When Non-Resident Indians (NRIs) sell property located in India, they are subject to taxes on the capital gains earned from the sale. These taxes are governed by specific rules under the Income Tax Act, and understanding the applicable Tax Deducted at Source (TDS) rates is crucial for a smooth transaction.
Understanding TDS on Property Sales for NRIs
TDS (Tax Deducted at Source) is a mandatory deduction that the buyer must make when purchasing property from an NRI. This deduction is then deposited with the Indian Income Tax Department.
Key TDS Rates:
- Long-Term Capital Gains: If the property is held for more than two years, the applicable TDS rate is 20% plus cess.
- Short-Term Capital Gains: If the property is sold within two years of purchase, the TDS rate increases to 30% plus cess.
Special Considerations for Inherited Property
When selling inherited property, it’s essential to consider the original purchase date by the previous owner to determine whether the gain is classified as long-term or short-term. The property’s cost basis should be calculated based on the expenses incurred by the original owner. This approach ensures a more accurate calculation of capital gains and accounts for the unique aspects of inherited properties.
TDS Deduction Threshold Under Section 195
According to Section 195 of the Income Tax Act, there is no minimum threshold for deducting TDS on payments to NRIs. However, TDS should only be deducted if the payment is taxable in India. If the payment is exempt, no TDS is required.
Income Tax Rules for NRIs on TDS
NRIs should be aware of the specific rules governing TDS in India:
- TDS on Income: TDS applies to various income sources for NRIs, including salary, rent, interest, and capital gains. The TDS rates vary depending on the income type and applicable tax rates. NRIs must provide their Permanent Account Number (PAN) to ensure proper TDS deduction.
- TDS on Interest Income: For interest income from fixed deposits, savings accounts, or other interest-bearing instruments, TDS is deducted at a flat rate of 30% plus surcharge and cess. NRIs eligible for lower tax rates or exemptions under the Double Taxation Avoidance Agreement (DTAA) can submit a Tax Residency Certificate (TRC) to avail of the lower rate.
- TDS on Capital Gains: NRIs are liable for TDS on capital gains from the sale of property, shares, or other capital assets in India. The rates depend on the asset type and holding period. NRIs can claim a refund for excess TDS by filing their income tax returns.
- TDS Exemptions: NRIs can apply for lower TDS rates or claim exemptions by obtaining a Certificate of Lower Deduction or No Deduction from a chartered accountant. This certificate helps reduce the TDS liability for specific transactions.
Understanding the TDS requirements and tax implications of selling property in India is essential for NRIs. By staying informed and adhering to the regulations, NRIs can ensure compliance and potentially save on taxes through exemptions and lower TDS rates.
