Understanding TDS on Property Purchase From An NRI

Purchasing a property in Indian as an NRI is a dream for many because of lucrative returns and a growing economy. However, property transactions in India revolve around various legal aspects, one of which is the property purchase tax deduction at source.

Section 194 IA of the Income Tax Act deals with the property purchase TDS mechanism. This mechanism aims to ensure proper tax compliance and maintain transparency in all real estate transactions.

In cases where the consideration for the property sale exceeds Rs 50 lakh, the buyer is required to deduct TDS at a 1% rate on the transaction amount and deposit it with the Government of India. In this blog, we will discuss the TDS property purchase provision to ensure all legal and financial concerns are addressed.

TDS Payment on purchase of Property from a Resident Seller - Section 194-IA

Under section 194 - IA of the Income Tax Act, the TDS applies to TDS on property purchases from a resident seller.

Who must deduct the TDS? The person who buys the property.

1. Set threshold: The tax deducted at source under this section is applicable when the purchase price of the property exceeds Rs 50 lakh.
2. TDS Rate: The rate of tax deducted at source is either the stamp duty value or 1% of the sale consideration. Whatever is high is considered.
3. TDS Filing and Payment: The payment must be made within 30 days using Form 26QB, and a Form 16B (TDS certificate) must be issued to the person selling the property.
4. Non-deduction Penalty: If the concerned individuals fail to deduct the TDS or deposit it, they are subject to interest and penalties. Additionally, there can be a risk of prosecution as well, under Section 271C.

TDS on Property Purchase from a Non-Resident Indian -Section 195.

If the seller of the property is a Non-Resident Indian, then in such a case, the TDS is deducted under Section 195. This section has slightly different rules from Section 194- IA.

The key differences of TDS on a property purchased from an NRI are likewise:

1. TDS Rate: If a resident buyer is purchasing a property from a non-resident Indian (NRI), then the buyer must withhold taxes for 12.5% plus cess and surcharges applicable.
2. TAN Requirement: The buyer of the property must have a TAN (Tax Deduction and Collection number ) before they deduct the TDS. Since the property is being purchased from an NRI, then Form 26QB is not used; instead, use Form 27Q.
3. TDS on the Total Sale Consideration: The tax is deducted at source from the entire selling price, not just the capital gains.
4. Instalment-Based Deduction: In cases where the property is paid in installments, the TDS must be deducted at each payment.
5. NRO Account: The sale consideration amount should be remitted directly to the Non-Resident Ordinary (NRO) account.

How can a Non-Resident Indian (NRI) Seller Lower the TDS deduction?

Non-Indian residents usually have higher TDS deduction rates compared to Indian residents. However, NRIs are eligible for a low TDS deduction certificate under section 197, which allows them to deduct TDS only on the capital gains (if any), reducing the TDS liability.

To do so, the seller must submit:

• Cost of the property acquisition documents.
• Sales agreement details.
• Computation of the capital gains.
• Re-investment proof (if claiming tax exemption on capital gains under section 54 and section 54EC, etc)

Note: The process might take around 4-6 weeks, so it is advised to apply early.

What Happens When you Do not Comply With TDS Rules?

Non-compliance with the TDS rules can result in.

1. Interest Changes: The interest at the rate of 1% per month is charged for non-deduction of TDS, and 1.5% monthly for non-deposit.
2. Late Filing Fees: Rs 200 per day for failing to file Form 27Q within the timeframe.
3. Penalty Under Section 271C: This is equal to the TDS amount that is not deducted.
4. Income Tax Scrutiny: Lastly, non-compliance with the TDS regulatory framework may also raise income tax department scrutiny and other legal complications.

Things to Keep in Mind

If you are a buyer of an NRI property, please ensure:

• Please confirm whether the seller is a resident of India or an NRI before applying the TDS rate.
• If you are deducting TDS under section 195, ensure that you obtain a TAN.
• Deduct the TDS on the full consideration value. When there is a sale of property by an NRI, the TDS is deducted on the entire sale price.
• Issue Form 27Q and Form 16A to the seller as the TDS deduction proof.
• You can also help the NRI seller in obtaining a lower TDS certificate (Section 197), which will help avoid excessive tax deductions.
• Ensure that the TDS is deposited within 30 days of the deduction made. After this time frame, the penalties are imposed.

Get Expert NRI Assistance in Property Transactions

When you buy a property from an NRI, the applicable TDS provisions must be met, as failure to do so will result in hefty penalties. NRIs seeking a lower TDS certificate can rely on Savetaxs for assistance. From TDS filing requirements to obtaining a TAN and more, we are here to help you.

As a leading NRI taxation firm, we have been helping NRIs for decades with property transactions, property sales, tax planning, and real estate investments. Our team of CA, CS, and the legal team brings over 30 years of experience to the table; hence, with us, you are in for the best advice.

We are available 24/7 across all time zones. Connect with us today and enjoy a hassle-free and seamless property transaction experience.