However, his plan fell apart when he approached a bank for a home loan. The loan manager informed him the loan would not cover the 23.92% TDS or tax deducted at source that he has to deposit with the Income Tax Department.
During a property sale, the buyer must deposit 20% (surcharge and cess extra) of the property’s total sale value, and not just the gains, as TDS when the seller is an NRI.
“This meant I had to pay almost 50% of the value from my own pocket, which was impossible for me,” said Chitransh, who wanted to use only his first name. “I asked the seller if I could use the downpayment for TDS, but he suggested I could only use about 10% of the 25% I had to pay him in the first month as he needed the remaining funds for his son’s wedding
“I still needed to shell out nearly ₹35 lakh extra from what I had budgeted. I’m salaried and don’t have so much surplus cash to spare,” he added. The seller found another buyer and the deal fell through for Chitransh.
The 20.8-23.9% (includes surcharge and 4% cess) TDS to be paid during a property sale when the seller is an NRI is a pain point not just for the seller but also for the buyer.
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The seller has to lock away a significant amount in TDS till they get a refund, whereas the buyer can face cash flow issues, said Urvil Modi, founder and chief executive of Samriddhi Wealth Management, a Sebi-registered investment advisor. Chitransh is a case in point.
“The TDS component is a serious problem for buyers as the banks will not fund it,” said Modi.
This is because the TDS counts as an expense related to the transaction that the banks cannot fund. “TDS forms part of the customers’ own contribution of the 20-25% required as per the LTV (loan-to-value) norms,” saidManu Singh, business head – Housing Finance, Kotak Mahindra Bank.
LTV ratio is the percentage of the property’s total value that the bank can finance in a loan. The Reserve Bank of India has capped the LTV ratio at 75-90% for home loans, which varies as per the value of the property. Say, if the loan LTV ratio is 80%, the buyer has to pay at least 20% on his own.
Costs involved in a property transaction do not constitute the loan, as per the LTV conditions. “When the property is purchased from a builder, all expenses as per the cost sheet are not covered by a home loan. In the case of a resale, TDS is one such expense,” said Singh.
Dishank Asija, property consultant and proprietor at Namo Property Consultant, told Mint he haseen many deals where the seller is an NRI fall out because of the TDS. “Such buyers refuse to engage with NRI sellers again,” he said.
Options for buyer
The buyer has two options in this situation: ask the NRI seller to get a lower TDS certificate or pay the TDS from the downpayment.
NRI sellers can apply for a lower TDS certificate by submitting Form 13 on the income tax portal. It is recommended that it must be applied well in advance as it can take up to two months to be issued. However, the seller can apply for it only after the buyer is finalised, as the buyer’s TAN is to be given among the many documents to be submitted along with Form 13.
This solution comes with its own challenges. One, the NRI seller may not always agree to apply for this certificate, said Asija.
“To get this certificate the NRI has to engage a chartered accountant, an added expense that many sellers don’t want to incur,” Asija said. “Additionally, they don’t want to add another one-two months to the already long drawn process. Compared to a resident to resident transaction that takes up to 45 days, sales involving an NRI typically have a timeline of two to four months. Many NRIs decide to go for a refund later rather than wait for the certificate.”
He added that several buyers also cancel the deal for the same reason if they’re in a hurry to move into the new house–a downside for NRIs who want to apply for the certificate.
Second, even if the seller applies for the certificate, it’s not guaranteed the TDS will be lowered by the assessing officer. “Past ITRs are also asked from the NRI when they apply for lower TDS. Most NRIs don’t file ITR in India if they don’t have an income. In cases in which there are no ITRs to show, the AO is unlikely to reduce the TDS to the minimal rates of 1-5%,” said Modi.
Also Read: Realty check: How NRIs can ace property sales in India
Other cases where the TDS is not lowered are when the NRI has other incomes and corresponding tax liability in the same year.
Therefore, the second option is the buyer’s best bet. “Buyer should try to educate the NRI seller on the TDS provisions at the start of the deal so that they can sail through these challenges easily,” said Modi.
Refinance TDS
Singh told Mintthat banks can refinance the TDS amount later after the buyer gives them the registered title document and the TDS challan. It would help buyers to enquire about this option with their loan managers.
However, take note that most banks will do this as a top-up loan if the buyer has already used the permissible LTV ratio for the home loan. For instance, if the LTV ratio is 75% and the buyer has financed 75% of the property value, he cannot get the TDS refinanced as part of the same loan, as the bank cannot exceed the LTV ratio. He may get a top-up loan, which will come with a higher interest rate.
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