In India, we have seen that most of the Indians go outside India for employment or business purpose and once they settled there, the major issue arise of their property in India because it would be very difficult for them to manage it.
In this article, I’ll cover all the major issues faced by the NRI when he sold the property in India and the buyer who purchase the property from such NRI.
So, lets first understand the concept of NRI, As per Foreign Exchange Management Act, 1999 (FEMA), A person who is residing outside India for more than 182 days becomes a Non-Resident Indian (NRI).
When NRI wants to sell his property in India, the major question arise is the tax compliances. It has been observed that, at the time of selling the property, neither the buyer nor the NRI was aware of the compliances to be followed.
Compliances For Buyer:
TO be followed by the Buyer
When any assessed purchase property from an NRI, he shall be required to deduct TDS U/s 195 @ 20% if the gain is Long term capital gain and as per the income tax slab rate applicable if the gain is short term capital gain.
Surcharge and Education cess shall also be added on the TDS rate.
[Note: The TDS Shall be deducted on the Capital gain value and not on the sale value. However, for this, the NRI is required to obtain a certificate from his Assessing Officer (AO) in which AO prescribed all the details of the property and the value at which the buyer should deduct the TDS.]
If the NRI (seller) does not such certificate from AO, then the buyer should deduct the TDS on sale value instead of capital gain. So, it is very important for the NRI to obtain such certificate.
Also, if the sale of property results in no capital gain or loss on a sale, then NRI should obtain the nil tax deduction certificate from his AO.
The buyer shall deduct the TDS whenever any payment is received from such NRI even as advance.
As per Section 194IA, if any persons buy the property from any Indian citizen then TDS @ 1% is required to be deducted when the value of the sale price is 50 lakhs or more however this limit is not applicable in case of NRI that means the buyer should deduct TDS even if the value of property is less than 50 Lakhs.
If the buyer fails to deduct the TDS or deduct less amount or deducted but not deposit the TDS, then income tax department shall make held responsible to the buyer and not the NRI. Hence, it is advisable for the person if he wants to buy any property from any NRI then he should take the consult with a CA.
In case, the TDS has not been deposited or late deposited, then following interest shall be levied on the buyer:
|Case||Particulars||Rate of interest||Period|
|1||If the deductor has not deducted the TDS||1% per month or part of the month||From Due date of deduction to the actual date of deduction|
|2||If the deductor deduct the TDS but not deposited||1.5% per month or part of the month||From the actual date of deduction to the actual date of deposit|
Time of deduction of TDS
Also, the buyer must have a valid TAN (Tax deduction or collection account Number) and after deduction of TDS, the buyer is required to deposit it within 7 days from the end of the month in which the TDS has been deducted. For Example: if the TDS has been deducted on August 19 then it should be deposited within 7th September 2019.
Return to be filed
The buyer shall also require to file the TDS return in form 27Q on a quarterly basis. The return should be filed within 31 days from the end of the relevant quarter. After filing of the return, the buyer shall furnish form 16A to such NRI.
Other Issued faced by the buyer at the time of purchase of property
Although there is n number of issues that the buyer may have to face at the time of purchase of property from an NRI some of the following are significant:
- Physically making a deal with NRI: If the NRI is not physically present in India then the buyer may not be able to rely on the agreement. Hence at the time of sale of the property, NRI should be physically present in India. Otherwise, NRI can execute a Power of attorney in favor of any person who shall be present in India, they may be their family members or friends. Since the power of attorney is especially executed for sale of the property so it would be called special power of attorney. Although power of attorney is in the Indian citizen it is advisable to the buyer that the payment should be directly transferred to the NRI bank Account instead of such Indian citizen in whose favor power of attorney is executed because such Indian citizen is only a representative.
- Payment Mode: Below we have discussed that an NRI can deposit, the Indian generated income, in his NRO Account. However, in practical life, we have seen that the NRI request to the buyer to deposit the consideration in any Indian saving bank account. For this, it is advisable that the buyer should insert the payment mode in the agreement.
- Status of the Seller: In the normal conditions, when a person starts residing in a foreign country and become a Non-resident, his residential details in India remains unchanged like Indian address showing in his PAN Number. That means although he becomes NRI as per FEMA Act or Income tax act, still, he is Indian resident as per his PAN Card and same information he may give it to the buyer of the property. With such information available, he may deduct the TDS U/s 194IA @ 1% instead of 20% U/s 195. This would cause a penalty and other interest because of lower deduction of TDS to the buyer.
- Tax deduction and Collection Account Number (TAN): As we already discussed above, if the person wants to purchase a property from an NRI then such person must obtain a valid TAN number because with this TAN number he shall be able to deduct the TDS and deposit it to the government and file form 27Q.
- Inform the NRI status to the loan provider: If any person takes a home loan, then such loan amount would be directly transferred to the seller and then it shall be recovered from the buyer in installments. So, if the seller is NRI, then the buyer should inform the status of the seller to the loan provider entity so that such entity may transfer the loan amount as consideration to the seller only after deduction of valid TDS amount on the behalf of the buyer.
Compliances For Seller:
TO be followed by the NRI (Seller)
Capital Gain on sale of property
If the NRI is selling its property within 2 years of its purchase then any gain from such property shall constitute short term capital gain and if the property was sold out after 2 years of purchasing it then it would be long term capital gain.
If the NRI is selling the property which is inherited to him then also it would be considered as long term capital gain and such NRI shall be liable to pay tax @ 20% on LTCG unless he inherited the property within 2 years from its sale.
