Buying non-resident’s flat? Check tax impact
Individuals who have purchased property from non-residents find themselves grappling with several income tax-related challenges. To begin with, it’s difficult to determine the seller’s tax status (whether he is a resident or non-resident in India according to the I-T Act). This is crucial, as tax is required to be deducted at 20 per cent (in some cases even higher) for property purchased from a non-resident, as opposed to 1 per cent where the seller is a tax resident. In case of wrong deduction, penalties apply, and the buyer can face prosecution. When property is purchased from a resident, according to section 194-IA, TDS obligations kick in only if the sale consideration is above Rs 50 lakh. In case the purchase is from a non-resident, according to section 195, TDS obligations apply in all cases irrespective of the quantum.
Ready reckoner for LTCG TDS rates
1. Properties valued less than INR 50 lakh: Total tax 20.8% (including surcharge and cess)
2. Properties valued between INR 50 lakh and INR 1 crore: Total tax 22.88%
3. Properties valued above INR 1 crore: Total tax 23.92%
Surcharge: You have to add Surcharge as under
1. The amount of TDS shall be increased by a surcharge at the rate of 10% of such tax, where total is between Rs.50 lakhs-1.00 cr.
2. The amount of TDS shall be increased by a surcharge at the rate of 15% of such tax, where total is between Rs.1 CR.-2.00 cr.
3. The amount of TDS shall be increased by a surcharge at the rate of 25% of such tax, where total total is between Rs.2 CR.-5.00 cr.
4. The amount of TDS shall be increased by a surcharge at the rate of 37% of such tax, where total is above Rs.5 cr.
Note: From 2020-2021, the 182 days has been reduced to 120 days. Central Board of Direct Taxes (CBDT) asked I-T cadre to closely watch property purchases from non-residents. How to identify if the seller is a non-resident? Lay buyers often get confused between residency according to tax laws, and nationality. Typically, the non-resident seller does not reside in India, where the property is situated. Communication with the prospective buyers are largely via email or telephone. In some cases, the seller sends the property documents along with a PAN card or Aadhaar card and agrees to meet on a pre-fixed date to complete the sale. These cards mislead the buyer who is a layman. Even otherwise, unless clearly disclosed by the property seller, it becomes difficult to determine his residential status. What to do: The first step is to directly ask the seller if he is a non-resident. One can also probe further and ask for his I-T returns or passport details to determine the number of days stayed in India during the relevant period. As sellers may be reluctant to share these documents, the prospective buyer could ask the seller to get a certificate from his chartered accountant of his being a tax resident in India. An undertaking in writing must also be obtained from the seller of his being a resident (this can be part of the sale deed or a separate document). But such declarations will not offer absolute protection. Typically, if the seller has given a power of attorney to someone else, it’s likely he is a non-resident. Tax residency in India is determined based on the number of days the individual has spent in India in the relevant financial year as well as a look-back period of four financial years. Stay details in India of the seller, such as copies of passport covering this period, should be obtained. However, if the transaction is carried out in the earlier part of the financial year, it is slightly difficult to determine residential status conclusively — here, a more conservative approach may be adopted by the buyer. Buyers should get the agreement or sale deed verified by an advocate to safeguard their interests from disputes arising out of arrears of income tax liabilities, if any. In order to deduct tax at source, the buyer has to register online for TAN, but there is no process for its surrender. The buyer (deductor) can apply to the jurisdictional TDS officer, requesting cancellation of TAN. In the absence of any prescribed form, he can use a plain paper and give reasons for his request.
Ensure the following:-
1) Try to get the Certificate from the Income Tax Officer for computation of Capital Gains which will lower the TDS to be deducted. This is now processed online.
2) The Income Tax Officer may take around 2 to 4 weeks to issue to certificate for lower deduction of TDS and will ask for various documents for checking details like Purchase Price, Date of Purchase, any expenses on Renovation/ Construction etc.
3) In case the Seller is unable to get the Certificate, the TDS would be deducted on the Sale Value and will lead to excess deduction of TDS.
4) Apart from the Property Registration Documents, the seller should also collect Form 16A from the Buyer.
5) The seller can reduce his Capital Gains which will lead to lesser TDS Deduction if the seller intends to reinvest the Capital Gains in India.
6) In case the seller does not opt for this certificate, he can also apply for Refund of the excess TDS deducted at the end of the year by filing tax returns ASAP, in April itself.
7) To complete a property transaction, the seller must have a Permanent Account Number (PAN). So, before initiating a deal, always verify availability of PAN.
8) Buyer should always ask the seller to be present in India to complete the deal. In case, the seller is unable to be present at the time of deal closure in front of the registrar, check if they have given Power of Attorney (PoA) to someone for carrying out the deal. Every Sub-Registrar has different format of POA and process about documentation.
9) Check whether there is a single owner or multiple owners of the property. If it is owned jointly, then the payment is made as per their share in the property. Paying a single owner may attract litigation in future. Incase % of ownership has not been shown in the Sale Deed, then it should be assumed to be propionate.
10) It is important for the buyer to determine the taxable value of capital gains (LTCG or STCG) in the hands of the seller for TDS purposes, subject to any tax relief available under the applicable Double Taxation Avoidance Agreement.
11) While computing the capital gains, the buyer also needs to evaluate whether the stamp duty value of the property exceeds 110% of the sale consideration. If so, there are additional tax implications for both the buyer and the seller. If the taxable amount of capital gain is nil, there will be no TDS implications.
As part of TDS compliance on purchase of a property from a non-resident, Buyer will need to do the following in consultation with tax adviser:
1. Obtain a TAN ;
2. Deduct TDS at an appropriate rate and deposit it with the income tax authorities within seven days from the end of the month in which the payment or credit has been made;
3. File Form 27Q (withholding tax return) within 30 days from the end of the quarter (31 May for the quarter ending in March) in which the payment or credit has been made; and
4. Issue Form 16A within 15 days from the due date of filing the withholding tax return.
Conclusion: Purchasing property from NRI involves a lot of legal and tax formalities, so buyer should take care of TDS provisions while the seller should focus on complying with tax obligations and registered documents to prove the source of income in case of any problem. In the case of tax evasion, income tax authorities have the power to cease the bank accounts also.