PROPERTY PURCHASED FROM NRI: TAX IMPLICATION ON BUYER

PROPERTY PURCHASED FROM NRI: TAX IMPLICATION.

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PROPERTY PURCHASED FROM NRI: TAX IMPLICATION ON BUYER

While purchasing a property from a Resident Indian buyer needs to deduct TDS at the rate of 1% on the amount of Sale Consideration if the amount of consideration is greater than Rs. 50 Lakhs under section 194IA of the Income Tax Act, 1961.

The case is not the same, if the property is purchased from Non- Resident India (NRI). Section 195(1) of the Income Tax Act, 1961 reads as under:

  1. (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or section 194LD or any other sum chargeable under the provisions of this Act not being income chargeable under the head “Salaries”) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :

 Analysis:

On carefully reading the section the following points can be inferred on a transaction of sale of property:

  • TDS under section 195 is to be deducted in case any person buys property from NRI whose such Income is chargeable to tax in India may be because the property is located in India or Payment is made in India. Since the person has paid to NRI any other sum chargeable under the provision of the Act.
  • The amount on which TDS is to be deducted is the amount of Sale Consideration actually paid. No benefit of the slab of Rs. 50 lakhs will be available in this case as available in case of purchase from Resident u/s 194IA.
  • TDS is to be deducted when the amount is actually paid or when the transaction is entered in the Books of Accounts whichever is earlier.
  • TDS is to be deducted at the rate in force. The rate in force in this transaction would be the rate chargeable to Capital Gains.

In case of Long Term Capital Asset i.e. property held for more than 24 months, TDS to be deducted at (20% + Education Cess @ 4%) plus Surcharge (if applicable).

In case of Short Term Capital Asset i.e. property held for 24 months or less, TDS to be deducted at the Income Tax Slab applicable for the seller i.e. NRI plus Education Cess @ 4% plus Surcharge (if applicable).

Don’t you think that this is injustice for NRI?  

The TDS is deducted on the amount of Sale Consideration and also at the same time it is deducted at the Rate on which Capital Gain is taxed i.e. 20%.

Example: A property is purchased from Non- Resident Indian of say Rs. 80 Lakhs situated at Mumbai, India on 8thSeptember 2018. NRI had purchased it 10yrs back in April 2008 for Rs. 50 Lakhs. The buyer has to deduct TDS of NRI at the rate of 20% on Rs. 80 Lakhs. But when we actually calculate the Tax of the NRI (assuming there is no other income chargeable to tax in India) would be as follows:

Sale consideration Rs. 80 Lakhs
Less: Indexed Cost of Acquisition                                         (50 Lakhs * 280/137) Rs.102.18 Lakhs
Long Term Capital Loss Rs. 22.18 Lakhs

It’s clear from above calculation that NRI has Capital Loss of around Rs. 22 Lakhs but as per Law his TDS is deducted at Rs. 80 Lakh at the rate of 20% plus Surcharge of 10% plus 4% Education Cess.

What remedy do NRI have?

To see what the NRI can do in this case Section 195(2) comes into picture. Section 195(2) reads as under:

(2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable.

 

The steps that NRI need to follow for lower deduction is as follows. He shall approach Assessing Officer and request him to calculate Capital Gain. The Assessing Officer shall compute the Capital Gains of the seller and intimate the NRI by issuing a certificate mentioning the computation of Capital gain. NRI shall than give the certificate to buyer for enjoying the benefit of lower tax deduction. Then yes, TDS is deducted on the lower amount for NRI.

Additional Compliances to be met by buyer of the property:

  • Requirement of Tax Deduction Account Number (TAN):

The buyer of the property shall have TAN number; if he does not have TAN he shall apply for it. In case the TDS is deducted u/s 194IA i.e. purchase of property from Resident there is no requirement of TAN. The buyer of property shall give the seller Form 16A.

  • File the TDS Return:

TDS return shall be furnished in Form 27Q and needs to be submitted quarterly

  • The amount of TDS deducted shall be deposited with government by 7th of the next month. In case TDS is deducted in March, TDS may be deposited by 30th of April.

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