Indian realty sector is a dreamland for investment and capital gains for most Non-Resident Indians (NRIs). The government has made few special rules and regulations for NRIs to facilitate more transparency in the buying or selling procedures and make the transaction process least complicated. One such regulation includes the Tax Deduction at Source (TDS) which can be calculated under section 195 of the Income Tax Act.
Section 195 of the Income Tax Act states that ANY payment made by an NRI attracts TDS at the prevailing rates. It is also important to highlight that tax is deducted only on incomes that are liable to tax in India. In case the income is tax-free such as long-term capital gains from equity shares, there would be no TDS.
TDS under ITA Section 195
Section 195 of the ITA states that a payer is obliged to deduct TDS only on the income component from the sale of the property and not on the total payable amount.
Income Tax Department (ITD) is not needed to be involved while making a decision on calculating the TDS if agreeable at both end. In case of dispute over income component, the payer can make a request to the ITD through an application form.
TDS deduction on the income component
Before calculating TDS, income component should be clear for the payee. Once it is defined, the payee should request the Assessing Officer under section 197 for a lower/nil rate certificate. Otherwise, payer must proceed to deduct TDS on full amount. To avoid any future confusion, the understanding on TDS should be well documented including the sale deed of the property transaction.
For NRIs, the current TDS rate under section 195 is 20.66 per cent for long-term capital gain (owned property for more than 3 years) and 33.99 per cent on short-term capital gain (owned property for less than 3 years).
Step-wise process to calculate TDS
- Generating Tax Deduction Account Number (TAN): This is the first step to initiate the process of deducting TDS. The buyer and seller should have their PAN Id before generating TAN under section 203A of the Income Tax Act, 1961. The buyer can apply for TAN online by filing Form 49B provided at the following link: https://tin.tin.nsdl.com/tan/.
- The deposit of TDS payment must be submitted on or before 7th day of next month in which the TDS is deducted.
- The buyer can deposit TDS under section 195 only through banks authorized by the Indian government or ITD. The list of authorized banks are given at this link: https://www.tin-nsdl.com/oltas/oltas-bank-branches.php
- After depositing TDS, the buyer must file TDS return by submitting Form 27Q which can be filed on quarterly basis. The last dates for filing the TDS return in Q1, Q2, Q3 and Q4 are July 15, October 15, January 15 and May 15 respectively.
- Within 15 days of filing the TDS return, the buyer should issue Certificate of Deduction of Tax i.e. Form 16A to NRI seller.
Penalties for non compliance of Section 195
If the buyer fails to deposit TDS under section 195, then he will be declared as Assessee in Default according to the section 201 of ITA. They are obliged to pay all tax dues including interest and penalty recovered by the ITD.
According to the ITA 1961, there are certain penalties imposed under section 271 and 272:
- Penalty of Rs 10,000 if failed to obtain or quote TAN
- Penalty of Rs 10,000 if failed to quote PAN
- 100 per cent penalty if failed to deduct TDS partially or fully
- Penalty of Rs 100 per day if failed to file TDS returns on time or to issue Certificate of Deduction of TDS within 15 days
The buyer must know that ITD is strict on compliance of TDS deduction. They reserve the right to attach properties, salaries or any other receivables of the buyers to recover the payable amount under section 222 and 226 of ITA 1961. If ITD fails to recover the dues, the buyer can be prosecuted under section 276B by the court of law in which they must serve imprisonment of maximum 7 years or minimum 3 months along with fine to be decided by the court.