Buying property from an NRI is not as easy as it sounds
So, if you are planning to buy a home, especially in the secondary market, you may find a Non-Resident Indian Seller (NRI) who is considering exiting their investments.
If you get a good deal, you shouldn’t worry about whether the seller is an NRI or a resident Indian. However, when buying property from an NRI you need to be very careful as the tax obligations and calculations are much more complex than buying property from a resident Indian.
Failure to meet the standards can get you in trouble, as the tax department can impose penalties.
Let us understand how the tax rules for such transactions are different from regular transactions and other things you should keep in mind when buying property from an NRI.
Deduction of TDS: When buying real estate, the buyer usually has to deduct withholding tax (TDS) and submit it to the tax department. The amount of TDS, or the rate at which TDS should be deducted, depends on the residence status of the seller. If you buy a property from a resident Indian, you must deduct TDS at the rate of 1%, when the value of the property is equal to or greater than ₹50 lakh, while no TDS deduction is required in case the property value is less than ₹50 lakh.
However, in the event that the seller is an NRI, the TDS must be deducted regardless of the value of the property. In addition, the calculation is a bit complex because it must be calculated on the capital gains rather than on the sale value of the property.
In the event of short-term capital gains (property sold within two years), the TDS must be deducted at the rate of 30% plus mark-up in addition to the health and education costs. In the event of long-term capital gains (sold after two years), the TDS will be deducted at the rate of 20% after having provided for the indexation services.
Determination of residence status: The buyer might experience issues with determining the NRI residency status as well as calculating the TDS. The seller cannot disclose residency status or may declare “Indian Resident” status to avoid a higher TDS deduction. Additionally, sometimes an NRI may not be sure of their residency status. As the responsibility for complying with the TDS deduction rules lies with the buyer who should trust the information provided by the seller, the buyer should be very careful and request the addition of the indemnity clause in the contract.
“The buyer can also insist on incorporating a clause in the sales agreement on compensation by the seller in the event of non-compliance with the TDS due to incorrect or incomplete information provided by the seller to the buyer”, said Sonu Iyer, tax partner. and leader in personal counseling services, EY India.
The indemnity clause does not mean that there is no need to pay taxes. This only relieves the buyer if a penalty needs to be paid due to incorrect information provided by the seller.
Additionally, to avoid non-compliance, buyers sometimes deduct TDS from the full value of the sale.
Other conformities: In order to deduct TDS, the buyer must obtain a Tax Deduction Account (TAN) number and file TDS returns within 30 days of the end of the quarter in which payment was made. The buyer must register on the TRACES platform.
“If you happen to deduct the TDS without a TAN, the IT department may impose a penalty on you. In the event that a property is purchased jointly, both buyers must have a TAN, ”said Ram Naik, executive director of The Guardians Real Estate Advisory.
The buyer must provide a TDS certificate (Form 16A) to the seller within 15 days of the due date for filing TDS statements. The buyer should ensure that the seller NRI has a permanent account number (PAN) as this will be required for the purposes of deducting TDS and filing TDS statements.
In addition, the buyer should be careful when making payment to the seller NRI.
“The deed of sale should contain the details of the account to which the amount is deposited,” said Suresh Surana, founder of RSM India.
In addition, in case of joint ownership of the seller, payment must be made to their accounts separately. If you are paying consideration for sales outside India, then you will need to notify the tax department separately.
Resident buyer should complete Form 15CA / 15CB (Certificate containing details of payment made to NRI) while remitting any amount of consideration for sale or rent outside India to NRI.
Payment should be made to the seller’s NRO (Ordinary Non-Resident) account if he is an NRI.
“An NRI cannot have a resident account in India under the exchange control rules. An NRI seller can collect payment from a resident buyer on an NRO bank account. An NRI can designate their ordinary savings bank account as an NRO by informing the relevant bank of their NRI status, ”said Iyer. Buying a home is a high value transaction. Therefore, you need to be very careful and ensure compliance. standards are met.
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