When buying property from a Non-Resident Indian (NRI), one of the key aspects that differentiates it from typical real estate transactions is the Tax Deducted at Source (TDS) under Section 195 of the Income Tax Act. While Indian residents are subject to a 1% TDS on property transactions above ₹50 lakh, the TDS rate increases significantly for property sales involving an NRI seller. The buyer must deduct TDS at rates starting from 20% and deposit it with the Indian income tax authorities. A failure to comply can result in penalties or interest charges. Understanding these rates and ensuring proper deduction is crucial to avoid any legal complications.
Key TDS Rates and Their Applicability
- Property Value Under ₹50 Lakh: 13% effective TDS
- ₹50 Lakh to ₹1 Crore: 14.3% TDS
- ₹1 Crore to ₹2 Crore: 14.95% TDS
- ₹2 Crore to ₹5 Crore: 16.25% TDS
- ₹5 Crore or More: 17.81% TDS
The buyer must also consider the property's holding period, as long-term capital gains (for properties held for over 24 months) attract a lower TDS rate of 12.5%, while short-term capital gains (properties held for 24 months or less) are taxed at a higher rate of 30%.
Legal Risks and Compliance Musts
Buying property from a Non-Resident Indian (NRI) involves specific legal and financial requirements that need to be carefully followed to avoid complications. The seller’s PAN must be correctly marked as NRI; if it’s not, it could block TDS refunds and complicate tax return filings. Additionally, if the NRI seller’s capital gain is lower, they may apply for a Lower Deduction Certificate (LDC), but this process can take time. Without the LDC, the buyer is required to deduct TDS at the full applicable rate. Moreover, when a Power of Attorney (PoA) is used for the sale, it must be a Specific PoA, officially registered in India. Payments for the property must be transferred directly to the seller’s NRO account, as using an NRE account for sale proceeds is not permitted.
It’s crucial for buyers to manage TDS deductions properly by ensuring each installment is deducted and deposited by the 7th of the following month. Delays can lead to penalties, and the buyer will be held responsible. Buyers must also ensure that all documentation, such as the PoA and PAN details, is in order before proceeding with the transaction. Understanding these legal obligations, along with proper compliance, is essential for a smooth and successful property purchase from an NRI. Consulting a tax or legal advisor familiar with NRI transactions can help avoid potential issues and ensure all steps are followed correctly.
Key Points to Remember When Buying Property from an NRI
- Power of Attorney (PoA) Requirements:
- Only a Specific PoA registered in India is valid.
- The PoA must only relate to the property being sold.
- It must be officially registered in India.
- The PoA holder may sign documents for registration but cannot receive the sale proceeds.
- Payment Requirements:
- Payments must be transferred directly to the NRI seller’s NRO account.
- The NRE account cannot be used for property sale proceeds due to tax exemptions on certain types of income.
- TDS Deductions:
- Every installment of payment must be accounted for individually.
- TDS should be deducted for each payment and deposited by the 7th of the following month.
- Delays in depositing TDS will result in interest charges and penalties, which the buyer is responsible for.
- General Power of Attorney (GPA): GPA is not acceptable for NRI property transactions, making the deal legally invalid.
- Buying property from an NRI involves complex legal and financial procedures.
- It's essential to understand tax obligations, documentation requirements, and compliance with regulations.
- Failing to follow these steps could lead to costly legal complications.
It’s highly recommended to consult a tax expert and legal advisor who specializes in NRI property transactions to avoid regulatory issues and ensure compliance.
