All about TDS on property deals with NRIs

In case of rent – TDS is to be deducted on or before the 7th of the subsequent month

Here is a case of Subramanya -- a Non-Resident Indian (NRI) based in Seattle, USA -- who let out his flat in Koramangala to Kumaran for a monthly rent of Rs 40,000.

Should Kumaran be aware of any Tax Deducted at Source (TDS) provisions under the Income Tax Act?

When an NRI owned property is taken on rent, it is the obligation of the tenant, in this case, Kumaran to deduct tax (TDS) u/s 195 of the Income Tax Act, at 31.20% and deposit it to the Government. Some of you may be surprised to know this and I have come across many tenants who are not deducting TDS due to ignorance of the law. Another case is of Kalyan buying a flat in J P Nagar for Rs 95 lakhs from an NRI living in the USA. Kalyan’s friend has advised him to deduct tax (TDS) at 1% on the sale value. Is he right? No.

The TDS at 1% is applicable for Resident sellers of the property. When an NRI owned property is sold, the buyer should deduct tax (TDS) u/s 195 at rates depending upon the period of holding of property by the seller. In case the property is held for more than 24 months, then it is considered as Long-Term Asset and therefore TDS is to be done at 20% plus applicable surcharge and Cess. Please refer to the chart for TDS rates. If the property was held for less than 24 months, it is considered as Short-Term Asset and attracts TDS of 30% plus applicable Surcharge and Cess. TDS rates are astonishingly high, isn’t it? Unfortunately, this is how it works.

What is the process for deducting TDS?

As a first step, the tenant/buyer has to obtain a TAN (Tax Deduction Account Number). It is issued by the Tax department to deduct tax and remit. Many people argued with me saying that I am a salaried person, why should I obtain TAN? Their arguments are logical but the law insists that the tenant or the buyer obtain TAN, deduct TDS and pay, and finally file an eTDS return.

When to pay TDS and file eTDS return?

In the case of Rent – TDS is to be deducted and deposited on or before the 7th of the subsequent month. For example, TDS towards the rent for October 2020, is to be deposited on or before 7th November 2020.

In the case of Property – A similar rule is applicable. However, practically it won’t work that way. The buyers will have to deduct and deposit TDS on or before registering the property.

The TDS details like date of payment, transaction ID have to be mentioned in the Sale Deed and the proof of TDS payment produced to the Sub-Registrar at the time of registration.

The tenant/buyer has to file a quarterly TDS return to effect the TDS amount against the PAN of the owner/seller of the property and then generate TDS Certificate in Form 16A.

What are the consequences of the non-deduction of TDS or non-filing of eTDS return?

Beware of the penal provision! Non-deduction of TDS attracts interest u/s 201(1A), Penalty u/s 271C amounting to a sum equal to the TDS not deducted or TDS not paid. Similarly, non filing or late filing of eTDS return attracts a late fee u/s 234E, of Rs 200 per day, (up to a maximum of the TDS amount) till the failure continues. This is a lot of money. Suppose, if someone has failed to file the return for 60 days then the penalty is Rs 12,000!

Is there a way TDS rates can be reduced?

After mentioning the frightening TDS rates and penal provisions, let us look at the positive side.

If we look at the above example of rent, the actual tax liability of the NRI owner will be around Rs 4,500, but the TDS amount will be Rs 1,49,760. Similarly, capital gain tax after indexation may not be much, maybe Rs 1 lakh, but the TDS amount will be Rs 22 Lakh!

To reduce the burden of high TDS rates, there is a provision to apply for a Lower Tax Certificate (LTC) from the jurisdictional Income Tax Officer. The Officer will check the tax computation and issue a certificate asking the tenant/buyer to deduct tax at lower tax. Thereby, the deduction of the astronomical TDS amount can be avoided.

Can the owner/seller get the TDS amount as a refund from the department?

Yes, Of course. They have to file the Income-tax return, adjust TDS to the actual tax liability, and the balance excess TDS, if any, can be claimed as a refund.

The Sellers CA has given the tax computation. Can I deduct tax based on this?

The tenant/buyer or his tax consultant can’t decide to reduce the tax rates. The powers to issue the reduced tax rate certificate lies only with the Tax Officer.

Is it not an additional cost if one rents a property from NRI?

This is a pertinent question asked by many people. NRIs feel that they are at a disadvantage while renting or selling the property as they have to undergo an elaborate TDS provision. This is true to the tenant or buyer dealing with NRI owned properties as well.

(The writer is a Chartered Accountant and Registered Valuer)