How is TDS on sale of property by NRI determined? - A Case Law

How is TDS on sale of property by NRI determined?

TDS on sale of property by NRI – 1% or 10% or 20% depends on residential status?

Background

An individual (Mr. X) is a citizen of India and is currently residing outside India. Mr. X has purchased the flat in the financial year 2000-01 for INR 375,000. Mr. X is now proposing to sale the said flat at INR 4,000,000 during the financial year 2013-14.

The stay pattern of Mr. X is as under.

Particulars	No. of days
Stay during the tax year 2013-14	20 days
Stay during the tax years 2009-10 to 2012-13	175 days
Stay during the tax years 2006-07 to 2012-13	265 days

Based on the above details, the residential status of Mr. X and the nature of gain will be as under.

Residential status

In terms of section 6(1) of the Act, an individual will be considered as resident in India for the financial year 2013-14 if any one of the following condition is satisfied:

         i.            if his stay in India exceeds 181 days during the financial year 2013-14; or

       ii.            if his stay in India in the preceding four years exceeds 364 days and exceeds 59 days in the relevant financial year 2013-14.

In the present case, the stay of Mr. X is only 20 days and accordingly, none of the aforesaid conditions are satisfied. Accordingly, the status of Mr. X will be regarded as non-resident for the purpose of the Act. 

Capital gain

Under the provisions of the Act, the gain arising from transfer of capital asset (immovable property) can be classified as either short term capital gain (STCG) or long term capital gain (LTCG).

The nature of gain depends upon the period of holding of the immovable property (flat).

·         If the flat is held for more than 36 months on the date of sale, the gain will be regarded as LTCG;

·         If the flat is held for less than or equal to 36 months on the date of sale, the gain will be regarded as STCG.

In the case at hand, the gain derived by Mr. X will be considered as LTCG as the flat is held for more than 36 months on the date of sale.

Having discussed that Mr. X will be regarded as non-resident for the purpose of the Act and the gain derived is LTCG, we shall now look into the finer aspects of the rate of TDS to be applied by the purchaser.

Section 194IA – Payment to resident

It may be noted that the Finance Act, 2013 has introduced the new section 194IA in the Income-tax Act, 1961 (“the Act”) which provides that any person responsible for making payment of consideration towards sale of immovable property to resident transferor is required deduct tax at source @ 1% of sale consideration.

Here, Mr. X is non-resident for the purpose of the Act. Consequently, the provisions of section 194IA will not be applicable.

Section 195 – Payment to non-resident

As per section 195 of the Act, tax is required to be deducted from the payment made to a non-resident at the rates in force if such payment is chargeable to tax under the Act.

The term “rates in force” is defined in section 2(37A)(iii)  as the rate which is prescribed under the Finance Act of the relevant year or the rate prescribed in the Tax Treaty entered into by Central Government of India for the purpose of avoidance of double taxation in terms of section 90 of the Act. The rates of tax are provided in Part II of First Schedule to the Finance Act, 2013 as under.

·         Item 1(b)(i)(B) to Part II of First Schedule to the Finance Act, 2013 - tax @ 10% is required to be deducted from the payment by way of long term capital gains referred to in section 115E of the Act. The above rate of tax will be further increased by education cess @ 3%. Consequently, the effective rate of tax will be 10.3%.

·         Item 1(b)(i)(D) to Part II of First Schedule to the Finance Act, 2013 - tax @ 20% is required to be deducted from the payment by way of long term capital gains. The above rate of tax will be further increased by education cess @ 3%. Consequently, the effective rate of tax will be 20.6%.

The issue may arise as to the rate of TDS to be applied by the purchaser of flat.

·         In this connection, reference may be invited to the provisions of Chapter XII-A – Special Provisions relating to Certain Incomes of Non-resident. The provisions of the said Chapter XII-A are applicable to Non-resident Indian (NRI). The definition of NRI is provided in section 115C(e) of the Act as under.

“Section 115C(e): ‘non-resident Indian’ means an individual, being a citizen of India or a person of Indian origin who is not a ‘resident’.

Explanation.—A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India”

In the present case, Mr. X is a citizen of India. Further, as mentioned above, Mr. X is regarded as non-resident for the purpose of the Act. Under the circumstances, Mr. X will be regarded as NRI for the purpose of Chapter XII-A of the Act.

Having said that the provisions of Chapter XII-A are applicable to Mr. X, reference is now invited to the provisions of section 115E of the Act.

“Section 115E: Where the total income of an assessee, being a non-resident Indian, includes—

(a)  any income from investment or income from long-term capital gains of an asset other than a specified asset;

(b)  income by way of long-term capital gains,

the tax payable by him shall be the aggregate of—

(i)                  the amount of income-tax calculated on the income in respect of investment income referred to in clause (a), if any, included in the total income, at the rate of twenty per cent;

(ii)                the amount of income-tax calculated on the income by way of long-term capital gains referred to in clause (b), if any, included in the total income, at the rate of ten per cent; and

(iii)               the amount of income-tax with which he would have been chargeable had his total income been reduced by the amount of income referred to in clauses (a) and (b)”

The term “specified asset”[1] is defined in section 115C(f) of the Act in an exhaustive manner. The immovable property (flat) is not included in the list of ‘specified asset’. Accordingly, the income derived from sale of property by Mr. X will be covered within the provisions of section 115E(a) of the Act. Consequently, Mr. X will be governed by the Item 1(b)(i)(B) to Part II of First Schedule to the Finance Act, 2013 and rate of TDS will be 10%.

Since the abovementioned rate of 10% is beneficial to Mr. X, the general rate of tax of 20% on LTCG will not be applicable.

To conclude, the following points should be kept in mind.

·         Rate of 1% of TDS is applicable only in case of resident transferor;

·         In case of non-resident transferor, the rate of TDS will be as under.

o   TDS @ 10% if the transferor is NRI covered by section 115E of the Act;

o   TDS @ 20% if the transferor is non-resident covered under the general provisions of section 112 of the Act.

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[1] Section 115C(f) : "specified asset" means any of the following assets, namely :—

   (i) shares in an Indian company;

  (ii) debentures issued by an Indian company which is not a private company as defined in the Companies Act, 1956 (1 of 1956);

 (iii) deposits with an Indian company which is not a private company as defined in the Companies Act, 1956 (1 of 1956);

 (iv) any security of the Central Government as defined in clause (2) of section 2 of the Public Debt Act, 1944 (18 of 1944);

  (v) such other assets as the Central Government may specify in this behalf by notification in the Official Gazette

Our views expressed herein are based on the facts and assumptions of case law. No assurance is given that the revenue authorities/courts will concur with the views expressed herein. Our views are based on the existing provisions of law and its interpretation, which are subject to change from time to time. We do not assume responsibility to update the views consequent to such changes. The views are exclusively for own use and shall not, without our prior written consent, be disclosed to any other person. We shall not be liable to any person for any claims, liabilities or expenses resulted primarily from bad faith or intentional misconduct. We strongly suggest that a subject matter expert opinion is taken before use of this opinion.