TDS rules for resident buyer buying property from NRI seller

TDS-rules-for-resident-buyer-buying-property-from-NRI-seller

A resident Indian buyer has to comply with a particular set of TDS rules when he is buying property from NRI. The rules are prescribed as per the Indian Income Tax Law. 

It is advised to take the assistance of an expert in calculation and filing of TDS return to avoid legal hassles. 

It would be easier to understand the nuances of buying property from NRI if we are aware of the correct information.

Read More: Tax implications on a gifted property

First and foremost you should know:

Who is an NRI seller?

NRI seller of the immovable property for TDS is the one who conforms to the status of NRI as per the Income Tax Law in India. The residential status must be mentioned in the sale deed.

Who is liable to pay TDS?

It is the buyer who pays the TDS. 

How is TDS calculated when buying the property?

TDS is calculated on capital gains. 

Capital Gains – it is income from profits earned by sale of a property in India.

  • Short term Capital Gains: profit from the sale of the property within two years of its purchase.
  • Long term Capital Gains: profit earned from the sale of property held for more than two years.

TDS is deducted at the rate of 20% on long term capital gains and 30% on short term capital gains plus surcharge, health and education cess.

In case there is any doubt about the capital gain income, an application can be filed with the income tax authority to know the correct amount. As a precaution, the buyer can ask the seller to bring a certificate from the authorities showing the ascertained amount of capital gain. The buyer must include the details of the same in the sale deed. . The residential status must be mentioned in the sale deed. There is a penalty for the buyer if he does not comply with the TDS rules.

Read More: Tax rules for investment in real estate by non-resident Indians

For any exemption available to NRI seller for payment of tax, he has to bring evidence of the same and show it to the buyer.

The amount of tax deducted and the rate applied must be mentioned in the sale deed.

What is TAN? 

A buyer has to get TAN (tax deduction account number) as he has to deposit tax. The buyer must have his PAN number as well as PAN of the seller also before applying for TAN.

There is a penalty if he TDS is deposited without TAN. In the case of joint purchase, all the buyers must obtain separate TAN.

How to Deposit TDS?

TDS is deducted and deposited by the buyer with the Taxation Department or through an authorized bank. After depositing, the buyer files return by submitting form 27Q and then issues a certificate to the seller.

Read More: Tax on capital gains for non-resident of India

Deposit of sale proceeds?

The buyer must deposit the amount in the NRO/NCR/FCNR account of NRI. 

It is better to execute the sale deed when the NRI is physically present in India. It should be done with a PoA holder in unavoidable circumstances. The buyer is responsible for deducting TDS and depositing the same. He must be careful while buying the property and comply with TDS rules. 

Tax rules for investment in real estate by non-resident Indians

Tax rules for investment in real estate by non-resident Indians

Indians staying abroad have deep-rooted connections with India. Non-resident Indians or persons of Indian origin staying abroad are given various kinds of facilities in India for investment in property in India. Income from such investment, i.e. the Capital Gains is taxable under the Income Tax Act.

Before getting on to understanding the rule of Investment for NRIs in real estate in India, let us be clear about the definition of NRI:

Who is an NRI?

The term NRI refers to Non-resident Indian. It is legally defined under the Income Tax Act, 1961 and FEMA, 1999.


Also read: NRI Investment in Property – India as an attraction


A person who is a citizen of India or a person of Indian origin is a resident of India:

Under IT Act

  • If during the previous year, he is in India for 182 days or more
  • If during the previous year he is in India for 60 days or more AND during the four year period immediately preceding the previous year, his stay in India is for 365 days or more.

Under FEMA-

  • If he is residing in India for more than 182 days in the Preceding Financial Year
  • It excludes a person who has gone out of India or who stays outside India for purposes of carrying on business or vocation in circumstances as would indicate an intention to stay outside India for an indefinite period.

A person if not covered under these Acts as a resident of India, is a NON-resident Indian.

Rules for Investment by Non-Resident Indians in Real Estate in India

Real Estate transactions fall under the purview of FEMA. Investment in property in India is permissible as follows:

NRIs can invest in

  1. Residential
  2. Commercial

NRIs cannot invest in

  1. Agriculture
  2. Plantation and Farmhouse
    (can only be inherited or gifted to NRI)

Also read: Increasing Benefits of Real Estate Investment in India


Mode of Payment

The payment can be made from funds received in India through normal banking channels or funds held in NRO/NRE/FCNR (B) accounts maintained in India.

