Understanding TDS on Property Sale for NRIs: Rates, Deductions & Compliance

When a Non-Resident Indian (NRI) sells property in India, Tax Deducted at Source (TDS) becomes an essential part of the process. The buyer of the property is required to deduct TDS before making the payment to the NRI seller. Understanding the applicable rates, calculation methods, exemptions, and penalties is crucial to ensure compliance and avoid unnecessary complications. 

What is the TDS Rate on Sale of Property by an NRI? 

The Tax Deducted at Source (TDS) on the sale of property ranges from 13% to 14.95% for properties held for more than 24 months. For properties held for less than 24 months, the TDS rate can go up to 39%. One significant point to note is that TDS is calculated on the total sale consideration of the property, not just the gain made by the NRI seller. This often results in a higher tax deduction unless the seller applies for a Lower Deduction Certificate (LDC) under Section 197 of the Income Tax Act, which allows TDS to be determined at a rate closer to the taxable capital gains. 

Who is Liable to Deduct TDS? 

The responsibility to deduct TDS lies with the buyer of the property. The buyer must deduct TDS at the applicable rate when making payment to the NRI seller and then deposit it with the Indian government. To comply with this requirement, the buyer needs to obtain a Tax Deduction Account Number (TAN), without which the TDS cannot be deposited. After depositing the TDS, the buyer is also required to file a TDS return and issue Form 16A to the seller as proof of tax deduction. 

How is TDS Calculated on Sale of Property by NRIs? 

Calculating TDS involves determining the total sale consideration of the property and applying the appropriate TDS rate. For instance, if the property is sold for ₹1 crore and qualifies as a long-term capital gain, the TDS deduction would be 12.5% on the sale consideration, amounting to ₹12.5 lakhs. Including surcharge and cess may increase this amount. If the seller has obtained an LDC, the reduced TDS is calculated only on the sale consideration, which can significantly reduce the tax liability. 

Exemptions and Deductions Available 

For long-term capital gains, several exemptions are available under certain conditions: 

• The entire capital gain amount is exempt if it is reinvested in the purchase of another residential property within the specified timeframe. 
• The capital gain is exempt if it is invested in bonds issued by the National Highways Authority of India (NHAI) or the Rural Electrification Corporation (REC) within six months of the sale. 
• If the property sold is not a residential property, the exemption can still be claimed by investing the proceeds in a residential property in India. 

What to Do if Excess TDS is Deducted? 

In cases where the buyer deducts more TDS than required, the NRI seller can claim a refund by filing an income tax return. During the return filing, the seller can report the actual capital gains and the TDS deducted. If the TDS exceeds the seller's tax liability, the excess amount will be refunded by the Income Tax Department. However, it is important to note that 31^st July is the due date of filing the income tax returns and it generally takes 60 to 90 days for the Income Tax Department to process the refund. 

Penalties for Non-Compliance with TDS Requirements 

Failure to deduct or deposit TDS correctly can lead to interest consequences on the buyer. Non-compliance may result in an interest being levied to the TDS amount not deducted or deposited. Additionally, interest at the rate of 1% per month for non-deduction and 1.5% per month for late payment is charged. The buyer could also be regarded as an assessee in default thereby by could be subject to severe consequences. 

Conclusion 

Selling property in India as an NRI involves a detailed understanding of TDS regulations, tax rates, and compliance requirements. Buyers must ensure that TDS is deducted at the correct rate and deposited with the government, while sellers should focus on availing exemptions and addressing excess deductions promptly. Proper documentation and timely filing of tax returns are key to avoiding penalties and ensuring a smooth transaction.

If you're an NRI planning to sell property in India, consulting with a tax professional can help you navigate the complexities and minimize your tax liability. Need expert guidance? Get in touch with a tax consultant today to ensure a hassle-free transaction.

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