Section 195 of the Income Tax Act, 1961, governs the rate of tax to be deducted at source (TDS) on consideration to be paid to a Non-Resident Indian (NRI) on acquisition of a property situated in India. It spells out, inter alia, “Any person responsible for paying to a non-resident, not being a company, or to a foreign company…shall…deduct income-tax thereon at the rates in force.”
As per the latest finance bill, the “rates in force” for capital gains on transfer of immovable property by an NRI are as follows:
Long-Term Capital Gains (LTCG): 20% + Applicable surcharge + Health and Education Cess @4% (benefit of basic exemption limit on LTCG is not available for NRI); and
Short-Term Capital Gains (STCG): Tax as per slab rates + Applicable surcharge + Health and Education Cess @4%.
Section 197 (1) provides, inter alia, “where income-tax is required to be deducted…under the provisions of…section 195, and the Assessing Officer (AO) is satisfied that the total income of the recipient justifies the deduction of income-tax at any lower rates or no deduction of income-tax, as the case may be, the Assessing Officer shall, on an application made by the assessee in this behalf, give to him such certificate as may be appropriate”, i.e. the seller may apply to the AO, in Form No. 13, along with necessary supporting, for the deduction of TDS at a lower rate or no TDS at all, as the case may be.
Section 197 (2) provides, “where any such certificate is given, the person responsible for paying the income shall, until such certificate is cancelled by the Assessing Officer, deduct income-tax at the rates specified in such certificate or deduct no tax, as the case may be.” i.e. once the certificate for lower tax deduction or no tax deduction is issued by the AO, the buyer is bound to deduct tax accordingly on presentation of the certificate.
The problem and the solution
The major problem arises when an NRI goes about settling the transaction of transfer of property without obtaining a lower tax deduction certificate under section 197, i.e. the buyer makes TDS @20% as per section 195. This can be understood by way of a hypothetical situation:
Mr. A is an NRI and has a property in Kolkata which he wants to sell to Mr. B who is a resident Indian. The property was acquired in FY 2003 and being sold in FY 2019. It is being sold at ₹100 Lakhs, while the indexed cost of the property is ₹60 Lakhs, such that the Long-Term Capital Gain (LTCG) on the transaction is ₹40 Lakhs. Now, tax payable on the LTCG @20% rate and Health & Education Cess @4% will be ₹8.32 Lakhs. Therefore, tax on sale consideration will be 8.32%. However, as per section 195, TDS must be made at the “prevailing rate” i.e. 20%, which is way higher than the effective tax rate of 8.32%.
Hence, it is seen that if an NRI does not choose to obtain a lower tax deduction certificate, he must bear TDS at 20% of the sale consideration i.e. ₹20 Lakhs, while his tax liability is only ₹8.32 Lakhs. This way, he will have to wait for a refund, which in this case is as much as ₹11.68 Lakhs, which is only processed after return of income is duly filed.
The solution to counter the above mentioned problem is to apply to the AO in Form 13 and bear TDS only as much as the tax liability.
Procedure for application to the AO in Form No. 13
Application to the AO can be made in Form No. 13 once the agreement for sale has been entered into where the sale consideration, mode of payment and the date of final settlement are agreed upon. Form 13 requires various information such as the estimated income of the applicant, previously filed returns and tax paid thereon, nature, consideration and date of transaction for which the certificate is being sought, details of the buyer, etc.
The form must be annexed with a list of supporting documents as proof for the information given therein such as detailed computation of estimated income, computation of capital gains tax, guidance value and agreement to sale of the concerned property, 26AS for 3 preceding years, etc. The documents required to successfully obtain a certificate of lower tax deduction from the AO will vary from case to case, depending upon the complexity of the transaction and also the state in which the property is situated.
It usually takes 1 month’s time to obtain the certificate from the AO. However, it is advisable for the NRIs to seek professional help and plan the entire process atleast 3 months before the date of final settlement.