Earnings of NRI from investment in real estate can be in the form of:

  • Rental Income – it is income from rent of property in India
  • Capital Gains – it is income from profits earned by the sale of a property in India

2 a.    Short-term Capital Gains: profit from the sale of property within 2 years of its purchase.

2 b.   Long-term Capital Gains: profit earned from the sale of property held for more than two years.

Taxation

Income from rent or Capital Gains is taxable in India under the Income Tax Act. In case of purchase of property, deduction of income tax is made and paid to Income Tax Authorities. When selling a property, taxes are paid on Capital Gains.

Under DTAA (Double Taxation Avoidance Agreements), an NRI can claim a tax credit in his country of residence, for taxes paid in India.

Tax Payable and Tax Exemptions

  • In case of purchase of property, deduction of Rs 1 lac allowed
  • In case of purchasing a house on loan, deduction on home interest is available
  • Other deductions like stamp duty, registration charges and municipal taxes paid are also available.
  • No wealth tax payment if the property is vacant, but tax is payable on subsequent property purchase even if vacant.
  • Capital Gains are also taxable, but an exemption is allowed:
  1. If invested in another property
  2. If invested in certain Bonds are also exempted. (NHA I, REC)

Thus India provides Investment opportunities to Non-Resident Indians to invest in property in India to earn Capital Gains. The income is taxable under the Income Tax Act.

Have Income? Will be taxed!

Income Tax

Income Tax is a matter of interest both for citizens and NRIs – though the rules of taxation for both could vary. An NRI is a person who has an Indian passport and has temporarily migrated to another country for six months or more for employment, residence, education or any other purpose.

If an Indian citizen leaves the country for work abroad or as a crew on an Indian ship and spends less than 182 days in India in a year, he or she is considered non-resident for tax plans.

Taxability in India depends on if an individual suits the NRI status for each year.

Following are few regulations of income tax NRIs should acknowledge:

  1. An NRI has to pay tax on any income that accumulated in India or received in India. So salary received in India, rental income, interest income from fixed deposits or saving bank accounts and capital gains on assets sold in India are taxable. If the salary of an NRI is higher than the basic exemption limit for the year, he/she is subject to file return in India. Also, to claim tax refunds, or to carry forward losses to future years, NRIs have to file income tax return.
  2. If an NRI returns to India forever, his or her foreign income does not instantly become taxable in India. A person, who has stayed as a non-resident for nine consecutive years, continues RNOR (Resident but not Ordinarily Resident) for two years for tax plans, which is transitional status amid being an NRI and converting into an Indian citizen completely. Until a returning NRI becomes a resident in India, as per the Income Tax laws, which commonly takes about two years – any profit obtained outside India will not be assessed in India except it is from a business or profession managed from India. Once, he is a resident, his global income (which includes income outside India as well) gets taxed in India.
  3. The Budget stated that TDS (tax deducted at source) would not be subtracted at a higher rate if an NRI without PAN can provide alternative documents. Earlier the NRI had to pay the tax at the rate of 20 percent or the rate in force whatever is higher in case the NRI does not provide the PAN. According to the new provision, an NRI does not have to pay the higher tax if he does not provide PAN and instead provides the documents specified under the recently notified rules in this regard.
  4. If an NRI returns to India and becomes Ordinary Resident Indian for a particular year, then the person will have to reveal all the foreign income and assets in the income tax proceeds. There are harsh punishments as per the Undisclosed Foreign Income and Assets Bill 2015 for not doing so. Such income will not be assessed henceforth under the Income Tax Act but under the provisions of this new legislation on the unaccounted wealth.
  5. An NRI cannot open a Public Provident Fund (PPF) account. But if an individual has a PPF account already before becoming an NRI, he or she can continue to operate the account, but only till the period of its maturity. At maturity, the NRI would have the choice to absolve the returns in the home country and will not have the option of continuation after the necessary 15 years’ lock-in period. If after maturity the account is left unattended; it will be recognized as “extended without contribution.”