S/195 & Purchasse of property from NRI

Since the immovable property sale by non resident entails payment of sale consideration by the buyer who is resident Indian , tax has to be deducted at source and paid to government as per section 195 of the I T Act before paying the sum to the non resident seller of the property .

An NRI can sell residential or commercial property in India. He can sell to:

- A person resident in India (the definition of resident in this case will be as per FEMA)

- An NRI

- A Person of Indian Origin (PIO)

1. Who should deduct TDS?

Section 195 of the I T Act  -  the person who is paying any sum to NRI, is responsible for deducting TDS  before making payment or crediting the payment in his accounts.  Hence  the buyer of the property is responsible for deducting TDS.

2.What if TDS is not deducted?

If  resident buys the property from a NRI and fails to deduct TDS at the time of payment or credit of

the amount to his account, he shall be liable for penalty equal to the amount of tax not deducted or after deducting not depositing the tax . A person is also liable for prosecution for such failure.

3.Can the resident buyer be assessed under I T Act for income arising to a non resident?

Yes, under Clause ( C ) of section 163(1) of the I T Act says

So , a buyer through whom the income to non-resident arises can be treated as agent of the non-resident and therefore can be assessed as “representative assessee” as per section 160(1) of the I T Act.

4.On which amount TDS to be deducted?

TDS on Gross amount of payment or only on the gains.

Supreme Court set the confusion at rest by its order in Transmission Corporation (239 ITR 587) where in it has been ruled that tax should be deducted on the income embedded in the payment.

But confusion regarding quantum still remains there , regarding the decision about the computation of gain. The points for confusion for the deductor are knowledge of cost. The seller , may also claim exemption u/s 54 or 54EC , which may make his gains tax exempt, in that case there is no need of deduction of tax .Therefore, solution to sort out such problem are taking one of the following steps :

a. TDS should be deducted only after making an application in Form 13 before A.O u/s 195(2) for

determination of the amount on which tax has to be deducted.

b. Even Non Resident seller can also make an application in Form 13 before A.O u/s 195(3) for

determination of quantum of tax to be deducted .

5. What is the rate of deduction?

The rate of deduction in case of 20 % . plus Education Cess 3 %.

6.When is the amount required to be deducted and deposited?

The amount is required to be deposited

a. Within one week from the end of month in which the payment was made.

b. Within two months from the end of month in which credit was made.

7. What are other formalities under I T Laws to be done?

1. Get a Tax Deduction Number (TAN )by applying in Form 49B to Utitsl or NSDL.

2. File a statement of tax deduction in Form 27Q of the I T Act quoting TAN .

3. Issue a certificate of deduction in Form 16A to the Non Resident within one month from the end of month in which payment was made.

8. In which account must the sales proceeds be credited (for Buyer)?

There are two scenarios that may arise here:

a. Sale of property purchased as a resident Indian

The sale proceeds in such cases would have to be credited in the Non Resident Ordinary (NRO) Account.

b. Sale of property purchased as a non-resident Indian

If the property was purchased out of rupee resources, that is, income earned in rupees, or the home loan is repaid by a relative who is a resident of India, the amount must be credited in the NRO account.