Must Know Facts If You Are Buying Property From An NRI

The taxman may come after those who bought property from non-resident Indians (NRIs) and failed to deduct/deposit they are obliged to. Earlier this year, officials of the Central Board of Direct Taxes (CBDT) had been directed to carry out surveys to detect tax evasion. Officials had also been directed to collate data of property transactions and match it TDS (tax deducted at source) records to find out the possible mismatches. 

Interestingly, in several cases these “defaulters” may face the wrath of the taxman without having intentionally withheld anything ─ tax laws related to property purchases where the seller is an NRI are complex, and must strictly be carried out with the help of an expert only. Here is a primer for those buyers who are planning to buy a property that belongs to an NRI.

Buyer is responsible for deducting TDS

Only one per cent of the deal value is deducted by the buyer as TDS when the seller is a resident. Also, if the deal value is less than Rs 50 lakh, no TDS deduction liability arises on such deals.

It is quite different when the seller is an NRI. 

*TDS rate is 22.88 per cent of the deal value if the property is worth anywhere between Rs 50 lakh and Rs 1 crore.

*In case the property is worth over Rs 1 crore, 23.92 per cent of the deal value must be deducted as TDS by the buyer.

*TDS of 20.80 per cent must be deducted even if the deal value is less than Rs 50 lakh.

Why the wide difference, you think? It is because the buyer has to deduct tax on the capital gains of the seller under Section 195 of the Income Tax Act.

Now, arises the question, if the buyer is deducting TDS on capital gains, why should he deduct 20 per cent of the deal value? Should it actually not be 20 per cent of the actual gains the seller has made by making the deal? You are thinking right, and the seller might even try to convince you about the same. However, legally speaking, the buyer is no judge of that; only an income tax officer could do that for the seller. Unless the seller approaches the tax official concerned, gets the calculation done and produces a certificate proving the same, you as a buyer are supposed to deduct TDS on the entire transaction value.

Do note here that there is no restriction on who actually can deduct and submit TDS. The seller can do that, too. However, in case of any default, the taxman will come after the buyer and not the seller.

Apart from earning yourself the dubious distinction of being a defaulter, you will also be liable to pay all outstanding dues along with a 12 per cent interest. The department can also impose a penalty on you.

So, it is in your best interest that you deduct and deposit the money yourself.

At this juncture, you may wonder, would there be issues in registering the property if you fail to deduct the right amount of TDS? The answer is, no. While the details pertaining to TDS deduction must be clearly mentioned in the sale agreement, the sub-registrar is not responsible for making calculations here. You property would certainly be registered; the trouble with the taxman for the miscalculation would arise later.

The buyer is also responsible for filing TDS return and issue Form 16A to the seller after depositing TDS.

You need a TAN

There is another point where things get different when you are buying property from a non-resident. You must have a Tax Deduction and Collection Account Number (TAN) . Section 195 rules that to deduct TDS, the buyer must have a TAN. If you go ahead and deduct the TDS without a TAN, the I-T department may slap a penalty on you. Also note here that if a property is being jointly purchased, all the members must have TANs. For instance, if you are buying a property along with your wife, both of you must apply for a TAN.  

Deposit the money in NRO/NRE/FCNR accounts only

This matter should be settled while you are still in the negotiating stage. To make it convenient for them, an NRI seller might ask you to deposit the sale proceeds in his Indian saving bank account. This is where you should put your foot down and say you would go ahead with the deal only if they provided you details of their Non-Resident External (NRE) or a Non-Resident Ordinary (NRO) or Foreign Currency Non-Repatriable (FCNR) account. These are the accounts where you should be depositing the money to steer clear of any legal troubles arising in future. Also, mention the account details clearly in your sale deed document.

Other key points to remember

Seller’s PAN must: To carry out the transaction, it is important that the seller has a Permanent Account Number (PAN) . He does not need to have a TAN though, unlike the buyer.

Seller’s presence: It would be the best if the seller is present in India at the time of the transaction. However, if they have given someone a power of attorney (PoA) to carry out the deal, this PoA should be a Special PoA. While a PoA is given to carry out all sorts of financial transactions, a SPoA is granted to carry out a specific task.   

Seller’s share: If there are multiple owners of the property, the buyers must make the payment depending on their share in the said property. Making the entire payment to one party might lead to litigation in future.

Useful tips

Banking on your lender: You bank could also help you with the tax deductions in case you are applying for home finance to make the purchase. The TDS amount would be deposited in your account. You can take it up from there.

Leave it to the expert: Hire a chartered accountant, who specialises in NRI real estate transactions. Owing to the complexities of the rules, one might overlook certain key aspects of the transaction that might cause problems in future.