Buying property from an NRI? TDS deduction is mandatory even if you take a home loan

Tax rules for buying property from NRI

Buying property from an NRI involves additional tax compliance beyond the usual documentation and payment process. Today's Ask Wallet Wise query decodes one of the most common areas of confusion for buyers is whether tax must be deducted before making payment to the seller.

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I am planning to buy a flat in India from an NRI who is settled in the US. Do I need to deduct tax before making the final payment? I am applying for a home loan for the same. Does the bank deduct TDS while disbursing the loan?

Expert Advice: Under Section 195 of the Income Tax Act, the buyer is required to deduct tax at source if the seller is a non-resident for tax purposes. The rate of tax deduction is 12.5 percent (plus applicable surcharge and health and education cess) on the amount of capital gains if the property being purchased was held by the non-resident for two years or more, and 30 percent (plus applicable surcharge and cess) if the holding period is less than 24 months.

For computing the capital gains, the buyer must collect relevant documents from the seller to establish the holding period and the amount of capital gain.

Capital gains are calculated as the full value of the sale consideration minus (i) expenditure incurred wholly and exclusively for the transfer, (ii) the cost of acquisition, and (iii) the cost of improvement. The seller may also be eligible for exemption from long-term capital gains tax under specified sections of the Income Tax Act, subject to fulfillment of prescribed conditions.

As the buyer, you, not the bank, are liable to deduct tax on the taxable capital gains of the seller. You must obtain a TAN, deduct the appropriate TDS while making payment to the non-resident seller (even if routed through the bank), file the TDS return, and deposit the tax with the Income Tax Department within seven days from the end of the month in which the payment is made or credited.

There are penal consequences in case of non-compliance. It is advisable to seek assistance from a qualified tax professional, as TDS compliance in NRI property transactions can be complex.

Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions

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