If you buy real estate from a Non-Resident Indian (NRI), you must deduct tax (TDS) under Section 195 of the Income Tax Act of 1961. (ITA).
When you make a payment to an NRI for the purchase of a piece of property, you must deduct tax. This is also true if an advance is being paid. As a buyer, you must submit TDS with the Income Tax Department.
“TDS on the purchase of property from an NRI should be deducted from the sale price and the rest paid to the NRI seller.” The tax deduction has no maximum limit. “Provided the property is acquired from a resident, no tax is required to be deducted if the selling value does not exceed Rs 50 lakh (Section 194IA),” explains Archit Gupta, Founder, and CEO of Clear.
How are capital gains on property sales calculated?
An NRI’s property is classified as a capital asset, which can be either long-term or short-term. When a property is sold after two years, it is subject to long-term capital gains (LTCG) tax. Short-term capital gains (STCG) tax is applied if it is held for less than two years.
TDS rates on the sale of an NRI-owned property are as follows:
* LTCG tax on property sold after more than two years: 20%
* STCG tax on the sale of a property owned for less than two years: According to the relevant Income Tax slab rates for NRIs
Surcharges and cess are also levied on capital gains.
TAN No., TDS Payment, and TDS Return
The buyer of the property must comply with Section 195 of the Income Tax Act as well as the following statutory reporting requirements:
Obtain TAN: If you are purchasing a property from an NRI, you must obtain a Tax Deduction and Collection Account Number (TAN No.) to deduct TDS.
Deduct TDS: When you deduct TDS as a buyer, it must be lodged with the Income Tax Department within seven days after the end of the month in which the deduction was commenced.
TDS must be submitted using Challan No./ITNS 281. TDS payments may be made online at the following website: TIN e-payment (egov-nsdl.com).
TDS Return: After paying taxes, the buyer must file a TDS return. It must be submitted on Form No. 27Q, as stipulated by the Income Tax Department. A separate Form No 27Q must be provided for each quarter in which TDS was deducted. The return must be submitted to the government within 31 days of the end of the quarter in which the TDS was deducted.
Finally, as a buyer, you must present Form No. 16A to the NRI who is selling the property.
Lower or no tax deduction
“The NRI seller can make use of the opportunity of tax deduction at reduced rates to the Income Tax Jurisdictional Assessing Officer.” The application can be submitted by the resident buyer of the property (under Section 195(2) of the Income Tax Act) to assess the share of income liable for a tax deduction. “The NRI seller can also apply in Form 13 to seek a lower/nil TDS (under Section 197) for such revenues,” Gupta explains.
The Assessing Officer will provide a certificate detailing the amount of tax deduction, based on which the buyer of the property will be required to deduct TDS on the entire selling consideration.
If neither the buyer nor the NRI seller files such an application to identify the amount on which tax is deductible, the tax must be deducted from the full selling price of the property.