I am planning to buy a flat in India from an NRI who is based in Germany. Do I need to deduct TDS before making the final payment? I am applying for a bank loan for the same. Does the bank deduct TDS while disbursing the loan?
Under the Indian I-T law, if the “seller” qualifies as “non-resident” in India, the buyer is required to deduct TDS at a specified rate on taxable capital gains on the sale of immovable property. The specified rate is 20% (plus applicable surcharge and health and education cess) in case of long-term capital gain (LTCG) and 30% (plus applicable surcharge and health and education cess) in case of short-term capital gains (STCG).
Any immovable property held for a period of more than 24 months is classified as a long-term capital asset. In case of a long-term capital asset, the taxable capital gain will be the full value of sale consideration less (i) expenditure incurred wholly and exclusively in connection with such transfer (ii) indexed cost of acquisition (i.e. adjusted as per cost of inflation index or CII) and (iii) indexed cost of the improvement. The seller is entitled to exemption from I-T in respect of LTCG under specified provisions of the Indian I-T law subject to fulfillment of attached conditions thereon.
Accordingly, you as a buyer would be liable to deduct TDS on the taxable value of the capital gains of the seller and not the bank. You need to ensure that appropriate TDS is deducted by you before making payment to the non-resident seller by you or the bank.There are penal consequences if there is a default in the deposit of TDS. Thus, it is very important for the buyer that the residential status of the seller and taxable value of capital gains (LTCG or STCG) in the hands of the seller for TDS purposes is calculated accurately.
While computing the capital gains, the buyer also needs to evaluate whether the stamp duty value of the property exceeds 110% of the sale consideration. If so, there are additional tax implications for both the buyer and seller with reference to the shortfall between stamp duty value and actual sale consideration. If stamp duty and registration costs are borne by the seller, they will form part of the expenditure incurred in connection with the transfer and can be deducted while computing the capital gains of the seller.
You may obtain an affidavit-cum-declaration for residential status and taxable capital gain from the seller. Alternatively, you may request the seller to approach the I-T officer to calculate taxable capital gain on the sale of immovable property and/or obtain a lower or nil withholding tax certificate.
As part of TDS compliance on purchase of immovable property from a non-resident, you will need to do the following in consultation with your tax advisor:
Obtain a Tax Deduction Account Number (TAN);
Deduct TDS at the appropriate rate and deposit TDS with the Income-Tax Authorities within seven days from the end of the month in which the payment or credit has been made.
File Form 27Q (withholding tax return) within 31 days from the end of the quarter (31 May for the quarter ending March) in which the payment or credit has been made.
Issue Form 16A within 15 days from the due date of filing the withholding tax return.
Sonu Iyer is tax partner and people advisory services leader, EY India.
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