NRI Selling Property in India — TDS u/s 195 and Lower Deduction Certificate

Introduction

Selling immovable property in India can have important tax implications when the seller is a Non-Resident Indian (NRI). Unlike a sale by a resident seller, the buyer generally has to comply with Section 195 of the Income-tax Act, 1961 when making payment to an NRI.

A common area of concern is the amount of TDS (Tax Deducted at Source) that needs to be deducted. In many cases, the tax deducted can be significantly higher than the seller’s actual tax liability, particularly where the property has been held for a long period or substantial deductions and exemptions are available.

In such situations, an NRI seller may consider applying for a Lower or Nil Deduction Certificate from the Income Tax Department.

This article explains the applicable TDS provisions, rates, lower deduction certificate process, and important precautions for NRI property sellers and buyers.

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Who is an NRI for Income Tax Purposes?

For income-tax purposes, residential status is determined based on the individual’s stay in India and other conditions prescribed under the Income-tax Act.

If the seller qualifies as a Non-Resident, the tax provisions applicable to non-residents need to be considered when selling property situated in India.

Income arising from the transfer of immovable property located in India is generally taxable in India, even if the seller is living outside India.

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TDS on Sale of Property by an NRI — Section 195

When an NRI sells a property located in India, the buyer is generally required to deduct tax under Section 195 of the Income-tax Act.

This is different from the TDS mechanism under Section 194-IA, which generally applies to the purchase of immovable property from a resident seller.

Therefore, buyers should not automatically use the resident-property TDS procedure merely because the property transaction is below a particular threshold.

For an NRI seller, Section 195 needs to be examined.

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What is the TDS Rate Under Section 195?

The applicable TDS rate depends upon the nature of the capital gain and the provisions applicable in the relevant financial year.

Broadly, the tax treatment may differ depending upon whether the property is classified as a long-term or short-term capital asset.

The applicable surcharge and health and education cess may also affect the effective rate.

Therefore, the buyer should not determine the deduction merely by applying a flat percentage to the transaction value without examining the seller’s tax position.

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Is TDS Deducted on the Entire Sale Consideration?

This is one of the most important points in an NRI property transaction.

Section 195 generally requires tax deduction from the amount chargeable to tax. However, in practical transactions, buyers and sellers may face difficulties in determining the exact taxable amount at the time of payment.

For example, an NRI may have purchased a property several years ago and may have:

• Original purchase cost
• Stamp duty and registration expenses
• Improvement expenses
• Eligible transfer expenses
• Cost inflation adjustment, where applicable
• Capital gains exemptions

Therefore, the actual taxable capital gain may be considerably lower than the gross sale consideration.

This is one of the major reasons why an NRI seller may consider obtaining a lower or nil deduction certificate.

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What is a Lower Deduction Certificate?

A lower or nil deduction certificate is an approval issued by the Income Tax Department that allows tax to be deducted at a lower rate or, where applicable, at nil rate.

An NRI seller can apply to the Assessing Officer where the tax deductible on the proposed transaction is expected to be lower than the amount that would otherwise be deducted.

The certificate can help prevent excessive TDS and reduce the need to claim a large refund after filing the income-tax return.

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Why Should an NRI Seller Apply for a Lower Deduction Certificate?

Suppose an NRI is selling a property for ₹1 crore.

The seller’s actual taxable capital gain after considering the applicable cost, expenses and eligible deductions may be substantially lower than the gross sale value.

If TDS is deducted at a rate that results in tax substantially exceeding the eventual tax liability, the seller may have to wait until filing the income-tax return to claim the excess amount as a refund.

A lower deduction certificate can help align the TDS deduction more closely with the expected tax liability.

Key advantages include:

• Lower TDS outflow
• Better cash flow
• Reduced refund claim
• More accurate tax deduction
• Better transaction planning

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How to Apply for a Lower Deduction Certificate?

An NRI seller can approach the Income Tax Department for determination of the appropriate amount or rate of tax deduction.

The application generally requires details relating to:

Seller’s PAN and residential status

Property details

Original purchase price

Date of acquisition

Proposed sale consideration

Date of proposed transfer

Improvement expenses

Transfer-related expenses

Existing income and tax details, where relevant

Computation of expected capital gains

Details of taxes already paid or deducted

Supporting documentary evidence

The Assessing Officer examines the application and determines the appropriate amount or rate of deduction based on the facts and estimated tax liability.

