Tax Deducted at Source or TDS (Withholding Tax) is a type of tax that is deducted from an individual’s income on a periodic or occasional basis. TDS can be applicable for incomes that are regular as well as irregular in nature. Income Tax Act, 1961 regulates TDS in India through Central Board of Direct taxes (CBDT) under the Indian Revenue Services (IRS). TDS rule directs the payee or employer to deduct a certain amount of tax before making full payment to the receiver. TDS is applicable for salary, commission, professional fees, interest, rent, overseas remittances for services etc.
TDS be deducted when and by whom?
Any person making specified payments mentioned under the Income Tax Act are required to deduct TDS at the time of making such specified payment. But no TDS has to deducted if the person making the payment is an individual or HUF whose books are not required to be audited. However, in case of rent payments made by individuals and HUF exceeding Rs 50,000 per month, are required to deduct TDS @ 5% even if the individual or HUF is not liable for a tax audit. Also, such Individuals and HUF liable to deduct TDS @ 5% need not apply for TAN.
The TDS deducted must be deposited to the government by 7th of the subsequent month using Challan ITNS-281 on the government portal.
Form 16, Form 16A, Form 16 B and Form 16 C are all TDS certificates. TDS certificates have to be issued by a person deducting TDS to the assessee from whose income TDS was deducted while making payment.
Section 192: Payment of salary-As per applicable rate based on Taxable Income.
Section 194A: Income by way of interest other than “Interest on securities” @ 10%
Section 194C: Payment to contractor/sub-contractors. Payment to HUF/Individuals @ 1%, Others @ 20%
Section 194H: Commission or brokerage @ 5%
Section 194-I: Rent on a) Plant & Machinery @ 2% b) Land or building or furniture or fitting @ 10%
Section 194 -IB: Rent payable by an individual or HUF not covered u/s. 194I @ 5%
Section 194-IA: Payment on transfer of certain immovable property other than agricultural land @ 1%
Section 194J: Any sum paid by way of: a) Fee for professional services b) Fee for technical services c) Royalty d) Remuneration/fee/commission to a director or e) For not carrying out any activity in relation to any business f) For not sharing any know-how, patent, copyright etc.@ 10%
TDS Rates Applicable for Persons not Resident in India (NRIs)
Section 195: Payment of any other sum to a Non-resident
a) Income in respect of investment made by a Non-resident Indian Citizen 20%
b) Income by way of long-term capital gains referred to in Section 115E in case of a Non-resident Indian Citizen-10%
c) Income by way of long-term capital gains referred to in sub-clause (iii) of clause (c) of sub-section (1) of Section 193-10%
d) Income by way of short-term capital gains referred to in Section 111A-15%
e) Any other income by way of long-term capital gains [not being long-term capital gains referred to in clauses (33), (36) and (38) of Section 10]-20%
i) Income by way of fees for technical services payable by Government or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern and where such agreement is with an Indian concern, the agreement is approved by the Central Government or where it relates to a matter included in the industrial policy, for the time being in force, of the Government of India, the agreement is in accordance with that policy-10%
j) Any other income-30%
NRI’s and lower TDS on Property Sale
One can apply for Nil / Lower Tax Deduction Certificate or Tax Exemption Certificate on Property Sale
NRI Seller can apply for Nil Tax Deduction or Lower Tax Deduction with Income Tax Assessing Office. In case, NRI seller is planning to re-invest capital gain as i mentioned earlier then he can apply for tax exemption certificate. Based on assessment by Income Tax Department, certificate will be issued to NRI seller for property sale. In this case, buyer will not deduct TDS u/s 195 on sale consideration value. Income Tax Department will issue separate certificate to NRI seller for TDS on capital gains. For Tax Exemption Certificate, NRI seller can submit application in Income Tax Department under whose jurisdiction his / her PAN belongs to.
Documents Required: Income tax department may ask for following documents to issue Nil / Lower Tax Deduction or Tax Exemption certificate
(c) Sale Agreement / Sale Deed or Draft of the same if not executed.
