FAQs on Sale of Immovable Property by Non-residents


FAQs on Sale of Immovable Property by Non-residents

Are you buying a property from NRI? It is a Sale of Immoveable Property by NRI? Here are few common FAQ & common points which you as a buyer must know.

  1. The most common question is with regard to TDS Rate. At what rate TDS is required to be done in such cases? Is it 1% as applicable u/s 194IA or not? It may be noted that section 194-IA deals with TDS on sale of immovable property by Resident taxpayers and not by Non-resident taxpayers. Section 194-IA requires TDS @1% on sale of immovable property at the time of credit of such sum to the account of the transferor or at the time of payment of such sum whichever is earlier. It is applicable only if the consideration for sale of property exceeds Rs. 50 lacs. TDS@1% is not applicable to sale of immovable property by Non-Residents.
  2. TDS is applicable u/s 195 in respect of payment to NRI. Section 195 of the Income Tax Act’1961 reads as under:Section 195:
    Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act 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:
    [Explanation 2.—For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction there under applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has—
    (i) a residence or place of business or business connection in India; or
    (ii) any other presence in any manner whatsoever in India.]

    (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.

    (3) Subject to rules made under sub-section (5), any person entitled to receive any interest or other sum on which income-tax has to be deducted under sub-section (1) may make an application in the prescribed form to the [Assessing] Officer for the grant of a certificate authorising him to receive such interest or other sum without deduction of tax under that sub-section, and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long as the certificate is in force, make payment of such interest or other sum without deducting tax thereon under sub-section (1).
    (4) A certificate granted under sub-section (3) shall remain in force till the expiry of the period specified therein or, if it is cancelled by the [Assessing] Officer before the expiry of such period, till such cancellation…..

Section 195 talks about sums payable to a non-resident which are chargeable to tax in India under the Income Tax Act-1961. This sum payable even includes “amount payable towards sale of the property”.

In short, when a Non-resident sells an Immovable property in India, income may accrue on such sale to the Non-resident which is chargeable to tax in India & so TDS is required u/s 195.

It may be noted that the TDS rate is mentioned as the “Rates in force” under the provisions of the Income Tax Act.

3.Rate in force:
“Rate in force” depends on whether the asset is short term capital asset or long term capital asset. For land & Building, Short term capital asset is a capital asset held for a period of not more than 2 years. If such asset is held for a period exceeding 2 years then it is treated as Long Term Capital Asset. The tax rates in case of sale of land & building shall be as under:

Rate in Force for LTCG of Land & Building:

The applicable rate in force in case of Long Term Capital Gain (i.e., if the property is sold after a holding period of more than 2 years) shall be as under:

Particulars If capital gain is less than Rs. 50 Lakhs If capital gain is between Rs. 50 Lakhs to 1 Cr If capital gain is  More than 1 Cr
Long Term Capital Gains Tax 20% 20% 20%
Surcharge Nil 2% of above 3% of above
Health & Ed. Cess (w.e.f. 1.4.18) 4% 4% of above total 4% of above total
Applicable TDS Rate
(incl. Surcharge & Cess)
20.80% 22.88% 23.92%

Rate in Force for STCG of Land & Building:

The applicable “Rate in force” in case of Short Term Capital Gain shall be according to the applicable income slab of such NRI seller.

In short, a buyer is required to do the TDS u/s 195 @ 20.80% or 22.88% or 23.92% of the capital gain amount if the property purchased is a Long Term Capital Assets. In case of Short Term Capital Assets, it is required to be done at the applicable tax slab of NRI.

4.Rate in force on Sale consideration or on Income only?
In most of the cases, buyer cannot ascertain, compute or certify the amount of capital gain of NRI and so to avoid disputes, complications & future litigations prefer to do TDS on the “sale consideration” and not on the amount of LTCG/STCG as discussed above. In such situations, Buyers do TDS on the sale value whereas the seller becomes liable to pay Capital gains tax on the amount of capital gain. It results in unnecessary fund blockage.

5.Whether TDS can be done at lower rate is another common question?
Let us discuss it with example. A buyer Say Mr. X purchases a property located in India from NRI Seller Say Mr. Y for Rs. 2 Cr.  Mr. X may do TDS on the whole amount of Rs. 2 Cr before payment to Mr. Y. Considering that the property is a long term capital asset & the indexed cost of acquisition &  improvement is Rs. 1.60 Cr, LTCG in the hands of Mr. Y would be Rs. 40 Lakh. Capital gain tax to be paid by Mr. Y would be 20.80% * 40 Lakh = Rs. 8.32 Lakh. However, TDS by Mr. X may be on Rs. 2 Cr @ 23.92% i.e., Rs. 47.84 Lakh, resulting in excess TDS of Rs. 39.52 Lakh.

To overcome this situation, it may be noted that sub-sections (2) & (3) of section 195 have special provisions. It provides that transferor/payee can make an application to the jurisdictional Assessing officer to issue a lower deduction certificate determining the rate at which the tax is to be deducted by the buyer and also determine the sum of capital gains on which tax is to be deducted. The application to the AO will be made in the prescribed form.

  1. What after the TDS is done by the buyer from NRI seller? It needs to be deposited in Government Treasury. The buyer has to file TDS Return in form 27Q after deducting tax from the seller. It may be noted that Form 26QB is applicable where the seller is a resident. In case the seller is NRI, Tax has to be paid in a return cum challan form in form 26QB.
  2. Tax Deduction Account Number:
    Buyers have to mandatorily obtain the TAN for TDS compliance in such cases. Unlike buy from resident buyer, buyer has to take a TAN in order to deposit tax on sale of property by Non-resident.