NRIs should obtain TDS certificate in advance for lower deduction at source

It will lower the tax deducted at source and they won't have to wait a long time for refunds

Manish Shah was elated when his siblings and he finally managed to sell their ancestral family property located in Mumbai to a well-known developer in October 2016. The deal took a long time to close due to various reasons, including the fact that Shah and his brother, besides being the key negotiators in the transaction, are also non-residents.

The developer who bought the property made all the family members (eight of them) parties to the agreement and paid each his respective share according to the Will left behind by their grandfather.

Tax deduction for non-residents: Going by the rules, the developer deducted the mandatory one per cent tax from the payment made to all the resident family members.

The Income-Tax Act mandates that any resident making payments to non-residents has to deduct tax on the income. Typically, in such cases, residents prefer to deduct tax on the entire sum payable to the non-resident as they cannot determine the actual taxable income of the non-resident. Accordingly, the developer deducted tax at 20 per cent plus surcharge and cess on the payments made to Manish Shah and his brother.

Shah had made up his mind to invest the entire proceeds in another residential property in Mumbai to claim capital gains tax exemption under Section 54 of the I-T Act. Shah had no clue about the cost of acquisition or construction of the ancestral property, as this meant digging into 75-year old history.

DON’T RELY ON REFUNDS

• Non-residents usually end up paying higher taxes because of TDS than the actual dues
   
• To avoid higher outgo, they can approach the income tax department and get a TDS certificate
   
• An officer will issue the certificate for the actual dues, after examining the claim
   
• Non-residents need to make the application before a transaction is concluded

In his computation of income, Shah offered the entire sale amount as long-term capital gain after deducting a notional cost of Rs 1,000 as the fair market value of the property. He claimed exemption on account of the reinvestment made in the new property. Accordingly, the entire tax deducted (approximately Rs 45 lakh) by the developer was claimed as refundable in the return of income filed in June 2017. 

The processing and payment of refund took a long time. Shah finally received the money in his bank account in October 2018. He was not too happy about this as the tax was deducted from his payment in October 2016, but he was able to get the refund only in October 2018 - a gap of 24 months. 

On the sum of Rs 45 lakh, the notional interest lost by Manish over 24 months was considerable. The State Bank of India (SBI) offers an interest rate of 6.8 per cent on two-year fixed deposit. If Shah had kept Rs 45 lakh as fixed deposit with the bank, he would have got about Rs 6.5 lakh in two years. Prudent tax planning  can help non-resident taxpayers avoid such delays in realising their tax refunds. 

A stitch in time: Relief from such a situation is available under Section 197. A taxpayer can apply to the tax officer for nil or lower tax deduction at source (TDS) certificate. The taxpayer needs to make this application before the transaction is concluded. 

Once the taxpayer applies, he has to submit the basis for making the application for lower deduction. The tax officer then calls for additional data, information, and documents to satisfy himself that the existing or estimated tax liability justifies deduction of tax at lower rates or nil, as the case may be.

The application has to be specific to the transaction and the amount involved. The taxpayer has to mention the names and account details of the deductors. The tax officer will determine the tax liability applicable on the transaction by considering the tax payable on the estimated income for the year in question, tax paid in the preceding three-four years, the TDS, advance taxes paid and any existing liability.

If the officer is satisfied on the basis of the facts, he will issue a certificate directing the deductor to deduct tax at nil or lower rates. These certificates are valid only for such period as specified in the document, unless the officer 

cancels it. Further, these certificates are only valid vis-à-vis the deductor named therein and are not transferable. 

Let’s take an example of a non-resident, who had bought a residential property for Rs 1 crore in August 2011 and is now getting an offer to sell it at Rs 2 crore. Under the prescribed provisions of the Act, the buyer is obliged to deduct tax at 23.92 per cent (tax rate plus surcharge and cess) on the 

total amount of Rs 2 crore, which is Rs 47.85 lakh.

The taxable long-term capital gain for the non-resident works out to only Rs 47.82 lakh. Accordingly, the tax due on the taxable capital gain is only Rs 9.95 lakh, under the assumption that the non-resident is not claiming any exemption and his other income is less than the basic exemption limit.

In this case, if the non-resident plans his tax liability, it is advisable that he should file an application with his tax officer along with the capital gain calculations, to obtain a lower deduction certificate of 5 per cent (Rs 10 lakh on Rs 2 crore). If the taxpayer plans to save on paying tax using any of the exemptions prescribed under the Act, the application can be suitably modified. 

Sail through scrutiny: According to the recent guidelines, the tax officer is obliged to dispose of an application received for lower deduction within a time frame of 30 days from the end of the month in which the application, complete in all respects, is received. 

It may be observed from the above that prudent tax planning can help the non-resident improve his cash flows from the above transaction by Rs 37.90 lakh, which is almost 80 per cent of the tax that would have been deducted by the buyer without this intervention.

There is another hidden advantage for a non-resident who takes resort to this procedure. High-value property transactions are one of the criteria for selection of cases for detailed tax scrutiny. In such cases, even if the non-resident taxpayer’s case is selected for scrutiny, he need not worry about any further details being asked for it, as all the tax deductions that have been made are on the basis of directions in the certificate.

The writer is founder, Arvind Rao & Associates