NRI Property – 7 Mistakes to Avoid by a Resident Indian Buyer

Are you planning to buy an NRI property? & if you are a resident Indian buyer then you should go through this post :). Usually buyers don’t prefer to buy NRI Property. The reason being rules and regulations are bit complex in nature. Another reason is that the onus of compliance rests on buyers shoulder. It is little unfair as buyers cannot buy NRI Property without professional help. The biggest hassle is of TDS deduction and filing of TDS return. A buyer also needs TAN for TDS deduction. I discussed the same in my post, How to deduct TDS u/s 195?. I do agree that rules should be simplified to make the process simpler for buyers. On the other simplified rules may means more violation. In case, the money is repatriated without paying capital gain tax then it is difficult for IT department to recover the same. Because of this reason, TDS of 20.60% is applicable on sale of NRI Property. IT department believe that seller will not comply therefore onus of deduction is on buyer :).

Let me also clarify that each and every case is unique in nature. On the other hand, posts shared by me are general in nature. In short, all the points mentioned in the posts may or may not be applicable in all the cases. The objective of this post is only to caution the potential buyers. As the TDS of 20.60% is too high and claiming a refund of same is a tedious process. Therefore, some of the mistakes from buyers end is a result of misrepresentation of facts by NRI seller. In case you are buying an NRI property, it is always advisable to take professional help.

NRI Property – Seven Common Mistakes a Buyer Should Avoid

1. Payment to SPOA Holder: It is always advisable that during the sale of NRI property the NRI seller should be physically present in India. Sometimes it is not possible due to unavoidable circumstances. In such cases, A Special Power of Attorney or SPOA is executed in favour of a person present in India. Typically SPOA holder is a relative of an NRI Seller. A power of attorney is called Special Power of Attorney if it is executed for a particular purpose as the sale of the property. A General Power of Attorney is multi-purpose like authorization to carry out any financial transaction in India. POA, GPOA and SPOA are used interchangeably. For NRI property, any reference to POA from my end precisely means SPOA.

In the case of NRI property, it is preferred that POA should be SPOA i.e. executed only for the purpose of sale of NRI property. The SPOA should specify property details and also the complete details of SPOA holder i.e. relation, PAN No, etc. Now in many cases, i observed that SPOA holder demands that payment should be made to the SPOA holder. There can be multiple possibilities like the intent of fraud, avoid TDS, family dispute, etc. Whatever be the reason a buyer should follow the natural law of any financial transaction. For an NRI property, the payment should be made only to the NRI Seller in his/her bank account. SPOA holder is only a representative of NRI seller to execute the NRI property transaction. SPOA holder is not the beneficiary of the property transaction.

In one of the case, SPOA holder told that as he is resident India, therefore, TDS applicable is 1%. It is not correct. As you are making payment to NRI seller, therefore, TDS is applicable according to residency status of a seller. The rate of TDS will be 20.60% or 20.66% as the case may be.

2. TDS % and Value: This is a major grey area due to lack of proper information. A buyer is confused on two counts (a) TDS Percentage & (b) Value on which TDS is deducted. In most of the cases, the mistake is from buyer’s end on these two factors i.e. wrong TDS % or wrong value. Let me explain in detail

To simplify, for NRI property, a buyer should deduct TDS of 20.60% on total consideration value. The rate of TDS is 20.66% if the consideration value is more than 1 Cr. It includes 10% surcharge. The rate of TDS as explained is applicable until unless NRI seller produces Nil/Lower Tax Deduction or Tax exemption certificate issued by IT department.  For more details, you may check my post on How NRI’s can lower TDS on Property Sale?.

In many cases, NRI seller shares capital gain tax calculation with the buyer. He requests the buyer to deduct 22.66% on LTCG or 33.99% on STCG. In short, the deduction is on capital gain value but not on total consideration value. In this case, the buyer cannot certify the capital gain on NRI Property. In another instance, an NRI seller told my client that he will reinvest the capital gain therefore TDS is not applicable. Let me clarify that in all such instances, a buyer cannot enforce future compliance. Until unless AO or seller’s CA is satisfied with the seller’s justification, the buyer is not the right authority to reach any conclusion. A buyer should deduct TDS u/s 195. An NRI seller can claim a refund if he re-invest the capital gain to save capital gain tax.

