If you plan to purchase a house, especially on the secondary market, you may bump into a non-resident (NRI) seller who intends to end his/her investments.
If it seems like a good deal, you don’t have to think about if the seller is an NRI or a resident of India. However, when purchasing a property from an NRI, you need to be vigilant as the tax regulations and calculations are much more complex than buying a property from a resident Indian.
If failed to comply with the standards, you can get in trouble as the tax department can impose fines.
Let’s examine how the tax rules in such deals differ from regular transactions and other things when purchasing a property from an NRI.
Deduction from TDS
When you buy a property, you have to deduct the withholding tax (TDS) and file it with the tax authorities. The rate, at which TDS must be deducted, based on the seller’s residency status. When buying a property from an Indian resident, you mandatorily have to deduct TDS at the rate of 1% if the property’s value is equivalent to or over Rs 50 lakh. However, no TDS deduction is necessary if the property’s value is less than Rs 50 lakh.
However, in the case of an NRI seller, TDS must be deducted irrespective of the property’s value. The calculation is also quite complicated due to its calculation on capital gains instead of the value of the sale of the property.
Determinations of Residence Status
You may face difficulties in determining the NRI residency status and the TDS calculation. The NRI seller may not reveal residency status or declare status as ‘Resident of India’ to avoid higher TDS deductions. Sometimes an NRI herself is unsure of his/her residency status. The responsibility for complying with the TDS deduction rules rests with the buyer, who must believe in the provided information.
If you are a buyer, in such cases, you must insist on the inclusion of a clause in the sales contract about indemnification by the NRI seller because of non-compliance with TDS.
However, the safeguard clause does not mean that no tax has to be paid. It only ensures you that there is a penalty if the seller misinforms you.
To avoid non-compliance, sometimes buyers deduct TDS from the total resale value.
Other than these, you should be careful while paying the NRI seller. You must submit Certificates with details (Form 15CA/15CB) whilst remitting any amount of selling price or rent outside India to an NRI.