TDS on Sale of Property by NRI & Importance of Lower Deduction Certificate
Since the NRI person doesn’t live in India, the TDS application for the sale of property by NRI is quite different compared to Indian residents when they sell their property. Generally speaking, when NRIs sell their property located in India after keeping it for at least two years, they need to pay long-term capital tax at the rate of 20%, excluding surcharge and cess. Although, the tax rate can be lower with the help of the TDS deduction available under the Income Tax Act 1961.
The payer is liable to deduct the tax amount before making payment to the recipient at the rate set by the Income tax department under relevant sections of the Income Tax Act. The tax deduction can be made either while making an entry in the books of account or making payment to the recipient, whichever is earlier.
TDS Applicability on the Sale of Property
While purchasing the property, the buyer is liable to deduct and deposit the TDS amount to the tax department. The tax rate to be deducted varies depending on the residential status of the seller.
- For Indian residents, the 1% of sale consideration needs to be deducted under section 194IA, where the transaction’s value is Rs 50 lakh or more.
- If the property seller is a non-resident Indian (NRI), the buyer must deduct 20% of the sales consideration, irrespective of the property value. In addition, when sales consideration is less than Rs 50 lakh, the buyer still needs to deduct 20% of the TDS amount. However, the surcharge amount would not be required to be deducted.
- Once the buyer deducts the TDS amount, they must deposit the same amount with Income Tax Authorities on behalf of the seller.
Lower Deduction of Tax: Overview
In many cases, the TDS amount might be more than the assessee’s actual tax liability. In such cases, the assessee or seller might face several challenges, as they will be required to pay the TDS amount, even after falling in the basic exemption limit, that will end up claiming the surplus TDS amount back.
It’s unnecessary blockage of the fund until the seller gets its refund. However, to get the claim on their amount paid as TDS, NRI must comply with filing ITR, even if they do not have any taxable income for the year.
The income tax law provides such taxpayers a facility to obtain a certificate to prevent such an unnecessary burden on non-Indian residents. This certificate is known as the Lower Deduction Certificate (LDC), issued by the Assessing Officer under Section 197 of the Income Tax Act, 1961. Using LDC, NRI can get a comparatively lower or NIL rate of TDS compared to the effective rate of TDS, based on the facts and features of different cases on which the application is made.
Application Form for Issuance of LDC
NRI willing to obtain a Lower Deduction Certificate, under section 197 of the Income Tax Act, 1961, must apply for; for no deduction of tax or deduction of tax at lower tax by filling out Form 13 online.
Documents Required to Be Submitted
NRI has to provide the following details and documents while filling out Form 13 online.
- Applicant’s Email ID and phone number
- Copy of ITR and Computation (last three years)
- Copy of Form 26 AS (last three years)
- Copy of Bank Statement (must show the payment for the purchased property)
- Agreement to the Sale of Property
- Purchase Deed of Purchased Property
- Builder Statement
- Relevant Proof of NRI (such as a Passport)
- Additional Documents (if the applicant needs exemption under section 54)
- Power of Attorney (must be duly signed by the applicant and his/her authorized representative.)
- When NRI fills out the application successfully and submits it, the assessing officer will review the documents/information provided and ask for additional information or documents before issuing or rejecting the application.
- If the assessing officer thinks the application justifies the lower tax deduction criteria, he/she will issue the certificate for the same under section 197.
- When the certificate of LDC is issued, the TDS will be deducted as per the TDS rate mentioned in the certificate. Furthermore, the certificate is issued online; the taxpayer (NRI) can download it from Income Tax Portal.
What is the Timeline to Apply for LDC?
There is no such timeline to apply for a Lower Deduction Certificate under IT Act. However, NRI should make sure he/she applies 20–25 days before selling their Indian property. During this time, the income tax officer will verify the submitted documents and accept/reject the application.
What is the Validity of LDC?
The Lower Deduction Certificate is generally issued for a particular financial year. It carries its validity from the date of issuance to the end of the relevant financial year until the assessing officer does not cancel it before the expiry.
Is there a Benefit to Obtaining LDC?
Obtaining LDC or Lower Deduction Certificate can benefit NRI on many grounds, such as mentioned below.
- Their fund does not block unnecessarily as a TDS amount.
- They do not need to file ITR to claim the TDS amount back
- NRIs do not require to bother about future scrutiny notices, as they have already gone through pre-assessment of capital gains while submitting their LDC Form.
- NRIs are eligible to pay the TDS amount at a lower or NIL rate by obtaining a Lower Deduction Certificate.
- The non-Indian resident seller needs to apply for LDC to the Income Tax Jurisdictional Assessing Officer by filling out Form 13.
- The Assessing Officer must issue the LDC within 30 days from the end of the month the application is received.
- The buyer of the NRIs property will be liable to deduct tax as per the tax rate specified in the Lower Deduction Certificate of the NRI seller.
- If two NRIs own the property and want to avail of the TDS deduction benefit, both must fill out Form 13 and submit it separately.
- If the NRI seller does not obtain LDC and has already paid the TDS amount, even after having non-taxable income for the financial year, he/she will have to file the ITR at the end of the financial year to claim the excess TDS amount.
The provision of NIL or lower TDS deduction on the sale of property by NRI helps to maintain the balance between proper cash flow to the taxpayer and receiving the government’s due as early as possible. If NRI is willing to sell his/her Indian property, they must avail of this facility, as it will prevent any blockage of the TDS amount and the requirement to file ITR to claim the blocked fund.
(Note: I published this article first on LinkedIn.)