Deduct TDS when buying property from NRI or else face penalties, fines

With the income tax department deciding to focus on property transactions involving NRIs, non-compliance can result in penalties and fines

Media reports suggest that income tax officials will focus on tax deducted at source (TDS), especially in case of sale of property by non-resident Indians (NRIs). The department also aims to carry out surveys to detect non-compliance regarding withholding tax. Both NRIs and those who make payouts to them need to understand the TDS provisions applicable or risk punishment.    

India follows a source-based taxation regime for NRIs. NRIs' income that is received or deemed to be received in India, and income that accrues or arises or is deemed to accrue or arise in India, is taxed here. As for deducting TDS, the rule is that any payment made to an NRI, which is chargeable to tax in India, will be subject to TDS, according to Section 195 of the IT Act. "The rationale for applying TDS on NRIs' income is better tax administration, the same as it is in the case of residents," says Suresh Surana, founder, RSM Astute Consulting Group. The TDS rules are, however, a little more stringent for NRIs. For instance, in some cases, TDS rates applicable to NRIs are higher than those applicable to residents. In the case of bank deposits, TDS rate applicable to interest on non-resident ordinary (NRO) account is 30 per cent, whereas in the case of residents it is 10 per cent.

In the case of residents, surcharge and cess are not deducted while making non-salary payments. But in case of payments to NRIs, surcharge and cess have to be levied, which increases the effective TDS rates.

Next, let us turn to the TDS rates applicable on various transactions. Interest earned by NRIs from non-resident external (NRE) and foreign currency non-resident (FCNR) account are exempt from taxation. But interest on NRO account is taxable at rate of 30 per cent, plus the applicable surcharge and cess.

India has entered into double tax avoidance agreements (DTAA) with a number of countries. "Of the two - DTAA and the provisions of the Indian IT Act - whichever is more beneficial to the taxpayer will apply," says Archit Gupta, founder and chief executive officer, ClearTax. In case of certain treaties, a lower withholding tax rate is prescribed on interest income, and NRIs of those countries can avail of the lower rate, provided they have a valid tax residency certificate (TRC). An NRI who is resident of United Arab Emirates (UAE) can, for instance, benefit from a concessional tax rate of 12.5 per cent on interest income in India, informs Surana.

In case of sale of property by an NRI (see table for rates), TDS has to be deducted by the purchaser. Tax should be deducted only on capital gains and not on the sale price. "The NRI should approach the jurisdictional Assessing Officer (AO) under Section 197 and make an application for obtaining the lower withholding tax certificate," says Surana. The AO will decide the proportion of the sale amount on which tax is to be deducted and issue a certificate within 30 days. On furnishing the lower deduction certificate to the buyer, the latter will deduct tax at the lower rate and deposit it with the government. The credit for such tax deducted can be claimed by the NRI while filing his return in India.

In case of rent paid to an NRI landlord, the tenant has to deduct TDS at 30 per cent and remit it to the government.  If you are paying rent to an NRI landlord, you must fill Form 15CA at the time of making payment. "Form 15CA is a form of remittance that is filed by the person deducting taxes. In fact, in case of certain payments, it becomes mandatory to obtain Form 15CB from a chartered accountant too besides filing Form 15CA," says Gupta. Form 15CB is not required when remittance does not exceed Rs 500,000, and remittance does not require RBI approval. Form 15CB is a certificate in which details of payment, TDS rate, TDS deduction and other details of nature and purpose of the remittance are verified by a chartered accountant.

One of the requirements for withholding TDS is that the buyer of the immovable property should possess a tax deduction account number (TAN). TDS must be deposited on or before seventh of the month immediately succeeding the month of deduction. TDS can be deposited online using challan number ITNS/281 through NSDL portal.