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The below content is purely for informational purposes and is not intended to constitute advisory of any kind. Please note, these are in-depth articles which are best viewed on large screen devices like laptops, desktops and tablets. The position reflected in this article has been updated as of April 15, 2024.

Non-Resident Indians (NRIs)/Persons of Indian Origin (PIOs)/Overseas Citizens of India (OCIs) often invest in Indian real estate. Sale of such property involves complex tax considerations where Tax Deducted at Source (TDS) is considered to be the most crucial one. This article elaborates on the TDS implications for NRIs selling property in India.

 

TDS on NRI property transactions

As an NRI, you can sell your residential or commercial properties to any resident Indian or another NRI/OCI. If you have inherited an agricultural property, you can sell it to resident Indians only. Regardless of the property type (residential, commercial or agricultural), the sale of real estate in India by NRIs is subject to TDS as per the Income Tax Act, 1961 (‘the Act’).

While making the payment, the buyer of the property is obligated to withhold a predetermined portion of applicable tax from the sale proceeds and deposit it to the government treasury. Thereafter, you, the seller (NRI), will be eligible to claim a credit for such TDS while filing your income tax return in which you are reporting capital gains in India. Please note that even if the buyer is another NRI/PIO/OCI or any other person, they will be required to deduct the TDS amount from the sale consideration and deposit those funds with the Indian government.

 

Determining the applicable TDS rate

The rate of TDS applicable on the sale of property depends upon multiple factors including:

  • Whether the gain is a Long Term Capital Gain (LTCG) or a Short Term Capital Gain (STCG). If you have held the property for more than 24 months, it will be considered as an LTCG, otherwise, it will be considered as an STCG.
  • Whether you have opted for the old or new tax regime
  • Your applicable Income Tax (IT) slab rate
  • Availability of Lower Tax Deduction Certificate (LDC).

Please note, in case of properties inherited by an NRI, the prior ownership would also be considered as a part of the holding period to determine the LTCG and STCG.

The table below summarises the effective rate of TDS for different income levels of NRIs in India and the type of capital gains.

Please note, tables are best viewed on desktops or in landscape mode on mobile phones.

Particulars LTCG STCG
Total income is less than ₹50 lakh Total income is from ₹50 lakh - ₹1 crore Total income is more than ₹1 crore

Capital gain tax rate

20%

20%

20%

As per the applicable IT slab rate

Add: Surcharge

Nil

10% of the above tax

15% of the above tax

As per the applicable IT slab rate

Total tax rate

20%

22%

23%

 

Add: Health & Education cess

4% of the total tax rate

4% of the total tax rate

4% of the total tax rate

4% of the total tax

Effective TDS rate

20.80%

22.88%

23.92%

To be ascertained as above

For a detailed explanation on determining the amount of capital gains on the sale of your immovable property, click here

Did you know?

Just like resident Indians, NRIs selling property in India can benefit from the tax relief on long term capital gains.  The Act offers exemptions under Section 54 series for the same. To qualify, you must reinvest the sale proceeds within a specific timeframe. This reinvestment can be made in another residential property located in India, specific government bonds with certain characteristics or other assets as detailed out in the Act. 

Reducing your TDS liability with LDC

While your overall tax liability remains the same, as an NRI, you have an option to reduce your TDS payout. With an LDC, you can have a lower TDS rate, thereby, reducing your TDS amount.

Prior to the sale transaction, you can register yourself on traces portal and apply online for an LDC in Form 13 along with the requisite documentation to the Income Tax Assessing Officer (AO) in India. You will have to justify a lower tax burden to the AO by disclosing:

  • Any long-term/short-term capital gains from the sale transaction; and
  • Your estimated total income in India for the current year

Once approved, the AO will issue an LDC for a specified period pertaining to the transaction. You should ensure the validity of the certificate throughout the sale transaction duration.

Alternatively, the buyer can also reach out to the AO seeking the applicable TDS rate (LDC) for the seller prior to the sale transaction.

Please note that if neither the buyer, nor the seller obtains the certificate, then the buyer will compute the TDS considering the entire sale consideration as capital gain and at the maximum rate of TDS.

Let’s understand how an LDC can reduce TDS with the help of an illustration.

 

Scenario 1: LDC not taken

Amit, an NRI, sold a plot in Mumbai to a resident, Rahul, for ₹1.5 crore in July 2023. Amit had purchased the plot in January 2020. Since the plot qualifies as a long-term capital asset (held for more than 24 months) the applicable TDS rate will be 20% along with applicable surcharge and cess. Amit did not seek an LDC from the AO. Accordingly, Rahul, the buyer, computed TDS on the entire sale consideration of ₹1.5 crore.

