Purchasing property is already a complex process, but when the seller is a Non-Resident Indian (NRI), the process becomes even more intricate due to stringent regulations and tax implications. Here, we break down the essential points every buyer should know before entering into a real estate transaction with an NRI seller.
1. Higher TDS Liability on the Buyer
When purchasing a property from an NRI, the buyer is required to deduct tax at source (TDS) before making the payment to the seller. This is governed by Section 195 of the Income Tax Act, 1961, which deals specifically with TDS on payments to non-residents.
- TAN and PAN Requirements: The NRI seller must have a Permanent Account Number (PAN), and the buyer must obtain a Tax Deduction and Collection Account Number (TAN). Without these, the transaction cannot proceed. If the buyer is purchasing the property jointly with another person (like a spouse), both must have a TAN, and the same applies to the seller if there are multiple owners.
- TDS Calculation: The TDS is calculated on the capital gains made by the seller. However, in the absence of a certificate from an income tax officer specifying a lower tax liability, the buyer should deduct TDS on the total sale consideration. The TDS must be deposited within seven days of the subsequent month following the transaction.
- Forms 27Q and 16A: After depositing the TDS, the buyer must file a TDS return using Form 27Q and issue a TDS certificate (Form 16A) to the seller. Failure to do so on time can result in a late fee of ₹200 per day and interest on delayed payment.
- Payment to Seller’s Account: Ensure the payment is made only to the NRI seller’s NRE, NRO, or FCNR account. Avoid making payments to any third-party accounts to stay compliant with the law.
2. Payment to Special Power of Attorney (SPOA) Holder
In cases where the NRI seller cannot be physically present in India to execute the sale, they may appoint a Special Power of Attorney (SPOA) holder to represent them.
- SPOA vs. POA: A Special Power of Attorney (SPOA) is a legal document that grants the holder specific powers, like selling the property, as opposed to a General Power of Attorney (GPOA) which is broader. For NRI property transactions, the SPOA should explicitly state the property details and the relationship between the NRI seller and the SPOA holder.
- Payment to NRI Seller Only: Even if the SPOA holder insists on receiving the payment, the buyer should transfer the funds only to the NRI seller’s account. The SPOA holder is merely an executor of the transaction, not the beneficiary. Missteps here could lead to legal complications or accusations of fraud.
- TDS Applicability: TDS is applicable based on the residency status of the seller, not the SPOA holder. Even if the SPOA holder is a resident Indian, the TDS rate applicable to NRIs should be deducted.
3. RBI Approval for Sellers from Certain Countries
NRIs have the right to sell their property in India to Indian residents, but if the NRI resides in certain countries like Afghanistan, Bhutan, China, Nepal, Pakistan, or Sri Lanka, they must obtain approval from the Reserve Bank of India (RBI).
- Selling Agricultural Land: Additionally, selling agricultural land by an NRI also requires RBI approval. Before finalizing the deal, the buyer must verify that the NRI seller has obtained the necessary permissions from the RBI.
4. PAN, Citizenship, and Residency Status
The residency status, PAN address, and citizenship of the NRI seller can complicate the transaction, especially regarding TDS.
- Misleading PAN Address: Some NRIs might suggest that since their PAN address is an Indian address, the TDS applicable should be 1%, which is incorrect. The PAN address is irrelevant to TDS; what matters is the residency status of the seller at the time of the transaction.
- Change of Citizenship: If the NRI seller has surrendered their Indian citizenship and obtained foreign citizenship, they may still be considered an NRI for tax purposes. This applies even if they have returned to India and have been residing here for over 182 days, changing their residency status to a Resident Indian. In such cases, the TDS is still applicable as per NRI rates.
- Protecting the Buyer’s Interest: In cases of doubt regarding the seller’s residency or citizenship status, the buyer can include clauses in the sale deed to protect their financial interests and ensure compliance with tax laws.
Procedures for Making Payment to an NRI
When making payments to an NRI, specific procedures must be followed to ensure compliance with the Income Tax Act and FEMA regulations.
- Apply for TAN: The buyer must apply for a TAN to deduct TDS on the property transaction.
- Deduct TDS: Calculate and deduct TDS at the applicable rate based on the NRI seller’s residency status.
- Pay TDS: Deposit the deducted TDS within seven days of the following month.
- File Form 27Q: Submit the TDS return in Form 27Q within the due date of the relevant quarter.
- Issue Form 16A: Provide the TDS certificate to the NRI seller using Form 16A.
- Obtain CA Certificate in Form 15CB: If the NRI seller does not provide a certificate under Section 197, the buyer must obtain a certificate from a Chartered Accountant in Form 15CB.
- Form 15CA: The NRI seller must upload the remittance details electronically using Form 15CA and obtain a system-generated acknowledgment.
- Submission to RBI: The NRI seller must submit the signed Form 15CA and Form 15CB in duplicate to the Reserve Bank of India or an authorized dealer.
