When a Non-Resident Indian (NRI) sells property in India, the buyer is legally required to deduct Tax Deducted at Source (TDS) as per the Indian Income Tax Act, 1961. This provision ensures tax compliance while facilitating revenue collection on capital gains from property sales. Understanding the nuances of TDS deduction can help both NRIs and buyers manage their obligations efficiently.

---

TDS Deduction under Section 195

Section 195 governs TDS on payments made to NRIs. In property transactions, the buyer must deduct TDS before making payment to the seller.

Applicable TDS Rates:

1. For Long-Term Capital Gains (LTCG):
   • TDS is deducted at 20% on the capital gains amount.
   • The NRI benefits from indexation on the cost of acquisition, which reduces taxable gains.
2. For Short-Term Capital Gains (STCG):
   • If the property is held for 2 years or less, the gains are categorized as STCG.
   • TDS deduction for nri on sale of property as per the NRI’s applicable income tax slab rates, ranging from 5% to 30%.

Additional Charges:

Over and above the basic TDS, a surcharge (depending on income level) and health and education cess (4%) are levied.

---

TDS on the Total Sale Value

TDS is deducted on the entire sale consideration unless the NRI provides a certificate for lower or nil TDS. This often results in higher deductions than the actual tax liability based on capital gains.

Example:

• Sale Value: ₹1 crore
• TDS @20%: ₹20 lakhs
  If the capital gains are less than ₹1 crore, the excess TDS deducted can be claimed as a refund when filing the income tax return.

---

Steps for TDS Deduction

1. Obtain TAN (Tax Deduction and Collection Account Number):
   • The buyer must obtain a TAN to deduct and deposit TDS.
2. Deduct TDS on Sale Consideration:
   • Calculate TDS at the applicable rate and deduct it from the payment made to the NRI seller.
3. Deposit TDS with the Government:
   • Deposit the TDS amount with the Income Tax Department within seven days of the following month using Challan ITNS 281.
4. Issue Form 16A to the NRI Seller:
   • Provide the TDS certificate (Form 16A) to the seller as proof of tax deduction.
5. File TDS Returns:
   • Submit the TDS return in Form 27Q on a quarterly basis.

---

Lower or Nil TDS Certificate

If the NRI’s actual tax liability is lower than the TDS calculated on the total sale value, they can apply for a lower or nil TDS certificate.

How to Apply:

1. File Form 13 with the Income Tax Department.
2. Submit supporting documents, including:
   • Sale agreement and purchase deed
   • Proof of indexed cost of acquisition and improvements
   • Capital gains calculation

Once the certificate is issued, the buyer can deduct TDS based on the revised rate.

---

Challenges in TDS Compliance

1. High Initial Deduction:
   • Without a lower TDS certificate, buyers deduct TDS on the full sale value, leading to higher upfront deductions for NRIs.
2. TAN Requirement for Buyers:
   • Many buyers are unaware of their obligation to obtain a TAN before deducting TDS.
3. Delayed Refunds for NRIs:
   • Excess TDS deduction often results in refunds, which can take time to process after filing an income tax return.
4. Complex Documentation:
   • Calculating capital gains and applying for exemptions can be challenging for NRIs unfamiliar with Indian tax laws.

---

TDS and Capital Gains Exemptions

NRIs can claim exemptions on long-term capital gains under certain provisions:

1. Section 54: Reinvestment in residential property within India.
2. Section 54EC: Investment in government-approved capital gains bonds within 6 months of sale.
3. Section 54F: Exemption for reinvestment of the full sale proceeds (non-residential property).

Exemptions reduce taxable gains, and a lower TDS certificate can reflect these adjustments.

---

Double Taxation Avoidance Agreement (DTAA)

India’s DTAA agreements with several countries help NRIs avoid double taxation. Under DTAA:

• TDS rates may be reduced for certain countries.
• Taxes paid in India can be credited in the NRI’s country of residence.

Documents for DTAA Benefits:

• Tax Residency Certificate (TRC) from the country of residence.
• Form 10F and other supporting documents.

---

Best Practices for NRIs and Buyers

1. For NRIs:
   • Calculate capital gains in advance and apply for a lower TDS certificate if needed.
   • Keep all documents ready, including purchase deeds, sale agreements, and reinvestment proofs.
   • File income tax returns promptly to claim refunds for excess TDS.
2. For Buyers:
   • Understand TDS obligations and ensure timely compliance to avoid penalties.
   • Obtain a TAN before initiating the property transaction.
   • Maintain proper records of TDS deposits and returns.

---

Conclusion

TDS deduction on property sales by NRIs is a significant aspect of tax compliance in India. While the rules can be complex, proper planning and professional guidance can simplify the process for both NRIs and buyers. Ensuring compliance with Section 195 and leveraging provisions like lower TDS certificates and capital gains exemptions can reduce tax burdens and streamline transactions.

For expert advice on TDS compliance and NRI taxation, consult with Dinesh Aarjav & Associates, specialists in simplifying tax complexities for NRIs.