This NRI, who wished to remain anonymous, was bewildered since he had left India 17 years ago and had no income sources in the country. “At first, I thought it was a phishing scam. But on looking closely, I realized it was related to a property I sold in 2019. But it didn’t make sense as the buyer had deducted TDS,” he said.
After the NRI hired a chartered accountant to look into the notice, he realized that the buyer had deducted 1% TDS (tax deducted at source), the rate applicable to residents who sell property, instead of the 20% applicable to NRIs.
That’s not all. The NRI did not file an Income Tax Return (ITR) to report the sale of the property. “I thought if the TDS is paid, there’s no need for filing the ITR,” he said.
This was a mistake, as Income Tax laws mandate disclosing the sale of assets in India by NRIs in the ITR, even if the applicable taxes have been paid through TDS.
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The IT department has been issuing a flurry of tax notices to NRIs who sold property in India in the past and did not pay capital gains tax or failed to file an ITR to report the sale. Most of these notices concern property sales dating back to 2014, 2015, and beyond.
“Most of the NRIs facing this have not filed tax returns in India for several years and hence, are not aware of either the tax laws or the process of filing ITR. But ignorance of the law cannot be excused,” said Prakash Hegde, a chartered accountant at Acer Tax & Corporate Services LLP.
While it is not new for the IT department to issue notices to non-residents for non-payment of taxes or not filing tax returns, the number and frequency of notices have increased significantly in the past year due to digitization.
Several chartered accountants told Mint that they have received inquiries from several hundred NRIs who have recently received tax notices. “My firm is currently handling over 120 cases related to this issue,” said Ajay R Vaswani, founder of ARAS and Company.
Financial penalties
Non-compliance attracts severe penalties, including a 1% monthly interest on outstanding taxes and a penalty ranging from 100% to 300% of the tax.
If NRIs fail to file an ITR, an additional 1% monthly interest is charged. The interest alone adds up to 24% annually. Over several years, these penalties can accumulate to amounts far exceeding the property’s sale value.
In this particular case, a ₹8 lakh capital gains tax liability ballooned to nearly ₹25 lakh over five years.
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Bureaucratic hassle
If an NRI does not file an ITR in India reporting the sale of a property, the IT department first sends a tax notice seeking details of the sale and the gains made. When NRIs fail to respond to tax notices, or if the response is unsatisfactory, the IT Department may classify the entire sales proceeds as capital gains or undisclosed income.
Many NRIs are caught off-guard due to outdated contact information.
“Tax officers try to communicate with the NRI through multiple channels of email, phone number or address to which PAN is registered. But these channels may not be functional anymore, so the communications get missed and the tax officer passes an order as they are time bound to close the case,” explained ARAS’s Vaswani.
Path to resolution
Hegde said that whenever an NRI discovers an order demanding the payment of tax due to non-response caused by non-receipt of notices, they must immediately file an appeal with the Joint Commissioner of Income Tax (Appeals) or Commissioner of Income (Appeals).
The appeal should be filed within 30 days after the order is passed by the IT officer. If there is a delay in filing the appeal, a Condonation Application explaining the reason for the delay should also be filed.
“In many cases, they may not accept the excuse of non-functionality of email because the onus of updating the changed email ID or postal address with the tax department is on the NRI taxpayer. But, irrespective, the application must be filed,” he said.
If the entire sales proceeds are declared undisclosed income, the NRI is required to pay tax on it according to the tax slab, along with annual interest of 12-24%.
The recourse available for the NRI is to appeal, which is digital and doesn’t require their physical presence. Note that to appeal, the NRI must first deposit 20% of the raised tax demand with the IT department. If the appeal is honoured, it is refunded or adjusted against the net payable tax.
If the appeal is not allowed by the JCIT(A)/CIT(A), the NRI taxpayer can further appeal before the Income Tax Appellate Tribunal (ITAT).
Buyers beware
When an NRI sells a property, it is the buyer’s responsibility to deduct 20% TDS for long-term assets (30% for short-term assets) on the sale amount and deposit it with the IT department. Failing to do so can land the buyer in trouble with the tax authorities.
“In such cases, the tax department sends the buyer a short deduction notice and raises a demand for the differential or full amount if no TDS was paid at all. It increases compliance hassles for the buyer. Of course, they can either get the NRI seller to pay it or pay it themselves and later claim it from the NRI, but it’s an ordeal,” said Vaswani.
Note that no penalties are levied on the buyer for not deducting TDS.
In an extreme situation where the NRI seller doesn’t pay the due taxes for several years and has no assets or bank accounts in India that the tax department can use to recover the amount, the liability may eventually fall on the buyer.
“The liability will be limited to the extent of the sale price of the house. This is the reason it’s important that the buyer deducts the applicable TDS at the time of buying the property,” he said.
File ITR when purchasing property
NRIs should also be careful about reporting investments made in India by filing an ITR here if they are not declaring the same in their country of residence.
“While it’s not mandatory, for NRIs living in countries such as Dubai where there is no tax filing, I would advise filing an ITR in India. Otherwise, the tax department will most likely issue a notice demanding an explanation for the source of funds used to buy the asset,” Vaswani said.
If the NRI declares such investment in their tax return filed in their country of residence, they may not have to file an ITR in India, as the tax return filed in the other country documents the trail of the funds used to make the investment.