[For NRIs]: How to Avoid Paying 20% TDS on Sale of Property in India

NRIs pay 20% TDS on the entire sale value. We explain how to reduce this

When a Non-Resident Indian (NRI) sells property in India, they face a significant tax deduction at source (TDS). By default, this TDS can be as high as 20% on the entire sale consideration.

For example: when you sell a home for 1 crore, 20 lacs is deducted as taxes regardless of your actual profits! You then have to wait over a year for an Income Tax refund to get any additional deductions back.

However, there are ways to reduce or manage this deduction. In this blog, we’ll explain the TDS rules for NRIs, how to pay the TDS, and how to lower the TDS burden.

What Are the TDS Rules for NRIs?

When an NRI sells property in India, the buyer must deduct TDS as per Section 195 of the Income Tax Act. The TDS is deducted at different rates depending on whether the capital gains are short-term or long-term:

• Long-Term Capital Gains (LTCG): If the NRI has held the property for more than 2 years, the gains are classified as long-term, and the TDS rate is 20% on the entire sale consideration, plus applicable surcharge and cess.

• Short-Term Capital Gains (STCG): If the property has been held for less than 2 years, the gains are considered short-term, and the TDS rate is 30% on the entire sale consideration, plus applicable surcharge and cess.

How to Pay the TDS on Sale of Property

The process of paying TDS involves a few steps, and it’s typically the responsibility of the buyer to deduct and deposit this tax. Here’s a brief overview of the steps involved:

1. Buyer Obtains TAN: The buyer must obtain a Tax Deduction and Collection Account Number (TAN) to deduct TDS. This is mandatory under Indian tax laws for any individual responsible for deducting tax.

2. Calculate TDS: The buyer calculates TDS at 20% or 30% (as applicable) on the entire sale consideration.

3. Deposit TDS Using Challan 281: The buyer deposits the TDS using Challan No./ITNS 281 through the NSDL-TIN website or authorized banks.

4. File Form 27Q: This form needs to be filed by the buyer on a quarterly basis, providing details of the TDS deducted and deposited.

5. Issue TDS Certificate (Form 16A): After the TDS is paid, the buyer must issue a Form 16A to the NRI seller within 15 days of filing Form 27Q.

How NRIs Can Reduce TDS Liability Using Form 13

While the TDS is typically deducted on the entire sale amount, NRIs have the option to apply for a lower TDS certificate using Form 13. Here’s how it works:

Filing Form 13 for Lower or Nil TDS Certificate

• Purpose: Form 13 allows an NRI to request the Income Tax Department to allow TDS deduction at a lower rate or even zero if the taxable gain is lower than the sale amount.

• Application Process: The NRI must file Form 13 online on the TRACES website or at the jurisdictional Income Tax Office. The application should include details like the purchase price, sale price, and any other deductions available.

• Outcome: If the Income Tax Department approves the application, it issues a certificate authorizing the buyer to deduct TDS at a lower rate based on the estimated capital gains.

• Benefit: This directly reduces the TDS amount deducted by the buyer, making it a key strategy for NRIs to lower upfront TDS liability.

Example:

If an NRI sells a property for ₹1 crore but files Form 13 and proves that their taxable capital gain is only ₹20 lakh after considering the indexed cost, the Income Tax Department may issue a certificate allowing TDS deduction at 20% on ₹20 lakh instead of on the entire ₹1 crore. This can reduce the TDS amount from ₹20 lakh to ₹4 lakh.

TDS is not your final tax bill

While Form 13 helps in reducing TDS deduction at the source, other strategies can help lower the overall taxable capital gains, leading to a refund of excess TDS at the time of filing income tax returns. These strategies include:

Investing in Section 54

• Purpose: NRIs can claim exemption on long-term capital gains if they reinvest the gains in another residential property in India within 2 years (for purchase) or 3 years (for construction).

• Impact: Reduces the taxable amount, potentially leading to a refund if excess TDS was deducted.

Investing in Section 54EC Bonds

• Purpose: NRIs can invest the capital gains in bonds issued by the NHAI or REC within 6 months of the sale. The maximum investment allowed is ₹50 lakh.

• Impact: Reduces the taxable capital gains, thus reducing the final tax burden.

Claiming Deductions on Home Loans

• Purpose: If the property was purchased using a home loan, NRIs can claim deductions on the interest paid under Section 24(b).

• Impact: Lowers the net taxable gain, but does not directly impact the TDS deducted by the buyer.

Conclusion: Manage TDS Wisely When Selling Property in India

Understanding the TDS rules for NRIs is crucial to manage the tax impact when selling property in India. While Form 13 is the primary tool for reducing TDS deduction at the source, other strategies like investing in Section 54 or 54EC can help lower the overall tax liability and even result in a refund of excess TDS. By planning ahead and using the right strategies, NRIs can significantly optimize their tax obligations on property sales in India.

Always consult with a tax professional to ensure the best approach tailored to your situation.

Reach out to our founder (rank-holder CA) in the comment section for any questions!