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Documents Generally Required

The exact documents may vary depending on the case, but the following are commonly relevant:

• PAN card
• Passport
• Proof of residential status, where required
• Property purchase agreement/deed
• Proposed sale agreement
• Previous sale/purchase documents
• Stamp duty and registration payment proof
• Evidence of improvement expenses
• Brokerage or transfer expense details
• Capital gain computation
• Income-tax return details
• Form 26AS/AIS details, where relevant
• Bank statements, where required
• Details of other income and tax liabilities

Proper documentation is important because the tax authority needs sufficient information to determine the estimated taxable income and appropriate deduction.

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Capital Gains Calculation for NRI Property Sale

The capital gain generally depends on the difference between the sale consideration and the eligible cost/expenses associated with the property.

A simplified calculation can be represented as:

Sale Consideration

Less: Transfer Expenses

Less: Cost of Acquisition

Less: Eligible Cost of Improvement

= Capital Gain

The exact computation depends on the applicable provisions for the year of transfer, including the rules concerning indexation and the tax rates applicable to the property.

An NRI should therefore calculate the capital gains before deciding how much TDS should be deducted.

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Role of the Buyer

The buyer has an important compliance responsibility in an NRI property transaction.

Before making payment, the buyer should:

• Verify the seller’s PAN
• Confirm that the seller is a non-resident
• Determine the applicable TDS provisions
• Check whether a lower/nil deduction certificate has been issued
• Deduct the required TDS
• Deposit the TDS within the prescribed time
• File the applicable TDS statement
• Issue the relevant TDS certificate to the seller

The buyer should maintain proper documentation because failure to deduct or deposit tax can result in interest, penalties and other consequences.

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What If TDS Is Deducted at a Higher Rate?

If excessive TDS is deducted and deposited, the NRI seller can generally claim the excess amount as a refund through the income-tax return, subject to the applicable provisions.

However, this means that the seller’s money may remain blocked until the return is processed and the refund is issued.

Therefore, where the estimated actual tax liability is substantially lower, obtaining a lower deduction certificate before the transaction can be useful.

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Common Mistakes in NRI Property Transactions

1. Applying Section 194-IA Automatically

Section 194-IA applies to transfers by resident sellers subject to its conditions. An NRI seller generally requires examination under Section 195.

2. Ignoring Residential Status

The seller’s residential status should be established before determining the applicable TDS provisions.

3. Calculating TDS Without Computing Capital Gains

Simply applying a rate to the sale consideration without considering the applicable tax provisions can result in excessive deduction.

4. Not Considering Improvement Expenses

Eligible improvement expenses may affect the capital gain computation. Supporting bills and payment records should be maintained.

5. Applying for Lower Deduction Certificate Too Late

A certificate should ideally be obtained before the relevant payment/credit requiring deduction, so that the buyer can apply the approved rate or amount correctly.

6. Not Maintaining Supporting Documents

Property purchase documents, improvement bills, sale agreements and tax records can be important for determining the correct tax liability.

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NRI Property Sale — Practical Checklist

Before completing the transaction, the seller and buyer should check:

• [ ] Seller’s residential status confirmed
• [ ] PAN verified
• [ ] Property purchase documents available
• [ ] Proposed sale consideration determined
• [ ] Capital gain computation prepared
• [ ] Eligible expenses identified
• [ ] Applicable TDS provision determined
• [ ] Lower/Nil deduction certificate considered
• [ ] TDS amount confirmed
• [ ] TDS deposited within the prescribed timeline
• [ ] TDS return filed
• [ ] TDS certificate issued
• [ ] Capital gains reported in the NRI’s income-tax return

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Conclusion

The sale of property in India by an NRI requires careful attention to Section 195 TDS compliance. The buyer generally has the responsibility to deduct tax, while the NRI seller needs to ensure that the deduction reflects the actual tax liability as far as possible.

Where the expected tax liability is lower than the amount that would otherwise be deducted, an NRI seller can consider applying for a lower or nil deduction certificate from the Income Tax Department.

Proper capital gains computation, advance tax planning, documentation and timely communication between the buyer, seller and tax professional can help prevent excessive TDS and avoid compliance issues.

Disclaimer: Tax rates, thresholds, procedures and forms can change. The transaction should be reviewed under the provisions applicable in the relevant financial year before implementing the TDS position.