In my previous post on NRI’s and TDS on sale of property we discussed basics of TDS on Property Sale by NRI. In this post we will understand how my NRI friends can lower the TDS on Property Sale. Before you decide to go ahead with property sale following 2 points should be considered
1. Type of Capital Gain from Property Sale i.e. Short Term Capital Gain or Long Term Capital Gain
2. Whether i am willing to pay capital gain tax or would like to save capital gain tax by Re-investment of capital gains
Once these 2 points are clear then we are ready for property sale in India. Let’s discuss the case of Mr. Ashok Taneja (with his due permission) who lives in California. He has property in Delhi which he bought in Aug, 2009 for 70 lakhs. He approached me for consultation on TDS on property sale by NRI’s. He is planning to sell it in current FY 2014-15 for 1.5 Cr. Now in his case, the answer to above mentioned 2 points are
1. Capital Gain will be Long Term Capital Gain as Mr. Taneja held the property for more than 36 months. Rate of Capital Gain Tax for Long Term Capital Gain is 22.66%
2. Mr. Taneja is inclined to save capital gain tax by re-investment of capital gains
Therefore 1st task is to calculate long term capital gain of Mr. Taneja. Indexed cost of acquisition of property is approx 1.13 Cr and he is selling it for 1.5 Cr. Long Term Capital Gain from property sale is approx 37 lakhs and corresponding Long Term Capital Gain Tax at 22.66% is 8.38 Lakh.
As i shared in my previous post that there is anomaly in law. If in case of Mr. Taneja, buyer deduct TDS at 20.66% u/s 195 then TDS will be deducted on sale consideration value i.e. 1.5 Cr. TDS u/s 195 will be approx 31 Lakh against Mr Taneja’s Long Term Capital Gain Tax liability of 8.38 Lakh. In short, u/s 195 excess TDS to the extent of 22.62 lakh will be deducted assuming Mr Taneja decided not to re-invest capital gains from property sale.
After point 1 i.e. calculation of capital gain, there are 3 possible scenarios
(a) Capital Gain is Zero or there is Capital Loss on Property Sale: In this case NRI Seller can apply for NIL Tax Deduction Certificate.
(b) NRI Seller is willing to pay Actual Capital Gain Tax i.e. if Actual Capital Gain Tax liability is less than TDS u/s 195: In this scenario, based on capital gain tax calculation NRI seller can apply for Lower tax Deduction Certificate. In above example, Mr. Taneja can apply for Lower Tax Deduction Certificate as actual long term capital gain tax liability is only 8.38 lakh against TDS of 31 lakh u/s 195.
(c) NRI seller is willing to re-invest capital gain to save capital gain tax: In this case, NRI Seller can apply for Tax Exemption Certificate.
How to apply for Nil / Lower Tax Deduction Certificate or Tax Exemption Certificate on Property Sale
NRI Seller can apply for Nil Tax Deduction or Lower Tax Deduction with Income Tax Assessing Office. In case, NRI seller is planning to re-invest capital gain as i mentioned earlier then he can apply for tax exemption certificate. Based on assessment by Income Tax Department, certificate will be issued to NRI seller for property sale. In this case, buyer will not deduct TDS u/s 195 on sale consideration value. In above example, if Mr Taneja get certificate from Income Tax Department then buyer will pay full consideration i.e. 1.5 Cr to Mr. Taneja without deducting TDS. NRI seller can handover original Nil Deduction Certificate to the buyer for his reference. In short, buyer need not to file any TDS in seller’s name as TDS will not be deducted in this case. Income Tax Department will issue separate certificate to NRI seller for TDS on capital gains. For Tax Exemption Certificate, NRI seller can submit application in Income Tax Department under whose jurisdiction his / her PAN belongs to. To know the jurisdictional IT office of PAN, click on following link
In few cases i observed that TDS is not applicable on property sale as NRI seller obtained NIL Deduction or Tax exemption certificate but then buyer deducted TDS u/s 194IA just for the sake of deducting TDS. In such cases, full payment should be released to NRI seller for property sale and buyer should obtain Nil deduction certificate / Tax Exemption Certificate from NRI seller.
Documents Required: Income tax department may ask for following documents to issue Nil / Lower Tax Deduction or Tax Exemption certificate
(c) Sale Agreement / Sale Deed
(d) Income Tax Returns
(e) Bank Statement
(f) Any other document deemed relevant
Entire process may take upto 1 month’s time and it is advisable to hire a professional for this job.
In case, there is no tax liability then NRI can file form 15CA and 15CB online. These forms can be filed by CA. After filing form 15CA and 15CB, money can be transferred to country of residence else money can be retained in NRO account in India. Repatriation of funds during FY should not exceed $ 1 Mn
NRI’s and PIO’s can repatriate sale proceeds of property inherited from resident Indian without RBI’s permission subject to certain conditions. General Permission is available for repatriation of sale proceeds from inherited property. Documents required are Inheritance Certificate / Succession Certificate or Probate and a certificate from Chartered Accountant in specific format.
Word of Caution:
1. Please check income tax rules in your country of residence on capital gain out of property sale in India.
2. Please check income tax rules related to long term capital gain exemption under section 54/54F/54EC in your country of residence.
3. Please check whether DTAA (Double Taxation Avoidance Agreements) is signed between India and your country of residence.
4. Last but not the least, in many cases i observed that NRI seller insist buyer to not to deduct TDS. In specific cases, TDS is not deducted due to ignorance at buyers end. In all such scenarios, hefty penalty can be imposed on buyer or on NRI seller. It is always advisable to pay all taxes on time to buy peace of mind which is priceless.
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In my next post, i will discuss how buyers can deduct TDS u/s 195 if they are buying a property from NRI i.e. Property Sale by NRI.
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