When purchasing a property, the buyer is required to deduct the applicable tax at source (TDS) and file the TDS return. The applicability of TDS provisions depends on the type of seller i.e. Section 194-IA is applicable in case of resident seller and TDS is deductible u/s 195 if the seller is a non-resident. Here we will explain the TDS on purchase of property from NRI Under Section 195.
TDS on purchase of property from NRI
When an individual purchases an immovable property from an NRI (Non-Resident Indian), TDS is required to be deducted on the amount of the capital gain as per the Section 195 of the Income Tax Act. The resident Indian who purchases a property from an NRI needs to deduct TDS as per the following guidelines:
- The TDS will be deducted under section 195 of the Income Tax Act.
- If the property is held for a period of 2 years or more, long-term capital gain (LTCG) tax will be deducted at the rate of 20% (plus surcharge and cess).
Long-Term Capital Gain
In case of long-term capital gain, the effective rate of TDS on sale of property by NRI for property above Rs. 50 lakh and less than Rs. 50 lakh for the financial year 2021-22 are listed below:
Long-term capital gains tax
Surcharge on LTCG tax
|(C =A + B)|
Total tax (incl surcharge)
Health & education cess
Applicable TDS rate (incl surcharge + cess)
|Less than Rs. 50 lakh||20%||Nil||20%||4% of total tax||20.80%|
|Rs. 50 lakh to Rs. 1 cr||20%||10% of LTCG tax||22%||4% of total tax||22.88%|
|More than Rs. 1 cr||20%||15% of LTCG tax||23%||4% of total tax||23.92%|
Short-Term Capital Gain
If the property is held for a period of less than 2 years, the income would be short term capital gain and taxable as per the applicable income tax rates slab for the NRI seller. The surcharge and cess will also be added to the applicable tax rates.
Amount on which TDS is deducted
As per Section 195, the TDS is deducted only on the amount received by the NRI i.e. the buyer needs to deduct TDS only on the capital gain to the seller rather than on the complete sale proceeds.
The amount on which TDS is deducted for buying property from NRI seller depends on the following two situations:
- When the Lower deduction of TDS certificate has been procured from the Income Tax Officer by following the below steps:
- The seller needs to apply for computation of capital gain to the income tax officer.
- The officer will compute the capital gain based on the documentary evidence. The capital gain computed will be communicated to the seller through a certificate.
- The NRI seller is required to submit the lower deduction TDS certificate to the buyer.
- Depending on the certificate of lower deduction of TDS, the buyer needs to deduct TDS on the capital gain as calculated by the income tax officer.
- If the lower deduction of TDS has not been obtained, the buyer would need to deduct TDS on the transaction value, paying higher TDS. Therefore, you must obtain the certificate of lower deduction of TDS from the income tax officer.
General requirements for purchasing property from NRI
Buyer are required to meet certain requirements at the time of buying the property from a non-resident:
- The buyer should have a TAN or Tax Deduction and Collection Account Number.
- TDS should be deposited within a period of 7 days from the end of the month in which the TDS was deducted.
- The buyer needs to deposit the TDS through Challan No. ITNS 281.
- TDS return needs to be submitted within 31 days from the end of the quarter in which TDS is deducted through TDS Form 27Q.
- Generate TDS certificate after filing TDS return within 15 days from the due date of submission of TDS return.
Important point about TDS on purchase of property from NRI
- Only the Income Tax Officer can compute capital gain, not the NRI seller.
- If you don’t have Lower deduction of TDS certificate, deduct the TDS on the whole amount of the sale proceeds with a higher tax rate.
- The total amount payable shall be used for TDS amount computation, instead of stamp duty value or circle rate.
- If there is any short deduction or non payment of applicable taxes on the income of non-resident in the form of TDS, the Income Tax Department will pressurize the resident buyer to deposit the TDS.
- TDS must be deducted on each payment received by the non-resident regardless of the amount of sales consideration.
- File a return of income to claim any excess TDS deposited.
Due to a complicated tax system and recurrent amendments, understanding tax laws can be confusing and NRIs may be subject to additional fees or miss claiming deductions and other benefits. At SBNRI, we understand this struggle. You can download SBNRI App to connect with our NRI Tax Experts to know more about new TDS/ TCS rules for NRIs. You will also get end-to-end assistance related to NRI tax filing.