TDS implication on an NRI of the US for sale of property in India

What is TDS?

TDS implication on an NRI of the US , TDS is referred to as Tax deducted at Source. It is the income tax that is reduced from the money paid at a specific time such as payment of rent, salary, commission, interest, etc.  The Income Tax Department ensures that income tax is deducted in advance from the payments that are made by taxpayers and this is made feasible by TDS.

According to the provisions of the Income Tax Act, 1961 if an individual is purchasing a property in India then he would have to deduct the appropriate TDS from the sale value and pay it to the Government. In the case of a seller who is a resident of India and the value of the property is Rs. 50 lakhs or more, a TDS at the rate of 1% is deducted by the buyer and deposited with the Government.

However, there are certain different provisions related to TDS in case of the seller being an NRI.

Tax implications of sale of property by NRI in India

The selling of property in India by an NRI residing in the US is taxable under Section 195 of the Income Tax Act, 1961. When the seller of the property in India is an NRI, TDS at the rate of 1% is not applicable under Section 194/A of the Income Tax Act, 1961.

When an NRI is selling a property in India, there are three major points affecting taxation. Let us have a look at these 3 major factors.

• Capital Gain Tax

 When an NRI is selling a property in India after a period of 3 years of holding, then long term capital gain tax at the rate of 22.6% is applicable on the amount earned. In case of holding the property for less than 3 years before selling it, the short term capital gain tax is levied as per the rates of the Income Tax slab.  In the case of short term capital gain, a TDS at the rate of 33.9% is applicable even if the seller is an NRI. The capital gain taxation proceeds remain the same in the case of both resident sellers and an NRI as well. The difference lies in the calculation and deduction of TDS. The Income Tax Department of India directs the buyer to deduct the TDS under Section 195 before making payment to the NRI buyer.

• TDS

In case of an NRI selling a property in India, the buyer must deduct TDS at the rate of 20.66% on the price of the property. This is applicable in case of Long term capital gains. In the case of short term capital gains, the TDS would be deducted at the rate of 33.9%. NRIs who are selling property in India are liable for making payment of Capital Gain Tax on the capital gain obtained but TDS is levied on the property’s total sale value. So, usually, NRIs have to incur a loss if they do not claim their TDS refund on time.

• Re-investment of the capital gain obtained

Many NRIs re-invest their capital gains to be safe from the payment of capital gain tax. An NRI who has incurred a long term capital gain can re-invest the gain into property or other tax-exempted bonds for saving long term capital gain tax.  The Income Tax Department can issue a Tax Exemption Certificate to NRIs under Section 195 of the Income Tax Act, 1961.

Claim of TDS refund by NRIs

1.DTAA

NRIs in the US can avail the benefit of lower TDS by the provisions of DTAA (Double Tax Avoidance Agreements).  NRIs in the US can obtain a tax residency certificate i.e. ‘Form 6166′ from Revenue and Customs Department. Then an application for a TDS refund can be submitted with the IRS by ‘Form 8802′.

2.Re-investment proofs

NRIs can submit their proofs of re-investment proofs in India to claim a TDS refund.  NRIs will have to submit an affidavit which states the investment of the capital gains in the purchase of capital gain bonds. Moreover, if an NRI is purchasing a new property by the capital gain obtained then an allotment letter can be submitted.

3.TDS Waiver

In case of an NRI’s total income in India is less than Rs. 2, 50,000; an application for TDS waiver can be submitted with Income Tax Officer.

Hence, NRIs selling property in India will have to pay TDS on the entire sale value of the property. But, they should claim the TDS refund by making appropriate tax planning in advance.