(d) Income Tax Returns
(e) Bank Statement
(f) Any other document deemed relevant
Lower TDS on sale of Immovable Properties by NRI under section 197
Buying property requires a lot of home work before entering into a deal. One of the requirements being compliance with tax withholding provisions of the Income Tax Act. In case, both the buyer and the seller is resident Indian, the tax withholding of 1% on sale consideration is required to be remitted by using 26QB Challan. After deducting the tax of 1%, the balance sales consideration can be made based on the arrangement between the parties.
Buying Property from Non-Resident even require more ground work to be carried out by the buyer. The consideration from sale of property in India by a non-resident is chargeable to tax in India and is covered by section 195 and therefore tax has to be deducted at the time of payment of such consideration. The resident buyer has to withhold the tax of 20% on any sum chargeable to tax. For the purpose of sale by non-resident of an immovable property, one has to see the rate prescribed for taxation of capital gains. As per section 112 of the Income Tax Act, Long Term Capital Asset is taxed at the rate of 20%. Short-term Capital Assets other than equity shares and equity oriented mutual funds is to be taxed at the slab rates prescribed under the Finance Act applicable to the year of sale. The seller being non-resident, in such case will receive 80% of sale consideration directly from the resident buyer and the balance 20% will be in the form of withholding tax, the same of which can be claimed as credit while filing return of income by seller in India. The major concern of the Non-resident seller is the cash flow to the tune of 20% gets blocked with the income tax department.
The Non-resident has to file return of income in India and opt for refund for TDS amount in case assessee invest the proceeds into 54EC Bonds. As it is well known fact that the Income Tax department usually make delay in processing the refund amount for one or the other reason, the opportunity cost of such refund amount blocked with the department is lost. In many cases, this takes time and is burdensome for the taxpayer as first his TDS is being deducted by the person making the payment, then such TDS is deposited with the Government, and then a refund of TDS is being claimed. (Commission/brokerage on sale of property and EC and SHE is ignored for the purpose of explanation)
To reduce the hardships faced by the taxpayers, the seller can resort to section 197 which states that in case of total tax liability at the end of the person whose withholding tax is being deducted is less than the amount of withholding tax that is being deducted, he may file an application for lower deduction of TDS/certificate of NIL TDS. The withholding tax may be less because seller may invest the proceed either in another house or investment in prescribed bond u/s 54EC of the Income tax Act. Once a certificate is granted u/s 197, the withholding tax will be deducted as per the rate stated in the certificate.
An application for NIL/Lower deduction of withholding tax is required to be duly filled in Form 13 to the Jurisdictional Assessing Officer along with furnishing of the following documents/details:
ü Statement of total income for the current year after considering the income for with 197 certificates sought.
ü Draft Agreement of proposed Sales Deed.
ü Proof regarding NR Status - Copy of passport & Estimated number of days of stay in India, during the current FY.
ü Details and Purpose for which the payment is being received
ü ITR and ITR-V of the last three years along with statement of Income, in case ROI is filed.
ü In case the applicant has not filed returns, explanation for the same in the form of an Affidavit.
ü If any benefit under DTAA is claimed, copy of the Tax Residency Certificate issued by the tax authorities of the country of residence.
ü TAN of the Purchaser/Payer.
ü 26AS of the last three years and the latest for the current year.
ü Details of any demand pending under IT/WT Act, including CPC demands ( both Bangalore and TDS CPC)
ü Explanation about rental income of such property. If not let out, explain about use of same property.
ü Guidance Value fixed by Registrar
ü Bank Guarantee for the tax amount forgone for claiming exemption u/s54EC.
The Non-resident seller after receiving the certificate u/s 197 can request the buyer of immovable property to deduct specified percentage of withholding tax mentioned in the certificate and also need to furnish the certificate number to incorporate the same while file e-tds returns. Consequently, the credit of withholding taxes will be reflected in 26AS and the same can be claimed by the seller non-resident in his return of income.