Withholding Tax on Sale of Property in India: Everything You Need to Know

Withholding tax in India, commonly referred to as Tax Deducted at Source (TDS), is a mechanism under the Indian Income Tax Act, 1961, where a specified amount is deducted from payments such as salaries, interest, rent, professional fees, dividends, etc., by the payer at the time of making the payment. This deducted tax is then deposited with the government on behalf of the payee. TDS enables tracking of personal and corporate transactions and allows steady stream of revenue to the Government.

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Tax on Sale of Immovable Property by NRIs

When a non-resident sells property in India, the transaction attracts tax on the capital gains made by the non-resident. Capital gain refers to the gains arising from the sale of a capital asset, such as property, stocks, bonds, or mutual funds. It is the difference between the sale price of the asset and its purchase price (or cost of acquisition).

Capital gains tax on the sale of property in India by a non-resident depends on the holding period:

·         Long-Term Capital Gains (LTCG): If the property is held for more than two years, it results in long-term capital gains taxed at 12.5%.

·         Short-Term Capital Gains (STCG): If the holding period is two years or less, the gains are treated as short-term capital gains and taxed at the applicable income tax slab rate, typically 30%for non-residents.

Exemptions and Deductions Available for NRIs

If the NRI has earned long-term capital gains on the sale of property, the following exemptions are available, subject to the fulfillment of applicable conditions:

1.     The entire gain shall be exempt if an equal amount is invested in the purchase of another property.

2.     The entire gain shall be exempt if the entire sales proceeds are invested in bonds of the National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC) within six months from the date of sale.

3.     If the gain is on the sale of a property other than residential property, the NRI can avail of exemption (full or pro-rata) by investing the sale proceeds in a residential property in India.

No exemption is available against short term capital gains in the above scenarios.

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Execution of sale through attorney

A non-resident who cannot be physically present in India to handle the legal and administrative procedures for the sale of property generally provides a Power of Attorney (POA). The POA enables a representative to act on their behalf, ensuring compliance with local laws, execution of sale documents, representation before authorities, and completion of formalities such as registration and compliance. This streamlines the process while safeguarding their interests.

It is important to note that the role of the POA holder is limited to executing the transaction for which they are authorized. The responsibility for paying income tax on the capital gains from the sale of the property rests solely with the non-resident seller.

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Withholding Tax on Purchase of Immovable Property

When purchasing immovable property from a non-resident in India, the buyer is required to deduct TDS on the entire sale consideration paid to the non-resident. This is irrespective of whether the non-resident has capital gains on the sale of the property or not. The rate of TDS may extend up to 39% depending on the gains realized.

The fact that the TDS is deducted on the sale consideration results in significant amounts being deducted as TDS at the time of remittance by the buyer to the non-resident.

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Income Tax on Sale of Property Received as Gift or Inheritance

It is common for NRIs to sell property in India which was received by way of a gift from their relative (parents, spouse, etc.) or by way of inheritance. Sale of such property would also attract capital gains tax in India. However, the following points need to be noted:

1.     Cost of Acquisition: The cost of acquisition of the property will be the cost at which it was originally acquired by the donor. If the donor inherited or received the property as a gift, the original cost of acquisition of the person who first acquired the property will be considered.

2.     Holding Period: The period for which the property was held by the donor is also included to determine whether the gain is short-term or long-term. If the total holding period exceeds 24 months, the capital gain is treated as long-term; otherwise, it is considered short-term.

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Reduction of TDS rate through Lower Tax Deduction Certificate(LTC)

A Lower Tax Deduction Certificate (LTC) is issued by the Income Tax Department, confirming either a lower rate of TDS compared to the rate specified under the law or a NIL rate of TDS, depending upon the facts and circumstances of each case.

An NRI may apply for LTC when the actual tax payable is expected to be lower than the TDS on sale consideration.

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Application Process:

To request a certificate for a lower tax deduction, an NRI must submit an application in Form No. 13 electronically. The list of documents required for LTC depends on the transaction and other facts of the non-resident and property. However, the following is a standard list of documents and information that are generally required for the certificate:

·         Income Tax Login Details of the non-resident

·         Access to the TRACES Portal(for filing Form 13 online)

·         Agreement to sell/ Memorandum of sale entered with the Buyer for the sale of the property

·         TDS Account Number (TAN) of the Buyer

·         Copy of Passport of the NRI

·         Property acquisition and purchase-related documents

The certificate is valid from the date of issuance till the end of the financial year for which it has been applied. However, if the Assessing Officer cancels the certificate before its expiry, it becomes invalid. It is essential to note that the certificate is only valid for the specified period in the previous year and cannot be carried forward to future years.

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Conclusion

Understanding the nuances of withholding tax on the sale of property is crucial for both NRIs and buyers. Proper compliance with TDS requirements, tax deduction rules, and exemption provisions can significantly optimize tax liabilities while ensuring adherence to the Indian Income Tax Act Indian Income Tax Act. For NRIs, applying for a Lower Tax Deduction Certificate can help mitigate the financial burden of high TDS rates, providing relief and smoother transactions.

Need expert guidance on navigating withholding tax regulations? Contact us today for tailored advice and support!

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