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Under the Income Tax Act of 1961 in India, TDS, or ‘Tax Deducted at Source’ is the tax paid by receiver of goods or services on the overall transfer amount from the provider, under certain situations.
The framework for TDS is reasonably clear when it comes to purely domestic transactions. However, if an NRI is involved in either part of this transaction, there is often some confusion regarding the TDS provisions.
One such instance is the sale of NRI properties in India, and the consequent responsibility to deduct taxes. In this article, we will explain how TDS is applicable on the sale of property by NRI, and how can you use it to your advantage.
TDS requirements when the provider of goods or services is an NRI is explained by section 195 of the Income Tax Act. According to this section, any person who pays to a Non-Resident, any money which otherwise would have been chargeable to tax, at the time of such payment must deduct income tax thereon at the rates in force.
Since the NRI sellers would be paying taxes within India as per the applicable sections on capital gains, the purchaser of property must also compute TDS liabilities as per the capital gains structure of the NRI seller.
The property held by the NRI seller is categorized as a ‘Capital Asset’, which can be a 'Long-Term Capital Asset' or 'Short-Term Capital Asset'.
If the NRI has held the property for more than 24 months, it shall be categorized as a ‘Long-Term Capital Asset’, and thus be liable for ‘Long Term Capital Gains’. Conversely, if the NRI has held the property for less than 24 months, it shall be categorized as a ‘Short-Term Capital Asset’, and thus be liable for ‘Short Term Capital Gains’.
- Long Term Capital Gains shall be facilitated with a concessional rate of tax of 20% on the capital gains amount or sale value
- Short Term Capital Gains shall be computed at the regular slab rates which often translate to 30% on the capital gains amount or sale value
Capital Gains Amount = Sale Consideration (-) Cost of Acquisition (purchase cost to NRI)
NRIs selling property have to get their capital gains amount computed by their Income Tax Officer (Assessing Officer). Once the NRI procures this report from their Assessing Officer, they must provide the same to the buyer who may then deduct the 20% on the capital gains amount.
In absence of the report from the Assessing Officer, the buyer would not be in a position to compute the taxes for the NRI Seller, and thus must deduct the 20% on the entire sale value (and not the capital gains component).
To the benefit on capital gains amount, NRI sellers may avail exemption benefits by reinvesting under the section 54 for residential properties, and under section 54F for commercial properties. However, this benefit is subject to fulfillment of all the requirements under these sections.
NRIs can also invest in bonds issued by select companies which can help minimize taxes by further reducing the capital gains amount by a further 50,00,000 INR, or investment amount if lesser than 50 Lakh INR.
NRI investors may also file for income tax returns with the Indian Taxation Authorities and present their tax calculations. In case of a resultant refund being calculated, they may claim a part of or entire portion of the TDS deducted by the buyer.
To note, this information is given in a general capacity and should not be taken as tax advice. Tax consequences are based on you as an individual, so please consult a tax advisor before taking any actions
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Source used for this article:
All sources checked as of 22nd April, 2019
This publication is provided for general information purposes and does not constitute legal, tax or other professional advice from Wise Payments Limited or its subsidiaries and its affiliates, and it is not intended as a substitute for obtaining advice from a financial advisor or any other professional.
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