TDS (tax deduction at source) is something that continues to be an enigma to many of us still today, considering that we’re sometimes in the dark about how it is implemented and the rules governing its execution. Jokes aside, NRIs (non-resident Indians) should definitely be aware of TDS laws which govern property transactions of which they are a part. This will keep them on the right side of the fence (whichever way you interpret this!) and keep future hassles successfully at bay!
Core points worth remembering
The biggest point here is that there is no threshold/limit mandated for TDS being applicable in case of non-resident Indians. As a result, all kinds of transactions covering immovable property are subjected to the execution of TDS in the country courtesy the payer. The need to deduct TDS for payments made to an NRI applies in case of all immovable property transactions where income is gained by the NRI in question. The transactions which are covered here include rent payments to a non-resident Indian, payments for buying property from an NRI and so on.
For those recipients who are residents, transactions covered under this principle include buildings and land and also in case the value of the transaction crosses Rs. 50 lakhs. In case of NRIs, transactions for smaller amounts in case of purchase of any immovable property or its rights will be covered under TDS. In case the landlord/seller insists that he/she is not an NRI and a resident of India, make sure that there is a clause integrated into the agreement for lease/sale in order to protect your own interests, if you are the renter/buyer.
Here are some other aspects worth keeping in mind in this regard.
- The Finance Act is what mandates the rate of deduction.
- The rate of TDS is 20% on capital gains (long-term) on property.
- The rate is 30% in case of rental income.
- In case of short-term capital gains, the TDS rate is also 30%.
- In case a lower rate has been mandated, the lower rate can also be used for deductions.
- The tax has to be deducted from the amount which is taxable in the country. For instance, if there is a property rented out from an NRI, the 30% TDS deduction has to be made from the rental amount that is payable on your part. The tax has to be deducted on the balance sum which is taxable.
- For buying property from an NRI, the regular process will have to be used for working out the capital gains which are taxable. The 20% rate can be applicable on the computed long-term capital gains.
- In case you do not get proof of taxable capital gains, you can deduct TDS at 30% or the rate given in the double tax avoidance agreement between the NRI’s country of residence and India.
- In case the seller has investments giving him/her exemptions under Sections 54EC, 54F or 54, you can get him/her to obtain a no-tax deduction at source certificate from the jurisdictional tax authority or find out yourself with the documents provided by the seller to get this order.
Some other crucial aspects worth keeping in mind
- The TAN (tax deduction account number) has to be obtained prior to making payments to any NRI.
- The tax has to be deducted at the time of payment/credit whichever comes earlier.
- The tax that has been deducted has to be deposited as credit within 7 days from the end of the month in which it has been deducted to the Central Government.
- The quarterly return of Form Number 27Q has to be provided within a particular time period along with a TDS certificate copy to the NRI.
- There are strict penalties if you delay in quarterly return filing and delays in providing the TDS certificate to the particular payee in question.
- In case of remittance of payment outside the country, a certificate has to be obtained by the payer from a CA (chartered accountant) which has to be given with the application for remittance to the bank. This is not necessary in case the payment is being made to the NRI’s non-resident ordinary account.
- In case the property is jointly owned where one/multiple owners are NRIs and the others are resident Indians, you will have to go by the laws that apply for NRIs and resident Indians alike.
- TDS thus has to be deducted at the rate specified along with the surcharge and health and education cess applicable by the buyer in case the seller is an NRI in a specific financial year, on the capital gains which are taxable on the sale of immovable property.
- The rate is 20% for long-term capital gains and 30% for short-term capital gains.
Exemptions on capital gains for NRIs
- Section 54/54F- This exemption is offered when the NRI invests the taxable capital gains amount into buying a new property. The exemption will be limited only to the total capital gains. This property can be bought 1 year prior to the sale or 2 years post sale of the property. The gains can be invested in the construction of property although it should be finished within a period of 3 years from the sale date. The exemption applies for property located within India. Depositing of gains in any PSU/other bank under the Capital Gains Account Scheme may help get exemption as well. The NRI should not have more than one home property in India except the new house. The whole sale receipt has to be invested in case of Section 54F and the NRI should not construct within 3 years any other residential home or buy the same within a period of 2 years.
- Section 54EC- Tax savings are possible on long-term capital gains through investments in bonds issued by bodies like the REC (Rural Electrification Corporation) and NHAI (National Highways Authority of India) among others. These can be redeemed after a 3-year period and should not be sold prior to the expiry of 3 years from the sale date of the property. 6 months is the time period given for investing proceeds of the sale in these bonds. The maximum investment is Rs. 50 lakhs for one year in such bonds.
As can be seen, there are quite a few TDS rules and regulations applying to property transactions with NRIs. Keeping these in mind is a must in order to keep issues at bay in the future.