IT compliances related to the sale of immovable property by NRI in India

When a non-resident Indian sells property located in India, the Income Tax Act levies a tax on capital gains earned on the sale of the property. If the NRI sells the property after two years of purchase, the profit on such a sale will be a long-term capital gain. Otherwise, it will be a short-term capital gain. Where the property is inherited, the original owner’s purchase date will be considered to calculate the long-term or short-term capital gains.

Tax Deduction at Source (TDS) by Buyer

Where the resident buyer purchases any property from a non-resident seller, the buyer is required to deduct TDS from the sale proceeds and pay the remaining amount to the seller. The TDS amount to be deducted will depend on whether the profit is long-term or short-term to the seller.

• If the gain is long-term capital gain to the seller, the buyer needs to deduct tax at 20% of the capital gain (after taking indexation benefit).
• If the gain is short-term capital gain to the seller, the buyer needs to deduct tax at 30% on the capital gain.

However, it is practically impossible to retrieve all the transaction-related details from the seller to calculate capital gains or know the correct amount of capital gains. Also, the buyer might face issues in determining the residential status of the seller. Hence, the buyers deduct TDS on the whole amount instead of capital gains to avoid wrong calculations.

Income tax exemption 

The NRI seller of the property can benefit from an exemption on long-term capital gains under Section 54- purchase of another residential property, and Section 54EC- purchase of specified capital gain bonds.

Lower deduction/Nil deduction of TDS

To lessen the tax burden, the NRI seller can apply to the income tax authorities for receiving the sale proceeds without TDS deduction. For example, if the NRI wants to claim exemption by making specified investments under Section 54 or 54EC, an application can be made to the income tax authorities for receiving the payment without TDS deduction. However, the NRI has to make an application for the same in Form no. 13. 

On application by the seller of the property, the income tax authorities shall determine the rate at which the buyer of the property shall deduct tax. Based on such a certificate, the tax will be deducted by the buyer of the property. The buyer can also apply for this certificate to avoid penal charges for short deduction of the TDS.

Remittance of sale proceeds to NRI

The buyer of the property making the remittance to the NRI seller needs to furnish an undertaking in form 15CA. Also, a Chartered Accountants Certificate in Form 15CB should be accompanied in Form 15CA.

Thus tax compliance is required by both buyer and seller of the property in case of transfer of immovable property.

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For any clarifications/feedback on the topic, please contact the writer at namita.shah@cleartax.in