How tax is calculated on purchasing a property from NRI?
As per Section 195, 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.
In other words, as per the Indian Income Tax Act, when a resident purchases any property from a non resident, he has to deduct income tax (TDS) and pay the balance amount to the seller.
TDS must be deducted at the time of making the payment to the NRI. The information about the TDS being deducted and the rate at which it was deducted should be mentioned in the sale deed between the NRI seller and the buyer.
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 more than 2 years, then it is taxable @ 20% (plus surcharge and cess).
Short Term Capital Gain – If the property is held for 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
In Section 195, 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.
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.
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 28 th June then the deposit due date is 07 th of 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!