TDS on Immovable Property & Relevance of Lower Deduction Certificate For NRIs

Considering the tendency of taxpayers to evade the payment of taxes, Income Tax provisions provide for the collection of tax from the very source of income. Under this mechanism, the person responsible for making the payment is liable to deduct tax before making the final payment to the recipient at the rates specified by the department under the applicable sections of Income Tax Act, 1961.

Such tax is to be deducted either at the time of credit in the books or payment to the recipient, whichever is earlier. It ensures timely collection of revenues by the government and curbs tax evasion.

Applicability of TDS on Sale of Property

Whenever a property is purchased, the buyer is liable to deduct tax from the sale consideration and pay the balance to the seller. The tax amount to be deducted depends on the residential status of the seller.

• If the seller is an Indian resident, the tax has to be deducted at 1% of the sale consideration under section 194IA if such transaction's value is Rs. 50 lakhs or more.
• Whereas, if the seller is a non-resident Indian (NRI), the tax has to be deducted at the rate of 20% of the sale consideration irrespective of the transaction value of the property. Hence, in the case of an NRI seller, the tax has to be deducted by the buyer even if the value of such property is less than Rs. 50 lakhs.
• This amount, deducted by the buyer, is then required to be deposited with the Income Tax Authorities on behalf of the seller.

Concept of Lower Deduction of Tax

In some cases, the TDS amount might be more than the seller's actual tax liability.

In such a scenario, the assessees will have to face difficulties as they would be required to pay taxes in the form of TDS even after not having any taxable income for the year, which they end up claiming as a refund.

Such a situation leads to unnecessary blockage of funds till the refund is received. Furthermore, the NRIs have to comply with filing their return of income to claim it even if they are otherwise not liable to do so on account of their total Indian income being less than the basic exemption limit applicable to them.

Hence, to eliminate this unnecessary burden on such NRIs, the income tax law provides for the facility to obtain a certificate, known as Lower Deduction Certificate (LDC) from the Assessing Officer under the provisions Section 197, allowing either a lower rate of TDS compared to the effective rate or a NIL rate of TDS, depending on facts and features of each case based on the application made.

Relevant Form for Application for LDC

Application by an NRI for issuance of lower deduction certificate under section 197 of the Income-tax Act, 1961, for no deduction of tax or deduction of tax at a lower rate has to be made in Form 13 online.

Details/Documents to be submitted

1. Mobile number of the applicant
2. E-mail ID of the applicant
3. Copy of ITR and computation of income of last three years
4. Copy of Form 26AS of last three years
5. Copy of bank statements reflecting payment for the purchase of property
6. Agreement to the sale of property
7. Purchase deed of the original property
8. Builder statement
9. Proof of NRI (Passport or any other document signifying the residence of the applicant abroad)
10. Supporting documents if claiming exemption under section 54
11. Power of Attorney (should be signed by the applicant and his/her authorized representative).
12. Once the application is filed successfully, the assessing officer will review the documents/information submitted and ask for further queries and documents before issuing the certificate/rejecting the application.
13. On being satisfied that lower deduction of TDS is justified, he shall issue a certificate for the same under Section 197.
14. On successful issuance of the lower deduction certificate, the TDS will be deducted as per the TDS Rate stated in the Certificate. This certificate would be issued online, and the taxpayer can download it from the Income Tax portal.

Time limit for Applying for LDC

There is no deadline specified under the Income TaxAct to make an application under Section 197.

However, the NRI should make sure that he applies at least 25-30 days before selling the property, as the income tax officer would take this much time for verifying the documents.

Validity of LDC

A lower deduction certificate is issued for a particular financial year. It holds its validity from the date of issuance till the end of the relevant financial year unless cancelled by the assessing officer before its expiry.

Benefits of obtaining LDC

The option of applying for lower deduction certificate proves to be beneficial for an NRI on the following grounds –

• The funds do not get blocked unnecessarily in the form of TDS.
• No need to comply with the requirement of filing the income tax return to claim a refund of TDS.
• As the NRI has already undergone pre-assessment of capital gains amount while making the application for issuance of lower deduction certificate, he does not have to bother about any future scrutiny notices.

Summing up

• The facility of deducting tax at source at lower rate is available in case of TDS deduction on the purchase of property from NRI also.
• The NRI seller has to apply for a lower TDS deduction to the Income Tax Jurisdictional Assessing Officer in Form 13.
• The Assessing Officer shall issue a certificate of lower tax deduction within 30 days from the end of the month in which the application is received.
• Based on the lower deduction certificate, the buyer of the property would be liable to deduct TDS on total consideration as per the rate mentioned in the certificate.
• If the property being purchased is co-owned by two sellers, then both of them would be required to file Form 13 separately to get the certificate issued.
• If the seller does not opt for this certificate, he will have to apply for a refund of the excess TDS deducted by filing the income tax return at the end of the year.

Conclusion

The facility of providing a nil or lower rate for deduction of tax on the purchase of property from NRI helps in striking a balance between the requirement of ensuring cash flow to the taxpayer and receiving government dues at the earliest. NRIs should avail of the benefit of this facility to avoid blockage of funds and the hassle of filing the return of income to claim the refund, if any.

Authored by CA Manish Gupta & CA Rahul Bavega, assisted by Kriti Agrawal. The author can also be reached at info@manishanilgupta.com