The TDS computation is illustrated as below:

Please note, tables are best viewed on desktops or in landscape mode on mobile phones.

Particulars Amount (₹)

A

Sale consideration

1,50,00,000

B

Tax rate@ 20% on (A)

30,00,000

C

Surcharge @ 15% on (B)

4,50,000

D

Total tax (B) + (C)

34,50,000

E

Health & Education cess @ 4% on (D)

1,38,000

F

Total TDS (D) + (E)

35,88,000

 

TDS rate (F/A)

23.92%

Hence, Rahul, the buyer, will deduct ₹35,88,000 as TDS from the sale consideration.

 

Scenario 2: LDC is taken and TDS is deducted at a lesser rate:

Let’s look at the scenario where Amit had obtained an LDC from the AO. Since Amit had purchased the plot in January 2020 for ₹1.2 crore and disclosed the same to the AO, the AO will consider indexed cost of acquisition for determining the capital gains.

The indexed cost of acquisition will be computed as per the formula outlined below:

Indexed cost of acquisition =
Cost of acquisition x Cost Inflation Index (CII) of the year of transfer / CII of the year of acquisition

In the present case, the property was acquired for ₹1.2 crore, establishing its cost of acquisition at ₹1.2 crore. The acquisition occurred in the year 2020, and the property was subsequently transferred to Rahul in 2023. The Cost Inflation Index (CII) for the year 2020 was 289, and for 2023, it was 348. Therefore, for the purposes of calculating capital gains tax, the CII of 289 will be applied to the year of acquisition (2020), and the CII of 348 will be applied to the year of transfer (2023). Accordingly,

Indexed cost of acquisition =
₹1.2 crore x 348 / 289
= ₹1.45 crore

Once you arrive at the indexed cost of acquisition, the AO will use the LDC to arrive at the reduced TDS rate as per the computation outlined below:

Please note, tables are best viewed on desktops or in landscape mode on mobile phones.

Particulars Amount (₹)

A

Sale consideration

1,50,00,000

B

Less: Indexed* Cost of Acquisition (₹1.2 crore * 348/ 289)

1,44,49,827

C

Capital gain (A-B)

5,50,173

D

Tax rate @ 20% on (C) 

1,10,035 

E

Health & Education cess @ 4% on (D)

4,401 

F

Total TDS (D) + (E)

1,14,436 

 

TDS rate as per LDC (F/A

0.76%

**Please click on link to refer the relevant CII as per the indexation chart updated as per the Finance Act, 2024: Cost Inflation Index (incometaxindia.gov.in)

Amit then shared the LDC with Rahul and accordingly, Rahul deducted the TDS at a rate of 0.76% on the sale consideration.

Please note that Amit’s overall tax liability in either of the scenarios remains the same. However, using an LDC, he can have a lower TDS rate and reduce his upfront tax outflow. He can save by ₹34,73,564 (₹35,88,000 - ₹1,14,436) on the sale of his immovable property

 

Ensuring TDS compliance as a seller

While the buyer is responsible for deducting the TDS from the sale proceeds, as a seller, you should ensure compliance from your end as well. This includes:

  • Declaration of your residential status at the time of sale of property;
  • Obtaining a TDS certificate (Form 16A) from the buyer within 15 days of filing the TDS return;
  • Reconciliation of the TDS amount reflecting in Form 26AS with the TDS certificate (Form 16A);
  • Claim TDS credit (if any) as reflecting in form 26AS when you file your Indian tax return

 

Consequences of non-compliance

Both parties involved in the transaction may face consequences for non-compliance with TDS regulations. The buyer risks facing penalties and interest fees for delayed TDS deposits, while the seller may experience delays in repatriating the sale proceeds to the overseas country as funds cannot be repatriated unless taxes are paid. To know more on repatriating sale proceeds from property sales in India, click here.

Furthermore, misrepresenting residency status to evade TDS obligations could result in legal complications. It is advisable for sellers to ensure that buyers comply with TDS regulations.

 

Impact of Double Taxation Avoidance Agreements (DTAA)

As an NRI you can avail DTAA benefits as per the mutual agreement between India and your country of residence. Most countries, including the United States of America, do not provide DTAA benefits on sale of property. You should consult a tax professional or legal advisor for more details.

Conclusion

Understanding TDS is crucial when selling property in India as an NRI. You have an option to reduce your immediate tax burden by applying for an LDC. While the principal responsibility of TDS compliance resides with the buyer, as a seller, you should ensure true representation of your residency status and transparency in your sale transaction. For more details on computation of TDS, you should consult a tax expert.

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