50 Lakhs) is applicable only when the property is purchased from Resident Indian.
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 2 years or more then the gain arising to the non-resident is long-term in nature and taxable @ 20% (plus surcharge and cess).
The effective rate of TDS in case of long-term capital gain for the financial year 2018-19
| PARTICULARS | LESS THAN 50 LAKH | 50 LAKH TO 1 CRORES | MORE THAN 1 CRORES |
| Tax Rate | 20% | 20% | 20% |
| Add: Surcharge | 0% | 10% of above | 15% of above |
| Total Tax including Surcharge | 20% | 22% | 23% |
| Add: Cess | 4% | 4% | 4% |
| Applicable TDS Rate | 20.80% | 22.88% | 23.92% |
Short Term Capital Gain – If the property is held for a period of less than 2 years 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.
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.
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.
Important Point
- The computation of capital gain cannot be done by the Seller himself and shall be done only by the Income Tax Officer.
- In case the certificate is not available then it is advisable to deduct the TDS on the whole amount of the sale proceeds with the highest 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.
Other General 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 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.
