Lower Deduction Certificate for TDS on sale of property by Non Resident Indian

Lower Deduction Certificate (LDC) for TDS on sale of property by Non Resident Indian (NRI)

Are you an NRI who is selling his/her property in India and are unable to recover the entire sale proceeds due to very high withholding tax/TDS (about 22-23%) on such property sale even when actual capital gains tax are much lower?

The tax department has provided an option to apply for a Lower Deduction certificate (LDC) which allows TDS to be deducted at lower rates between 5-10% (in line with the actual capital gain). The same results in upfront realization of the about 90-95% of the property value rather than recovering the extra deduction (TDS – actual capital gain) after ITR filing and refund which generally blocks that amount for 15-24 months (depending on when transaction was undertaken).

Illustration:

Mr A (an NRI from UK) is selling a property in India for INR 100. The buyer is insisting on deducting INR 23 as taxes and passing on INR 77 to Mr A.

Mr A had bought this asset in 2001 for INR 25 and currently using indexation 3.31 (FY 22-23), his indexed cost of property is 82.75. He should ideally be paying approx. INR 3.5 as capital gain tax (Capital gain 100-82.75= 17.25* 20.60%). There is an extra deduction of INR 19.5 which will only be recovered after filing of ITR.

The transaction is being undertaken in January ‘23 and he will file the tax return for FY 22-23 in July 23. The refund would only be issued within 12-18 months of such transaction when the ITR is processed. Mr A is therefore not being able to use INR 19.5 for 12-18 months. In such cases, he should apply for LDC.

TDS ON SALE OF IMMOVABLE PROPERTY AND THE APPLICABILITY OF A LOWER DEDUCTION CERTIFICATE FOR NON-RESIDENT INDIANS (NRI)

Applicability of withholding tax on sale of property:

When buying a property, the buyer is required to deduct tax from the sale price and remit to the seller the remaining money. The amount of tax to be deducted depends on whether the seller is a resident or not.

According to section 194IA, the tax must be deducted at 1% of the sale consideration if the seller is an Indian resident if the price of such a transaction is Rs. 50 lakhs or higher.

In contrast, regardless of the property’s transaction value, tax must be withheld at 20% plus applicable cess (4%) & surcharge (10 or 15%) from the total sale consideration if the seller is a non-resident Indian (NRI). TDS on transaction of transfer of immovable property by Non-Resident to Resident was covered by Sec 195. Therefore, even if the value of the property is less than INR 50 lakhs, the buyer must deduct the tax in the case of an NRI seller. The buyer is then required to deposit this sum with the income tax authorities on the seller’s behalf.

Relevance and benefits of obtaining Lower/Nil Deduction Certificate:

The TDS amount may be greater than the seller’s actual tax liability in some cases. In such a case, the NRI will face difficulties because they will be required to pay taxes in the form of TDS even if they have no taxable/ lesser income for the year, which they will then claim as a refund. This results in an unnecessary blockage of funds until the refund is received. Furthermore, in order to close the gap between TDS deducted and actual tax liability NRIs must file their income tax return to claim the refund of excess TDS paid, even if they are not otherwise required to do so because their total Indian income is less than the basic exemption limit applicable to them.

To alleviate this unnecessary burden on such NRIs, the income tax law provides for the option of obtaining a certificate from the Assessing Officer under Section 197. Considering the merits and facts of each case based on the application made, the AO can issue a certificate allowing either a lower rate of TDS compared to the effective rate or a NIL rate of TDS.

Let’s use an example to better understand the cases where it will be beneficial to obtain LDC.

Case 1 (Favorable): Where there is a significant gap/difference between TDS deducted and actual tax liability.

Sale consideration of an immovable property is INR 4 crores, but the purchase cost (after indexation) was INR 2.5 crores. There is a capital gain of INR 1.5 crores after applying the capital gains provisions. Due to a long-term asset, TDS will be deducted at a rate of 23.92% (20% + SC15% + 4%Cess). As a result, the TDS will be 23.92% of RS. 4 crores, or Rs 95,68,000. Now the actual tax liability associated with the aforementioned transaction has been calculated, it will be assessed at a rate of 23.92% (20% + SC 15% + cess) on the sum of INR 1.5 crores, or INR 35,88,000.