- Certificate from Assessing Officer: If a certificate from the Assessing Officer specifies the rate at which tax is to be deducted, the buyer is not required to obtain a certificate from an accountant in Form 15CB.
Examples and Legal References
Example 1: TDS Deduction on NRI Property Sale
Mr. Sharma, an NRI, sells his property in India to Mr. Gupta, a resident Indian. The property is sold for ₹1 crore, and Mr. Sharma has a capital gain of ₹30 lakh. Mr. Gupta, as the buyer, is required to deduct TDS at 20% on the capital gains amount. If Mr. Sharma obtains a certificate under Section 197 for a lower tax deduction, Mr. Gupta can deduct TDS on the certified amount instead of the total sale consideration.
Example 2: SPOA Payment Misstep
Mrs. Reddy, an NRI, appoints her brother, Mr. Rao, as her SPOA holder to sell her property in India. Mr. Rao insists that the payment be made to his account. However, Mr. Sharma, the buyer, refuses and correctly transfers the payment to Mrs. Reddy’s NRO account, avoiding legal complications and ensuring compliance with the law.
Legal References
- Section 195 of the Income Tax Act, 1961: Governs TDS on payments to non-residents.
- Section 197 of the Income Tax Act, 1961: Allows NRIs to apply for a certificate for lower TDS.
- Foreign Exchange Management Act (FEMA), 1999: Regulates foreign exchange and cross-border transactions, including property sales by NRIs.
Frequently Asked Questions (FAQs) on Buying Property from an NRI
1. What is the applicable TDS rate when purchasing property from an NRI?
Answer: The Tax Deducted at Source (TDS) rate when purchasing property from a Non-Resident Indian (NRI) varies based on the nature and amount of capital gains accrued to the seller:
- Long-Term Capital Gains (Property held for more than 2 years): TDS is deducted at 20% plus applicable surcharge and cess.
- Short-Term Capital Gains (Property held for 2 years or less): TDS is deducted at the applicable income tax slab rates for NRIs, which can be up to 30% plus surcharge and cess.
It’s important to note that TDS should be deducted on the entire sale consideration unless the NRI seller obtains a certificate for lower deduction from the Income Tax Department under Section 197 of the Income Tax Act, 1961.
2. Is it mandatory for the buyer to have a TAN and the seller to have a PAN for the transaction?
Answer: Yes, it is mandatory:
- Buyer: The buyer must obtain a Tax Deduction and Collection Account Number (TAN) to deduct and deposit TDS with the government. This is required under Section 203A of the Income Tax Act.
- Seller: The NRI seller must have a Permanent Account Number (PAN). If the seller does not have a PAN, TDS may be deducted at a higher rate, and processing of tax-related documents can become complicated.
If there are multiple buyers or sellers, each party involved must have their respective TAN and PAN as applicable.
3. When should the deducted TDS be deposited with the government?
Answer: The deducted TDS must be deposited with the government within seven days from the end of the month in which the deduction was made. For example, if TDS is deducted on March 15th, it should be deposited by April 7th.
4. What are the forms required to be filed after TDS deduction?
Answer: The following forms must be filed:
- Form 27Q: This is the quarterly TDS statement that must be filed detailing the TDS deducted and deposited. The due dates for filing are:
- Form 16A: After filing Form 27Q, the buyer must issue a TDS certificate in Form 16A to the NRI seller, confirming the deduction and deposit of TDS. This should be issued within 15 days from the due date of filing Form 27Q.
5. Can the payment be made to the Special Power of Attorney (SPOA) holder instead of the NRI seller?
Answer: No, the payment should only be made directly to the NRI seller’s bank account, preferably to their Non-Resident External (NRE), Non-Resident Ordinary (NRO), or Foreign Currency Non-Resident (FCNR) account. The SPOA holder is authorized to execute documents and represent the seller but is not entitled to receive payment on behalf of the seller.
6. Is RBI approval required for all property sales involving NRIs?
Answer: RBI approval is generally not required when an NRI sells property in India to a resident Indian, except in certain cases:
- If the NRI resides in specific countries such as Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, or Bhutan, prior approval from the Reserve Bank of India (RBI) is mandatory.
- For agricultural land, plantation property, or farmhouse, NRIs require prior RBI approval to sell these properties.
Buyers should verify and ensure that appropriate approvals have been obtained before proceeding with the transaction.
7. What if the NRI seller claims to be a resident based on the PAN address or stay duration in India?
Answer: The residency status for tax purposes is determined based on the seller’s physical presence in India during the financial year, as per Section 6 of the Income Tax Act:
- Resident: Stayed in India for 182 days or more during the financial year.
- Non-Resident: Stayed in India for less than 182 days during the financial year.
The address on the PAN card is not a determining factor. Buyers should conduct due diligence and, if necessary, request the seller to provide a tax residency certificate or other relevant documents to ascertain their residency status accurately.
