Someone who buys property from an NRI (non-resident Indian) is required to deduct TDS (tax deducted at source) and deposit the same with the tax department. The TDS needs to be deducted on the amount of capital gains and not on the whole value of the property. The buyer usually deducts the TDS on the entire sale value to avoid the inconvenience of calculating capital gains and reducing the chances of error.
When the seller is an NRI, the buyer has to deduct TDS at the 20% post indexation rate when it comes to long-term capital gains. Short-term capital gains tax will be applicable in case the property is sold before two years. TDS has to be deducted at the rate of 30% in case of short-term capital gains.
It is possible that the buyer may face certain issues when they try to determine the residency status of the NRI and TDS calculation. In an attempt to avoid higher TDS deduction, the seller may refuse to disclose the residency status or declare the status as “Resident Indian”. In some instances, even the NRI may not be sure about their residency status. Buyers, therefore, tend to deduct TDS on the whole amount because it could be inconvenient to calculate capital gains or wrongly calculate capital gains.
To avoid this, however, a lower TDS certificate can be obtained from the tax department beforehand.
“There is a specific Form 13, which needs to be filed with the tax department. After checking the documents, the tax department will issue a lower TDS certificate and will give the exact percentage of TDS that needs to be deducted by the buyer,” Prakash Hegde, a Bengaluru-based chartered accountant, was quoted as saying.
“We generally advise our NRI clients to go with this certificate to avoid higher TDS deduction. Either the buyer or the seller can apply for this certificate. However, generally the sellers apply for it as there is a clearly defined process,” he added.
Therefore, an NRI selling property in India should get this certificate if they want to avoid a higher TDS deduction when selling a property. On the other hand, the buyer can use this to avoid penalties for miscalculating TDS.