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EMAIL : contact@balakrishnaandco.com

 

Buying Property from NRI and applicability of TDS

 

Let us understand with a simple example. Mr. Shekar, after completing his B. E. from PES College,Bangalore, was offered a job at London and has been living there for the last 10 years. His parents live at Jayanagar and he comes to India once a year to meet his friends and relatives. Out of his earnings at London, he purchased a residential site at Banashankari 6th Stage, Bangalore in the year 2004 for a consideration of Rs. 20 lakhs.

 

Now, Mr. Shekar wants to sell this site. Mr. Ramesh, a resident of Bangalore is interested to purchase the site from Mr. Shekar for a total sale consideration of Rs. 100 lakhs (Rs.1 Crore).

 

Mr. Ramesh, the buyer has given Rs. 5 lakhs as advance to Mr. Shekar. Mr. Ramesh has agreed to pay Rs.95 lakhs through a demand draft at the time of registration of the site. The site registration is scheduled on 17th January, 2011.

 

Issues

 

Question 01: Can Ramesh pay the full consideration of Rs. 100 lakhs to Shekar?

 

The answer would have been yes, if Mr. Shekar was a resident Indian. The answer however is no as Shekar is a non resident! As per the Indian Income Tax Act, when a resident purchases any property from a non resident, he has to deduct income tax (TDS) and pay the balance amount to the seller.

 

Question 02: What is the amount to be deducted as tax?

 

Don’t be surprised! He has to deduct 20% of the sale consideration as tax, i.e., Rs. 20 lakhs and pay Rs.80 lakhs to Shekar.

 

Question 03: What has to be done with Rs. 20 lakhs?

 

It has to be deposited to the Income Tax Account by Ramesh directly and he must issue form 16A to Shekar. Shekar can adjust this amount while filing his income tax return. In case, his income tax liability is less than the tax deducted, he can get a refund from the department.

 

Question 04: Are you joking? Have you read the rules well before writing this article?

 

We are not joking!

 

As per section 195 of IT Act, the person who is paying any sum to a non resident is responsible for deducting tax before making payment or crediting the payment in his account. So, the buyer of the property is responsible for deducting tax.

 

Question 05: We understand this may be applicable to firms, companies, businessmen, etc. Are you sure that this rule is applicable to Individuals, common citizens of this country? Will this rule apply to me even if I am not an Income tax payer?

 

Yes. This rule is applicable to citizens/residents of India, irrespective of their status; whether one is a businessman or salaried employee or a non income tax payer.

 

Question 06: What happens if Ramesh does not deduct tax and pays the full amount to Shekar?  Shekar will go back to London and it is the income tax department’s job to recover taxes from him.  After all, he is the seller and he is making profits/gains.

 

Unfortunately, though your contention is right, you are responsible for deduction and payment of tax! As per Income Tax Act, A resident buyer of the property from a non resident seller who fails to deduct the tax at the time of payment or credit of the amount to his account 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.

 

Question 07: That means Mr. Ramesh will be made responsible for payment of Income Tax of Shekar. Is this what you want to convey?

Yes. Your understanding is absolutely right.

 

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

For the purpose of this Act, agent in relation to a non-resident,

include any person in India –

(a)…….

(b)……..

(c) From or through whom the non-resident is in receipt of any income, whether directly or

indirectly; or….

 

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.

 

In case Ramesh does not deduct tax at the time of payment and Shekar does not file his Income tax return, then the buyer, Ramesh, will have to pay taxes to Income Tax department on behalf of Shekar.

 

To continue the same example, Assume that Ramesh has paid Rs. 100 lakhs as sale consideration without deducting tax, and then Mr. Ramesh may end up in paying an additional amount of Rs. 20 lakhs to income tax department.

 

Question 08: This rule looks strange and illogical….

 

This is a draconian rule under Income Tax Act.

  

Question 09: So, that means we should not buy property from NRIs, is it?

 

No, not really. You can buy the property after payment of taxes. You have to make the seller aware of Indian income tax law.

 

Question 10: Is there any way out to reduce or avoid tax deduction at the time of payment?

 

Yes. There are two solutions –

 

a.     Either you or the seller can make an application to Income Tax Officer, working out the tax on capital gain and seek a certificate from him for lower deduction or Nil deduction of tax; or

 

b.     You can ask the seller to open a capital gain account (SB Account) in a nationalized bank and issue a cheque for the total consideration in favor of “Shekar A/c No…………………, ……….Bank”. So, the total consideration will go to a capital gain account. The amount from the capital gain account be withdrawn only towards purchase of new property or can be withdrawn after payment of due income tax. Of course, this may not absolve you from the responsibility of deduction of tax, but you will be rest assured that the seller cannot get away, without payment of income tax. So, ultimately, you may not be liable to taxes.

 

Please note that this solution can be exercised in case, the seller makes reinvestment of the capital gain in another property in India and claims tax exemption u/s 54 or u/s 54F of Income Tax Act.

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