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TDS on Sale of Property by NRIs in India

TDS on Sale of Property by NRIs in India

When an NRI sells property in India, the profit earned is classified as capital gains. The type of capital gain—short-term or long-term—depends on how long the property has been held.

Capital Gains Classification for NRIs

  • Long-Term Capital Gains (LTCG): If the property is held for more than two years from the date of purchase, the profit from the sale is treated as LTCG.
  • Short-Term Capital Gains (STCG): If the property is sold within two years of purchase, the gains are considered STCG.

Tax Rates on Property Sale for NRIs

  • STCG (Short-Term Capital Gains): Taxed at 30% of the sale consideration if the property is sold within two years of purchase.
  • LTCG (Long-Term Capital Gains): Taxation depends on the purchase date:
    • Property purchased before 23rd July 2024: Taxed at 20% with indexation benefit.
    • Property purchased on or after 23rd July 2024: Taxed at 12.5% without indexation.

TDS on Sale of Property by NRIs

For NRIs, the buyer is responsible for deducting TDS before making payment:

  • STCG (sale within 2 years): TDS at 30% on the sale amount.
  • LTCG (sale after 2 years): TDS at 20%, plus applicable surcharge and cess.

Note: Unlike resident sellers, where TDS under Section 194-IA is only 1%, TDS for NRIs is higher because it is calculated on the capital gains tax liability.

How to Deduct TDS on Property Purchase from an NRI

When purchasing property from an NRI, the buyer is responsible for deducting TDS from the sale proceeds before making payment to the NRI seller.

Key Steps for Buyers:

  1. Obtain TAN: The buyer must obtain a Tax Deduction Account Number (TAN) in their name to deduct TDS.
    • If the property is bought jointly by two or more persons, each buyer must obtain a TAN.
  2. Deduct TDS: Once TAN is obtained, TDS must be deducted on every payment made to the NRI seller.
  3. Deposit TDS: The deducted TDS should be deposited with the Income Tax Department via e-challan by the 7th day of the next month following the payment.
  4. File TDS Return: The buyer must file the TDS return in the next quarter after depositing the TDS.
  5. Provide Form 16A: After filing, the buyer can download Form 16A and issue it to the NRI seller as proof of TDS deducted.

Lower or NIL TDS Certificate for NRIs

Although TDS must be deducted at the prescribed rate, the NRI seller can apply to the Income Tax Department for a NIL or lower TDS certificate:

  • If approved, the buyer can deduct TDS at the reduced rate mentioned in the certificate.
  • The NRI seller should apply for this certificate before signing the sale agreement if the expected TDS exceeds the actual tax liability.
  • If no certificate is obtained, the seller can claim a refund after filing their income tax return if TDS deducted is higher than the tax liability.

Consequences of Not Deducting TDS Properly

If the buyer fails to deduct TDS correctly:

  • They may deduct at the resident rate instead of the NRI rate, or not deduct at all.
  • The buyer is legally liable for TDS not deducted, including:
    • Penalty equal to the TDS amount not deducted.
    • Interest on the defaulted amount.
  • Improper TDS deduction can block the NRI seller from repatriating the sale proceeds to their foreign bank or NRE account.

Buyers must ensure TDS is deducted and deposited correctly to avoid legal complications and ensure smooth fund transfer for the NRI seller.

Repatriation of Sale Proceeds by NRIs

An NRI selling property in India must submit Form 15CA and Form 15CB to the authorised dealer bank to repatriate the sale proceeds abroad.

  • Form 15CB must be certified by a Chartered Accountant.
  • An NRI can repatriate up to USD 1 million per financial year from India.

How NRIs Can Save Tax on Capital Gains

NRIs can reduce tax on long-term capital gains (LTCG) from the sale of house property by claiming exemptions under Section 54 and Section 54EC.

Exemption under Section 54

  • Applicable when LTCG arises from the sale of a house property.
  • To claim this exemption, invest the gains in a new house property in India.
  • You do not need to invest the entire sale proceeds; investing an amount equal to the capital gains is sufficient.
  • Investment can be made:
    • One year before the sale, or
    • Within two years after the sale.
  • Gains can also be used for construction of a new property, which must be completed within three years of sale.
  • Exemption is restricted to properties in India. Properties purchased or constructed abroad are not eligible.
  • If the new property is sold within three years, the exemption may be withdrawn.
  • Maximum LTCG exemption under Section 54 is Rs 10 crores.
  • If you have not invested by the return filing date (usually 31st July of the next financial year), you can deposit the gains in a Capital Gains Account Scheme (1988) with a PSU or authorised bank and claim exemption in your return. The deposited amount can be used for future investment in eligible property.

