If seller is NRI, buyer needs to deduct TDS on taxable capital gain on sale of house

I am planning to purchase a residential flat in Mumbai from an NRI; the cost would be ₹ 45 lakh. What would be the TDS implications and things I need to ensure before proceeding with the purchase?

—Ankit Jain

Under the India income-tax law, if the seller qualifies as non-resident in India during the relevant financial year, the buyer is required to deduct TDS (tax deducted at source) at specified rate (plus applicable surcharge and health and education cess) on taxable capital gain on sale of immovable property. The specified rate is 20% (plus applicable surcharge and health and education cess) in case of long-term capital gain (LTCG) and 30% (plus applicable surcharge and health and education cess) in case of short-term capital gain (STCG).  

If the seller qualifies as resident in India during the relevant financial year, the buyer is required to deduct TDS at the rate of 1% on sale consideration if the sale consideration exceeds ₹ 50 lakh.

Any immovable property held for a period of more than 24 months is classified as a long-term capital asset. In case of a long-term capital asset, taxable capital gain will be net sale proceeds less indexed cost of acquisition (i.e. adjusted as per cost of inflation index or CII) less indexed cost of improvement.

The seller is entitled to exemption in respect of LTCG tax under specified provisions subject to fulfilment of attached conditions thereon.

In your case, it is important to determine:

a. Residential status of the seller

b. Taxable amount of capital gain

If the taxable amount of capital gain is nil, there will be no TDS implications. There are penal consequences if there is a default in deposit of TDS. Thus, it is very important that the residential status and the taxable amount of capital gain is calculated accurately. You may obtain an affidavit-cum-declaration for residential status and taxable capital gain from the seller.

Alternatively, you may approach the income-tax officer to calculate taxable capital gain on sale of immovable property and/or obtain a lower or nil withholding tax certificate.

As part of TDS compliance on purchase of immovable property from a non-resident, you will need to do the following in consultation with your tax advisor:

1. Obtain a Tax Deduction Account Number (TAN) ;

2. Deduct TDS at appropriate rate and deposit TDS with the income-tax authorities within seven days from the end of the month in which the payment or credit has been made.

3. File Form 27Q (withholding tax return) within 31 days from the end of the quarter (31 May for the quarter ending Mar) in which the payment or credit has been made.

4. Issue Form 16A within 15 days from the date of filing the withholding tax return.

Sonu Iyer is tax partner and people advisory services leader, EY India. Queries at mintmoney@livemint.com