It is evident that the TDS deducted from NRIs is INR 95,68,000, despite the fact that their actual tax liability is 35,88,000. There is a gap of 59,80,000 between TDS deducted and actual tax liability. The NRI would be required to file a tax return and wait for the refund for 15-24 months and not be able to use INR 59.80Lacs. In this case, tax officer should be approached and after submitting necessary documents an LDC should be obtained.

Case 2 (Favorable): Where there is a Long-Term Capital Loss.

Sale consideration of an immovable property is INR 4 crores, but the purchase cost (after indexation) was INR 4.5 crores. There is a capital loss of INR 50 Lakhs after applying the capital gains provisions. Due to a long-term asset, TDS will be deducted at a rate of 23.92% (20% + SC15% + cess). As a result, the TDS will be 23.92% of INR 4 crores, or INR 95,68,000. Now the actual tax liability associated with the aforementioned transaction will be Nil (there is a capital loss of INR 50 Lacs)

It is evident that the TDS deducted from NRIs is INR 95,68,000, despite the fact that their actual tax liability is Nil. There is a gap of 59,80,000 between TDS deducted and actual tax liability for which NRIs will file their income tax return to claim the refund of excess TDS paid. Resulting in an unnecessary blockage of funds until the refund is received and filing of tax return. In such a case the NRI should apply for an LDC (Lower Deduction Certificate)

Case 3 (Unfavorable): Where there is a no significant gap/difference between TDS deducted and actual tax liability.

Sale consideration of an immovable property is INR 4 crores, but the purchase cost (after indexation) was INR 0.25 crore. There is a capital gain of INR 3.75 crores after applying the capital gains provisions. Due to a long-term asset, TDS will be deducted at a rate of 23.92% (20% + SC15% + cess). As a result, the TDS will be 23.92% of INR 4 crores, or INR 95,68,000. The actual tax liability associated with the aforementioned transaction has been calculated, it will be assessed at a rate of 23.92% (20% + SC 15% + cess) on the sum of Rs. 3.75 crores, or Rs. 89,70,000.

It is evident that the gap between TDS deducted and actual tax liability is not significant. In such a case, it would not be beneficial to obtain an LDC.

How to apply for Lower/Nil Deduction Certificate u/s 197:

Application for obtaining Lower/Nil Deduction Certificate is required to be made online in Form 13 on government portal (Traces).

Below is the list of some standard documents required for making an application under u/s 197 to support Form 13.

• Mobile and E-mail ID of the applicant
• The agreement entered into with the buyer for the sale of the property.
• TAN copy of the buyer. In case the buyer does not have one, he/ she can apply for it and get it in 1-2 weeks by filing Form 49B with the Income Tax Department.
• Copy of Passport of NRI/Foreign Citizen Seller.
• Circle Value of property involved, certified by the regulating authority.
• Properly stamped and executed purchase deed of the property and proof of ownership by the Owner.
• Bank account statement of the NRI held in India.
• ITR of the NRI for the last 2-3 years.

Tax record and statement under 26AS for the last 2-3 years.

After the application has been submitted successfully, the assessing officer will examine the supporting materials and request additional information and supporting documentation if required before issuing the certificate or rejecting the application.

AO will issue a certificate under Section 197 once satisfied that a lower TDS deduction is appropriate. The TDS will be deducted in accordance with the TDS Rate specified in the Certificate upon successful issuance of the lower deduction certificate.

The LDC generally would take 3-6 weeks to process as it involves AO sending the application to TDS officer and their seniors.

Validity of LDC:

A certificate for a Lower / Nil deduction is given for a specific fiscal year at a specific rate which is in line with actual capital gains calculated. Unless it is revoked by the assessing officer prior to expiration, it remains valid from the date of issuance through the end of the applicable financial year.

When purchasing property from an NRI, the option of deducting tax at source at a lower rate is also available. The NRI seller must submit Form 13 to the Income Tax Jurisdictional Assessing Officer in order to request a lower TDS deduction.

The buyer of the property would be required to deduct TDS on the total consideration in accordance with the rate specified in the lower deduction certificate.