NRI Tax Filing Services

Exemption under Section 54EC

  • Allows saving tax on LTCG by investing in specified bonds issued by:
    • National Highway Authority of India (NHAI), or
    • Rural Electrification Corporation (REC).
  • Bonds are locked in for 5 years and cannot be sold before maturity.
  • Investment must be made within six months from the sale date and before filing the income tax return.
  • Maximum investment allowed per financial year is Rs 50 lakhs.
  • This investment cannot be claimed under any other deduction.

Exemption under Section 54F

The Section 54F exemption applies when an NRI earns long-term capital gains (LTCG) from the sale of any capital asset other than a residential house.

Key Conditions to Claim Exemption:

  1. The NRI must purchase a residential house in India:
    • Within one year before the sale, or
    • Within two years after the sale.
  2. Alternatively, the NRI can construct a residential house in India within three years from the date of sale.
  3. The new house must not be sold within three years of purchase or construction.
  4. The NRI should not own more than one other residential house apart from the new house.
  5. The NRI must not purchase or construct any additional residential property within the specified time frame (two years for purchase, three years for construction).

Investment Requirement:

  • The entire sale proceeds from the original capital asset must be invested in the new property to claim full exemption.
  • If only a part of the sale proceeds is invested, the exemption is proportionate to the amount invested.

TDS on Sale of Property by NRIs – FAQs

Q1. What is TDS on sale of property by an NRI in India?
A: When a Non-Resident Indian (NRI) sells immovable property in India, the buyer is required to deduct 20% TDS (plus applicable surcharge and cess) on the sale consideration under Section 195 of the Income Tax Act. This applies to both residential and commercial properties.

Q2. Is TDS applicable on the entire sale value or capital gains?
A: For NRIs, TDS is usually deducted on the total sale consideration. However, if the NRI obtains a certificate under Section 197 from the Income Tax Department, TDS can be deducted on a lower estimated capital gains amount.

Q3. Who is responsible for deducting TDS on property sale?
A: The buyer of the property is responsible for deducting TDS at the time of payment to the NRI seller. The seller cannot pay TDS themselves.

Q4. How can NRIs reduce TDS liability on property sale?
A: NRIs can reduce TDS by:

  • Applying for a lower deduction certificate under Section 197.
  • Investing in specified bonds under Section 54EC to claim capital gains exemption.
  • Claiming exemptions under Section 54 or 54F if reinvesting in residential property in India.

Q5. What documents are needed for TDS payment on property sale by NRIs?
A: Documents typically include:

  • PAN of the NRI seller
  • Sale agreement/transaction details
  • Form 26QB (TDS payment challan)
  • Buyer’s and seller’s KYC details

Q6. How is TDS on property sale paid to the government?
A: TDS is paid using Form 26QB, which is an online challan-cum-statement form filed by the buyer. Once paid, Form 16B is issued to the NRI seller as proof of TDS.

Q7. Can TDS deducted on property sale be claimed back?
A: Yes. After filing the Income Tax Return (ITR) in India, the NRI can claim credit for TDS paid. If excess TDS was deducted, it can be refunded by the Income Tax Department.

Q8. What is the due date for TDS payment on property sale by NRIs?
A: The buyer must deposit TDS within 30 days from the end of the month in which the deduction was made.

Q9. Are there different TDS rates for residential and commercial property?
A: Generally, TDS is 20% for capital gains for long-term assets, or as per actual capital gains rate if computed. Short-term gains are taxed as per the applicable slab rates for NRIs.

Q10. Does TDS apply if the property is inherited by an NRI?
A: If an NRI sells an inherited property, TDS still applies on the sale consideration. The seller can reduce TDS by calculating capital gains considering the cost of acquisition and indexation.

Q11. How can NRIs file for a TDS refund on property sale?
A: NRIs can file Income Tax Return (ITR-2) in India and claim the refund for excess TDS. Supporting documents like Form 16B, PAN, and sale agreement should be kept handy.

Q12. Is PAN mandatory for TDS on property sale by NRIs?
A: Yes, PAN is mandatory. If PAN is not provided, the TDS rate can go up to 20% plus surcharge.

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