Section 195: TDS On Purchase of Property From NRI

TDS on purchase of property from NRI

Section 195 of the Income Tax Act deals with such purchases. When any person (the buyer) purchases any immovable property from a non-resident Indian (NRI), tax Deducted at source (TDS) is required to be deducted by the buyer on the amount paid to the NRI seller. The TDS on purchase of property is a mechanism of levying tax (TDS) by the Indian customer (buyer) when purchasing immovable property from NRI (seller) and depositing deductible sums to the Government. This article aims to provide a comprehensive understanding of TDS on the purchase of property from an NRI.

What is Section 195 of TDS on the Purchase of Property from NRI?

Under Section 195 of the Income Tax Act 1961, the Tax Deducted at Source (TDS) on the purchase of property from NRIs is the tax that is levied on consideration paid to NRIs who sell a house in India. The amount of tax payable depends on whether the gain is Short-Term Capital Gains (STCG) or Long- Term Capital Gains (LTCG). To proceed with the deduction of tax at source (TDS) on the purchase of property from NRI, a Tax Deduction and Collection Account Number (TAN) is required to be obtained before deduction of TDS under Section 195, TDS on the purchase of property from NRI.

Who is a Non-Resident Indian (NRI)?

As per Section 6 of the Income Tax Act 1961, the following individuals qualify as an NRI:

• An individual who has not resided in India for 182 days or more in the previous year
• An individual who has not resided in India for a minimum period of 60 days or more in the previous year and 365 days or more during the past 4 years immediately preceding the previous year is said to be a non-resident in India.

On the other hand, if an individual resided for more than 182 days or more in India during the previous year, then he or she is considered to be a resident individual.

Threshold Limit u/s 195 TDS on Purchase of Property from NRI

There is no threshold limit to deduct TDS on the purchase of property from NRI under Section 195 of the Income Tax Act. Therefore, TDS is required to be deducted from any amount paid to NRI sellers for the purchase of immovable property.

TDS Rates u/s 195 on Purchase of Property from NRI (Before 23-07-2024)

The TDS rates on the purchase of property from an NRI when the transfer of property took place before 23-07-2024 are as follows:

Example for TDS on Purchase of Property from NRI (Before 23-07-2024)

Suppose Mr. X is a non-resident Indian (NRI) holding a property for more than 2 years. Mr. Y (Resident buyer) wants to purchase property from Mr. X (NRI seller) at the property value of Rs. 3 crores. The applicable TDS rate under the given example would be deducted at 20%, as the property is sold by NRI after 2 years from the date of purchase; therefore, the asset is said to be a long-term capital asset, and the arising gain would be Long-term Capital Gain (LTCG). The calculation of TDS is given below:

Revised TDS Rates on Purchase of Property from NRI (After 23-07-2024)

When the transfer of property takes place after 23-07-2024, the revised TDS rates are as follows:

Example for TDS on Purchase of Property from NRI (After 23-07-2024)

Suppose Mr. X is a Non-Resident Indian (NRI) holding a property for more than 2 years. Mr. Y (Resident buyer) wants to purchase the property from Mr. X at a value of ₹3 Crore. Under the revised rates (w.e.f. 23rd July 2024), the TDS calculation is as follows:

Procedures for TDS Filing under Section 195

The following steps must be followed for TDS filing on the purchase of property from an NRI:

• Step 1: A resident buyer purchasing the property from NRI must first determine the TDS rate applicable. This is done to ensure that the tax deducted at source (TDS) from the sale consideration of the property at the time of purchase should be in line with the Income Tax Act. The rate of TDS on the purchase of property from NRI can be ascertained on the basis of the given table (revised TDS rates), which are as per the provisions of Section 195 of the Income Tax Act.


• Step 2: The next step is to ensure that the TAN is obtained by the buyer in order to make deductions from the sale proceeds transferred to the seller. This TAN number helps to ensure that the individual is an authorized entity (buyer) and is liable to pay the tax to the Central Government after deducting the TDS in accordance with Section 195, TDS on Purchase of Property from NRI. This ensures that TDS is accurately deducted and reflected in the tax returns of both parties.
  

  Note: In a case where two or more individuals jointly purchase the property by investing funds from their sources or through joint loans, each person involved must acquire TAN.



• Step 3: After having all the required credentials, which are mentioned in earlier steps, the next step is the deduction of Tax at source (TDS) from the total sale proceeds. In the case of long-term capital assets, the TDS rate is 20% (which is 12.5% w.e.f. 23rd July, 2024) of the total sale consideration if the property is held for more than 2 years. While on the transfer of short-term capital assets (property is sold before completion of 2 years), the buyer is required to deduct TDS at 30%.


• Step 4: Upon successfully deducting the TDS from the sale proceeds made to the NRI seller, the buyer should proceed to deposit the TDS to the Income Tax Department within 7 days of the subsequent month in which the deduction is made or payment is made to the seller.


• Step 5: The buyer will file the TDS return using Form 27Q in the next quarter after successfully depositing the TDS amount.


• Step 6: After successfully filing the TDS return, the buyer can obtain Form 16A and produce it to the NRI seller. This is done to meet the tax regulations established under the Income Tax Act.


• Step 7: Where the Non-resident Indian seller believes that no amount or only a partial amount (other than salary) is taxable in India and he believes that TDS is to be done at a lower/nil rate, he may make an appeal to the Assessing Officer (AO) under Form 13 to obtain a lower/nil deduction certificate. Now, the Assessing Officer (AO) will enable the deductor or payer to deduct the TDS at a much lower rate. the Assessing

Penalties under Section 195 for TDS on Purchase of Property from NRI

Non-compliance with TDS provisions may result in penalties:

• If TDS is not deducted by the buyer, interest at 1% per month until TDS is deducted will be charged.
• If TDS is deducted but not deposited to the government, interest at 1.5% from the date of deduction until deposition is applicable.
• Under Section 234E, a fine of ₹200 per day may be levied for late filing.

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• Suggesting the right documents for TDS filing.
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Our commitment is to resolve your queries regarding documentation, procedures, and fees, helping you make informed decisions while ensuring successful TDS filing.

Conclusion

Understanding and adhering to the TDS requirements under Section 195 is crucial when purchasing property from an NRI. Both the buyer and seller must comply with the rules to avoid penalties and interest. Given the complexities involved, it is advisable to seek the assistance of experienced CA professionals to ensure accurate TDS filing.

Frequently Asked Questions (FAQs)