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”
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.
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.
