The coronavirus pandemic has impacted all realms of society. The real-estate sector is likely to command increased interest from the Non-Resident Indians (NRIs) post-COVID-19. Many NRIs may be contemplating shifting permanently to India, and hence, demand for real estate may be boosted. However, on the flip side, with the economic downturn, many NRIs may also be unwilling to move back to India. This is likely to result in them selling off their real estate investments in India. This is in favor of prospective homebuyers in India, who get an equal opportunity to buy premium properties at reasonable rates. The legal implications on thus purchasing a property from an NRI need to be studied in depth.
Buyer is liable to pay the TDS
When purchasing a property from an NRI, the TDS deduction has to be made before making the payment to the NRI seller. If the seller is local, and the property value is higher than Rs. 50 lakhs, only 1% of the total deal value is to be deducted at source. However, the TDS rate is different in the case of a seller who is an NRI. This is due to the capital gains tax that comes in:
20.80% of TDS applicable for properties priced less than Rs 50 lakhs
22.88% TDS applicable for properties priced between Rs 50 lakhs and Rs 1 Crore
23.92% TDS applicable for properties priced more than Rs 1 Crore
The seller will have to pay 20% of the actual gains as capital gains tax, while the buyer needs to deduct 20% of the deal value. The seller will have to contact the tax authorities to get the amount back as a refund. The buyer will have to deduct TDS on the entire transaction value. After depositing the TDS, the buyer has to file a TDS return and issue Form 16A to the seller.
If the buyer defaults on collecting and depositing the TDS, there will be a penal interest of 12% on the amount outstanding.
The buyer will be declared as an ‘Assessee in default’ in case TDS has not been deducted. The buyer will be booked under Section 201 of the Income Tax Act. On failure to provide TAN or PAN, a penalty of Rs 10,000 will be imposed. 100% penalty will be imposed on failure to deduct TDS partially or completely. The buyer will be charged Rs 100 per day in case of delay in filing TDS return or submission of Certification of Deduction within 15 days of the transaction.
The buyer should have a TAN (Tax Deduction and Collection Account Number)
Section 195 of the Income Tax Act states that for purchasing a property from an NRI or an Indian resident, the buyer must have a TAN. If the buyer moves forward with the purchase and deducts TDS without a valid TAN, the Income Tax Department may impose a penalty on the buyer. In case the property is purchased jointly, all the co-buyers must have a TAN. The seller, on the other needs, to mandatorily have a Permanent Account Number (PAN), and need not have to procure a TAN.
Make Payment in NRE/NRO/FCNR Accounts
NRI sellers often ask Indian buyers to make payments in their Indian accounts to make it less complicated. To prevent legal issues, it is always advisable to ask NRI sellers to provide their NRE/NRO/FCNR account details to make payments. It will help to avert any legal troubles that may arise in the future. Also, it is essential to mention the account details in the sale deed document.
Essential points to be noted
It is advisable to insist on the seller’s presence in India at the time of registration. If the seller is not able to be present at the time of closure in front of the registrar, he has to hand over a special power of attorney (PoA) to his representative in India to carry out the transaction.
If the property is owned jointly, the payment should be made in accordance with each party’s registered share in the property to their separate accounts.
Owing to the complex nature of tax regulations relating to the selling of property in India by NRIs, it is advisable to get the services of competent compliance and legal authorities to keep the slate clean.
Taxpayers, both resident, and non-resident can get in touch with GKM’s team of professional tax advisors to discuss more on the capital gains tax implications and tax planning on the purchase or selling of a property in India.