8. What is the procedure if the NRI seller provides a certificate under Section 197 for lower TDS deduction?
Answer: If the NRI seller obtains a certificate under Section 197 from the Income Tax Department specifying a lower or nil TDS rate:
- Verify the Certificate: The buyer should verify the authenticity and validity of the certificate.
- Deduct TDS as per Certificate: Deduct TDS at the rate specified in the certificate instead of the standard rates.
- Proceed with Payment and Filing: Deposit the deducted TDS within the stipulated time and file Form 27Q accordingly. Issue Form 16A to the seller reflecting the reduced TDS deduction.
9. What are Forms 15CA and 15CB, and when are they required?
Answer: These forms are related to foreign remittances and ensure compliance with Section 195 and FEMA regulations:
- Form 15CB: This is a certificate issued by a Chartered Accountant (CA) certifying that appropriate taxes have been deducted and paid on the remittance. It includes details about the nature and purpose of the remittance, tax residency status, and applicable tax treaties.
- Form 15CA: This is an undertaking by the remitter (buyer) providing details of the remittance and TDS deducted. It is uploaded online on the Income Tax Department’s website.
When Required:
- Form 15CB and 15CA are required when the payment exceeds ₹5 lakh in a financial year. For payments below ₹5 lakh, only Form 15CA (Part A) is required.
Procedure:
- Obtain Form 15CB from a CA.
- Upload Form 15CA online using the information from Form 15CB.
- Submit both forms to the authorized dealer/bank to process the remittance.
10. What precautions should a buyer take when purchasing property from an NRI?
Answer:
- Conduct Thorough Due Diligence: Verify the ownership documents, title deeds, and ensure no encumbrances on the property.
- Confirm Seller’s Residency Status: Obtain necessary documents to ascertain the seller’s residency and citizenship status.
- Ensure Proper TDS Deduction and Compliance: Deduct and deposit TDS appropriately, file required forms on time, and maintain all records.
- Verify RBI Approvals: Ensure all necessary approvals from RBI or other authorities are in place, especially for properties in sensitive locations or involving citizens of specific countries.
- Consult Professionals: Engage with legal and tax professionals to navigate complex regulations and ensure compliance throughout the transaction process.
11. What are the consequences of non-compliance with TDS provisions when buying property from an NRI?
Answer: Non-compliance can lead to:
- Interest and Penalties: The buyer may be liable to pay interest on the amount of TDS not deducted or deposited and may also face penalties under Section 201 of the Income Tax Act.
- Disallowance of Expenses: The amount equivalent to TDS not deducted or deposited may be disallowed as an expense for the buyer, increasing their taxable income.
- Legal Consequences: Persistent non-compliance can result in legal proceedings and prosecution under the Income Tax Act.
12. Can the buyer be held responsible if the seller fails to pay capital gains tax after receiving the sale proceeds?
Answer: The buyer’s responsibility is limited to proper deduction and deposit of TDS as per the applicable laws. If the buyer fulfills these obligations correctly, they are generally not held responsible for the seller’s failure to pay the remaining capital gains tax. However, failure to deduct or deposit TDS appropriately can make the buyer liable for the unpaid tax along with interest and penalties.
13. Is there any exemption available to the NRI seller from capital gains tax?
Answer: Yes, NRIs can avail exemptions under Sections 54, 54EC, and 54F of the Income Tax Act by:
- Section 54: Investing the capital gains from the sale of a residential property into purchasing or constructing another residential property within specified timelines.
- Section 54EC: Investing the capital gains in specified bonds (e.g., NHAI, REC) within six months from the date of sale.
- Section 54F: Applicable when the sale proceeds from any long-term capital asset other than a residential property are invested in purchasing or constructing a residential property.
Note: Despite these exemptions, TDS must still be deducted by the buyer at the time of payment. The NRI seller can claim a refund of excess tax deducted while filing their income tax return.
14. How to determine whether the property sale results in long-term or short-term capital gains?
Answer: The classification depends on the holding period of the property:
- Long-Term Capital Gains (LTCG): If the property is held for more than 2 years (24 months) before the date of sale.
- Short-Term Capital Gains (STCG): If the property is held for 2 years or less.
The applicable tax rates and indexation benefits vary based on this classification.
15. Are there any additional taxes or charges the buyer should be aware of?
Answer: Yes, apart from TDS, the buyer may be responsible for:
- Stamp Duty and Registration Charges: Payable as per the state government rates where the property is located.
- GST: Generally not applicable on the purchase of completed properties but may apply to under-construction properties.
- Professional Fees: Charges for legal, tax, and financial advisory services engaged during the transaction.
It’s advisable to factor in these costs while planning the purchase.
Conclusion
Buying a property from an NRI involves navigating a complex legal and tax landscape. By understanding the applicable laws and following the correct procedures, buyers can ensure a smooth transaction while safeguarding their financial interests. Always consult with legal and tax experts to guide you through the process and avoid potential pitfalls.
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