If NRIs sell their property located in India after retaining it at least for two years, they are liable to pay Long-term Capital Tax at the rate of 22.88%. However, this tax rate can be lowered or cut down with the help of TDS deductions available under the IT Act, 1961.
Under the Income Tax Act, 1961, Tax Deducted at Source or TDS deduction is the tax paid by the receiver of goods and services on the overall transfer amount from the provider, under certain situations. The framework for TDS deductions is reasonably clear when it comes to domestic transactions. However, there is a fair amount of confusion about tax imposition for Non-Residents Indians who want to sell any property that they may have in India. This article explores how much income tax is payable and TDS deductions in case of NRIs who want to sell property in India.
NRIs who are selling house property situated in India have to pay capital gain tax. The tax that is payable on the profit depends on whether it is a short term or long-term capital gain.
What is a capital gain on property sold by NRIs?
The property held by an NRI seller is categorised as a “Capital Asset”, which can be a long-term capital asset or a short-term capital asset. When a property is sold after a period of two years from the date it was owned – it attracts long-term capital gain tax. In case it is held for less than two years or less, it attracts short-term capital gain tax.
Long term capital gains shall be implied with a concessional rate of 20% on the sale value whereas the short-term capital gains shall be implied at the regular tax slab rate which is 30% on the sale value.
Capital gains for NRIs selling property
Capital gains = Sale Consideration - Cost of Acquisition. (purchase cost to NRI). NRIs selling property in India have to get their capital gain computed by the income tax officer. Once the NRI seller procures this report from the assessing officer, they must furnish the same to the buyer who may then subtract the 20% on the capital gain value.
If Non-Resident Indians sell their property located in India after retaining it at least for two years, then they have to pay a long-term capital gain tax at the rate of 22.88%, under Section 195 of the Income Tax Act, 1961. However, NRIs can lower down this TDS deduction with the help of exemptions and deductions available under the same Act. According to Section 197, every buyer who purchases property from NRI seller, needs to deduct a TDS at the rate of 22.88% on gross sales proceeds. In such a situation, first paying TDS at the rate of 22.88% and then claiming the refund after filing an income tax return, which may take months, would be tedious.
Instead, NRI sellers can avail a lower or No TDS Deduction Certificate by applying for Form 13 online from the Income Tax Department in case their actual tax rate is lower than 22.88%. This will help NRIs to save themselves from the hassle as well as avoid locking their money through TDS Deductions at the rate of 22.88% of the sales proceeds for months.
It is advisable to apply for low or no TDS Deduction Certificate under Section 197 of the Income Tax Act, as soon as one finds a prospective buyer and the sale value of the property is fixed.
The Income Tax Department may ask for the following documents to issue a Nil or Lower Tax Deduction Certificate.
- Sale Agreement / Sale Deed
- Income Tax Returns
- Bank account statement
- Any other document deemed relevant
An NRI seller can also apply for a lower tax deduction. This can be done by deducting TDS only on capital gains. As per Section 195 of the Income Tax Act, the TDS will be calculated only on capital gains, instead of calculating on the total sale value. This can help NRIs to arrive at 1% or 2% TDS, and in some cases, even No TDS is required if there is no actual gain reflected in calculations. Moreover, NRIs can also save on TDS by reinvesting capital gain amount in another property in India within two years from the sale.
They can also invest the amount in tax-free bonds within a span of six months from the date of sale.
NRIs can save on TDS by making wise moves at the time of property sale and even after receiving the proceeds. It is important to stay informed and check income tax regulations related to long term and short-term capital gain tax before making such sale.