Tax deducted at source, or TDS, is applicable on purchase of properties in India. But the tax rates are different for residents of India and for non-resident Indians (NRIs). Resident buyers should at the time of purchase deduct such tax at 1% of the sale consideration of the property and pay only the balance to the seller. Such TDS is applicable where the sale value of the property exceeds Rs50 lakh or more under section 194IA. The tax thus deducted is paid online by the buyer to the income tax department after filling in form 26QB and a copy of the challan generated for this payment needs to be submitted to the seller.
If the seller is an NRI, the buyer has to deduct tax at a higher rate of 20%, irrespective of the value of sale consideration. The amount thus deducted is to be deposited to the tax authorities vide a challan and the TDS return is to be filed for payment u/s 195.
Since the TDS at the rate of 20% is to be deducted from the sale value of the transaction and not on the actual capital gain, the TDS amount is bound to be more than the actual tax liability. In such a scenario, the assessee ends up paying more tax amount in the form of TDS and can later claim a refund when filing the income tax return. Genuine difficulty is caused to the assessee in such cases, specifically where there is no or negligible capital gain or in case of capital loss. The funds are blocked until the refund is processed back by the income tax department resulting in unnecessary withholding of capital.
To reduce this burden on non-resident Indian assessees, the Income tax law provides an option allowing them to apply for a lower deduction certificate. An application has to be filed to the assessing officer (AO) concerned under the provisions of section 197, allowing TDS to be deducted at a ‘nil’ rate in case of long-term capital loss or at a rate as commensurate to cover the effective tax liability of the taxpayer.
Lower or nil TDS certificates help NRIs sell immovable property in India while allowing them to reduce or eliminate the TDS deduction on the sale proceeds. By obtaining these certificates, NRIs can retain a higher portion of the sale proceeds and minimize their tax liability.
An NRI has to submit Form 13 online for issuance of a lower deduction certificate . In case there is more than one seller for the same property, the application has to be made separately for all sellers. The application should include copies of PAN card, property purchase deed, payment schedule, and sale agreement, besides the valuation certificate as per section 50C for income tax purpose, computation of capital gain, TAN of the buyer, copies of bank statement, proof of being an NRI, and copies of income tax returns, 26AS and computation for the last three years, as also any supporting documents if the individual is claiming exemption under section 54 of the income tax Act.
The application can be filed in city having jurisdiction over the property or that of an assessee. Once the application is filed successfully, the assessing officer will review it and may ask for additional documents before either issuing the certificate or rejecting the application. On being satisfied that a lower TDS is justified, the assessing officer shall issue a certificate, whereupon the applicant can use it for TDS as per the tax rate specified in the certificate. Surcharge and education cess, as applicable, are to be added as per the rules.
Typically, it takes 30-45 days to get the certificate. A lower deduction certificate is issued for a particular period. It is valid from the date of issuance as mentioned in the certificate. The validity gets over either at the end of the relevant financial year or is cancelled by the assessing officer before its expiry.
Ajay R. Vaswani is founder, Aras and Company Chartered Accountants