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In a separate article we have discussed the provisions of tax deduction at source on payments being made to residents with respect to rental and sale transactions of property. For a resident Indian, who is a recipient of income from the rental or sale transactions of properties, the provisions for Tax Deduction at Source (TDS) have been implemented selectively and that too, when the transaction exceeds a certain basic threshold limit.
However, for non-resident recipients, no threshold limit has been prescribed for applicability of TDS requirement. Therefore, all types of transactions with respect to immovable property with non-residents, are subject to TDS by the payer in India.
Property transactions with NRIs that attract TDS
The requirement to deduct tax at source, for payments made to a non-resident, is applicable with respect to all the transactions of immovable property, where any income accrues to the non-resident. The transactions covered would include payments of rent to a non-resident, as well as payments for purchase of a property from a non-resident. For a resident recipient, the transactions covered include land (excluding an agricultural land) and buildings and that too if the value of the transaction exceeds Rs 50 lakhs.
However, in case of non-residents, even transactions for a few thousands of rupees, for purchase of any immovable property or rights in immovable property, are covered. If the seller or landlord insists that he is a resident and not a non-resident, ensure that a specific clause is inserted in the sale/lease agreement, to safeguard your interest in the matter.
TDS rate and the amount on which the tax is deducted
The rate at which tax is required to be deducted, is prescribed by the Finance Act every year. For long-term capital gains on property, the rate applicable is 20% and for rental income, the rate of TDS is 30%. If the capital gains are of the nature of short term, you are required to deduct tax at the rate of 30%. However, if a lower rate has been prescribed the in double tax avoidance agreement between India and the country of residence of the seller, then, the tax can be deducted at such lower rates.
The tax is required to be deducted on the amount which is chargeable to tax in India. Hence, for a property that is taken on rent from a non-resident, you can deduct the standard deduction of 30% from the amount of rental payable by you and deduct tax on the balance taxable amount. Even if the landlord submits proof of having taken a home loan to buy the property, it will not be safe for you to reduce the amount of interest from the rent payable by you, for arriving at the amount chargeable to tax. This is because, presently, a tax payer is allowed to set off losses under the head ‘Income from House Property’ to the extent of Rs 2 lakhs only, for all the properties taken together and you have no means to verify whether the landlord has any other similar properties that have been let out.
For purchase of a property from a non-resident, you can apply the normal computation procedure, to arrive at the taxable capital gains, for the non-resident. If the seller submits copies of his purchase agreements to you, to help you determine whether the same is short term or long term and if the gains are long term, you can safely apply the standard rate of 20%, on the indexed long-term capital gains so computed.
In case the landlord does not give you any documents that will help you determine the amount of taxable capital gains, you will have no option but to deduct the tax at 30% or at the rate specified in the double tax avoidance agreement entered into between India and the country of residence of the non-resident seller.
If the seller claims that he has made investments, which entitle him to exemptions under Sections 54, 54F of 54EC and insists that no tax should be deducted on the sale proceeds, or lower tax should be deducted, then, you have two choices. If it is possible, request the seller to approach the jurisdictional tax officer, to issue a certificate for no tax deduction at source. Alternatively, armed with the documents submitted by the non-resident seller, you can also approach your tax officer, to issue an order to you, specifying either that no tax needs to be deducted or that the tax be deducted at the applicable reduced rates.
Procedures to be followed by the payer of the income to an NRI, vis-à-vis TDS
It is generally people engaged in business, who are required to deduct tax at source and comply with various provisions. However, even if you are not carrying on any business but are entering into any property transaction with a non-resident, you will have to comply with various procedures, with respect to the tax to be deducted from payments being made to such a non-resident, even for a single transaction.
You are required to obtain a tax deduction account number (TAN), before you make any payment to the non-resident. Moreover, you will have to deduct the tax either at the time of credit or payment, whichever is earlier. The tax so deducted, has to be deposited to the credit of the central government within seven days from the end of the month in which the tax is deducted. You also have to submit a quarterly return in Form No 27Q within the specified time, as well as furnish a copy of the TDS certificate to the non-resident, within the specified time. There are stringent penalties for delays in filing of the quarterly returns, as well as delays in furnishing the TDS certificate to the payee. So, it is advisable to take the help of a professionally qualified person.
In case the payment is required to be remitted outside India, the payer also will have to obtain a certificate from a chartered accountant, to be attached with the remittance application to the bank. However, no such certificate is required if the payment is being made to the non-resident ordinary account of the non-resident.
In case of jointly owned property, where one or more owners are residents and the other/s are non-residents, you will have to comply with the relevant requirements, as applicable to the residents, as well as non-residents.
(The author is a tax and investment expert with 35 years’ experience)