Another misconception is that if the seller is incurring a capital loss, then TDS is not applicable. It is wrong understanding. In such cases, an NRI seller can produce NIL deduction certificate.

3. Payment in Indian Savings Account: The sale proceed from NRI property can be deposited by the buyer in NRO/NRE/FCNR account as the case may be. In many instances, an NRI seller force buyer to pay in Indian Savings Account. It is not right practice. Now as a buyer, you must be wondering how can i check bank account status. I agree there is a practical problem. To safeguard interest, you should include bank account details in sale deed. Also, mention the account type i.e. NRO/NRE/FCNR as declared by the seller. Any misrepresentation of fact from the seller will put seller in the trouble. All the cheques/DD/Banker’s cheque should mention the bank and account no of the seller as recorded in sale deed. This point is must for purchase of NRI property

4. PAN, Citizenship and Residency Status: It is the complex web. I come across various interesting cases to avoid TDS. An NRI seller told my client that address on his PAN is Indian therefore TDS of 1% is applicable. Quite interesting. This option is suggested by the CA of an NRI seller. Let’s take an example, I shifted to self-occupied property six years back, and my address will remain Indian Address in PAN records. Meanwhile, i moved abroad and decided not to changes my address in PAN. My status change from resident Indian to NRI. After that i decide to sell my property and based on my PAN address, can i avoid TDS?. Can’t stop laughing.

Another case study was interesting. An Indian Citizen surrendered the citizenship and obtained citizenship of USA. Govt of India does not allow dual citizenship. If i opt for citizenship of some other country, then i need to surrender Indian Citizenship. Now this guy shifted back to India by his company. The residency status changed to Resident Indian after a stay of more than 182 days. He told my client that property cannot be classified as NRI property because of his residency status as Resident India. At the same time, he is governed by rules and regulations of FEMA. In short, a resident Indian, who is foreign national or PIO/OCI with non-Indian citizenship are treated at par with NRI’s. The TDS is applicable in all such cases.

In the event of doubt, a buyer can include relevant clauses in the sale deed to safeguard financial interests.

5. TAN: Under section 195, TDS can be deducted only after obtaining the TAN. If a buyer fails to deduct TDS or deduct TDS without TAN, then penalties will be applicable as i shared in my posts on NRI property. The common mistake from buyer’s end is in the case of joint property purchase. Typically brokers/agents suggest that one of the buyers can apply for TAN, deduct and deposit the TDS. It is not correct process. The TDS should be deducted and deposited by all the buyers in the proportion of ownership in the property. Therefore, all buyers require TAN for same.

6. Payment in Case of Joint Sellers: In the case of joint sellers, the payment should be made in the proportion of ownership in the property. If both sellers are NRI, then one of them cannot receive payment on behalf of other. In one of the case, there was a dispute between NRI couple. A husband sold the property on behalf of wife and wife filed a case. The property came under litigation. For each of the NRI seller, same compliance process is applicable.

7. TDS on Home Loan: A word of caution, if you are availing Home Loan. You should inform your home loan provider reg the residency status of the seller and request to deduct the TDS accordingly. It is always advisable to share the calculation with home loan provider and specify the TDS to be deducted from Home Loan disbursement. The bank will deposit the TDS deducted in borrower’s bank account. After that, a borrower can deposit the same. Another misconception is that TDS on NRI property is not applicable on Home Loan amount. It is not correct. Seriously, i would like to find out the person behind this suggestion.

In this post, i tried to cover all the common mistakes from a buyer’s end. The list is endless but as i suggested that in the case of an NRI property, a buyer should take professional help to close the deal. Hope you liked the post.

Copyright © Nitin Bhatia. All Rights Reserved.