The capital gain shall be calculated in the following manner
|The full value of sale consideration||xxx|
|Less:||Expenses incurred in connection with the sale||xxx|
|Less:||Cost of Acquisition||xxx|
|Less:||Cost of Improvement||xxx|
If the capital gain results in the long term capital gain then cost of acquisition shall be taken after indexation. It means if the property which has been acquired for more than 2 years, is being sold then its cost shall be taken after considering the inflation i.e. the indexed cost of acquisition. Cost of the index for the FY 18-19 is 280.
Exemptions available to NRI:
The NRI selling its property in India can reduce its capital gain tax by investing in the schemes as specified in section 54, 54F, 54EC. Although these sections are very broad so I’ll explain it only in respect of NRI.
As per Section 54 of income tax act, 1961, if the NRI, who is an individual, is selling a residential property after 2 years of purchase, then any gain on such property shall be exempted if such NRI has purchased a new residential house property in India within 1 year before or 2 years after the sale and if the new property is being constructed then construction should be completed within 3 years of sale. Also, such new assets should be held or at least 3 years from the date of its purchase by the NRI Note the exemption shall be limited to the value of capital gain.
As per Section 54F of income tax act, 1961, if the NRI, who is an individual, is selling any long term capital asset other than residential property, then any gain on such property shall be exempted if such NRI has purchased a new residential house property in India within 1 year before or 2 years after the sale and if the new property is being constructed then construction should be completed within 3 years of sale.
As per Section 54EC of the income tax act, 1961, if the NRI, who is an individual, is selling any long term capital asset being land or building or both, then any gain on such property shall be exempted if he invests, within 6 months of the transfer, in bonds of
- National Highway Authority of India or
- Rural Electrification Corp. Ltd. or
- Power finance corporation limited or
- Indian railway finance corporation limited
Note: The Bond should not be redeemable before 5 years from the date of issue. (Up to last year the said period was 3 years)
The maximum amount of deduction is Rs.50 lakhs.
Capital Gain Account Scheme: If the NRI could not invest the capital gain within the prescribed time as specified under section 54 and 54F, then, for the time being, he can invest such amount in capital gain account scheme in any scheduled bank. Although, this benefit is not available under section 54EC.
If the seller is investing in any of the above schemes, then he should obtain a tax exemption certificate from his AO and give it to the buyer so that the buyer shall not deduct the TDS.
Other Issues faced by NRI (Seller) at the time of sale of property:
Till now, we have discussed the tax compliance that has to be followed by the buyer and seller (NRI), now we will discuss some other issues faced by the seller at the time of sale of the property.
- Search about the rate of the property in your area in advance: Before selling the property, NRI should know the rate of the property in advance in his area. He should already know what are the benefits or disadvantages of the property. For this, he may appoint a person as an agent who shall do the research for you.
- Agent: In the above point, we already discussed that the NRI should appoint an agent. Although it is not compulsory that the person cannot sell the property without any real estate agent but it gives assistance for them who do not know about the property or the buyer nearby.
- Networking: For selling the property it is necessary for the seller to make marketing. For this, he may use a social network or advertisement banner at the house or telling his friends or relatives to help him for selling the house.
- Filing of Documents: Although this point more helpful for the buyer of the property. Since the sale of property involves a lot of documents, hence the NRI and buyer should ensure all the paperwork and document filing in an appropriate manner. For Example Sale deed, NOC Certificate, Letter of allotment, undivided share of the land (UDS), etc.
- Use professional Advice: Till now, you already know that there are so many compliances that have to be followed by the buyer and NRI (seller) like to determine the rate and amount at which TDS should be deducted, Depositing of TDS return, Calculating the correct amount of capital gain, Availing in the scheme u/s 54 or 54F or 54EC. Hence, it is advisable that the parties should take the advice of a Chartered Accountant to be clear about their tax structure.
- Ending the deal: In our previous article, normally an NRI can have 2 bank accounts which are
- Non-Residentxternal Account (NRE Account)
- Non-Residentrdinary Account(NRO Account)
We have discussed that if NRI has any income generated in India, then he should deposit it in the NRO Account. Hence, the consideration received from the sale of such property shall be required to be deposited in an NRO account by the NRI.
Let take an example to explain the whole article
Mr. Nikhil Bhatia (NRI) wants to sell his property in India which he purchased in May 2010 for 40,00,000/-. He has an agent to find the buyer, who charged Rs. 50,000/-. Mr. Mohit shows his interest in buying that property. The sale price decides of Rs. 80,00,000/-. Cost of the index for the FY 18-19 is 280 and for FY 10-11 is 167.
Now the capital gain shall be calculated in the following manner:
|The full value of sale consideration||80,00,000|
|Less||Expenses incurred in connection with a sale||Payment to Agent||50,000|
|Less||Cost of Acquisition||4000000 * 280 / 167||67,06,587|
|Less||Cost of Improvement||–|
Now, Mr. Nikhil Bhatia is required to get a tax deduction certificate from his Assessing officer and give it to Mr. Mohit, only then Mr. Mohit shall deduct the TDS on capital gain value i.e. 12,43,413/- otherwise, he shall have to deduct the TDS on sale value i.e. Rs. 80,00,000/-.
Say, Mr. Mohit has deducted the TDS on August 19 of @ 20% on Rs. 12,43,413 (Although surcharge and Education Cess shall also be added on TDS rate we have ignored to make it simple) i.e. 12,43,413 * 20% = 2,48,683.
This amount is required to be deposited by Mr. Mohit on or before 7th September 2019. Also, since the tax is deducted in the 2nd quarter, hence he is required to file form 27Q till 31st October 2019 in which he shall mention his and NRI details and of sale and TDS payment.