As per the provisions of the Income Tax Act, 1961 (“the Act), TDS is to be deducted from the payments to be made by the resident to non-resident towards purchase of property from Non-Resident. Hence it is very important to understand the provision, the applicable withholding tax rate and other compliance before any purchase transaction is entered into with the non-resident.
What is the charging provision for deducting TDS?
As per section 195 of the Act, the Indian tax resident while purchasing property from a non-resident is required to deduct the TDS and deposit the same with the Indian Government. TDS liability is triggered on the date of payment or credit of income whichever is earlier. Therefore, TDS is required to be deducted on the payment of advance also.
What is the TDS rate?
The TDS rates differs if the property is a long-term asset or a short term asset as under:
a. If the property is held by the owner for a period of more than 2 years, then gain on sale of such property qualifies as “Long term Capital Gains” and TDS is applicable @ 20% plus applicable surcharge and cess.
b. However, if the property is held by the owner for a period less than 2 years, then the gain on sale of such property qualifies as “Short term Capital Gains” and the TDS is applicable as per the Income Tax Rates slab based on the total income of the seller [Generally TDS is withheld @ 30% plus applicable surcharge and cess which is the maximum tax rate applicable to an individual, if the total income of the seller is not known]
What is the amount on which TDS is to be withheld ?
The purchaser needs to deduct TDS on the capital gain amount. There could be following situations:
i. When seller shares the certificated obtained by it:
The seller shares a certificate obtained by the seller from the Income Tax Officer (ITO) with the purchaser. The certificate obtained from the ITO contains the tax rate at which the TDS is to be deducted.
ITO while issuing the certificate to seller, computes the capital gains tax that the seller would earn and accordingly gives the tax rate.
ii. When the seller does not obtain a certificate from ITO:
Ideally TDS is to be deducted on the capital gains amount. If the seller fails to obtain a certificate from the ITO, then TDS needs to be withheld on the entire purchase consideration that is to be paid by the purchaser to the seller for purchase of property. This might lead to a higher tax outflow.
What are the other compliances to be done by the purchaser?
Other compliances to be done by the purchaser are:
- TDS deposition with the Government:
Deposit the TDS deducted from the payments with the government within a period of 7 days from the end of the relevant month in which TDS was deducted.
For eg:- If TDS was deducted on payment made to seller on 15th May, 2019, then the TDS that is deducted needs to be paid to the Government on or before 7th June, 2019.
2. TDS returns:
The purchaser needs to submit the TDS return in Form 27Q. TDS returns are to be submitted quarterly and the same needs to be submitted within one month from the end of the relevant quarter.
For eg:- Continuing the example given in point no. 1 above, since the TDS deduction falls in 1st quarter i.e. between April 2019 to June 2019, 27Q will have to be submitted on or before 31st July, 2019.
3. TDS certificate:
Purchaser will have to share the TDS certificate for the taxe s withheld with the seller. This certificate is generated within 15 days of filing of TDS return.
For eg:- Continuing the same example as given in point 1 and 2 above, assuming that the TDS return was filed on 31st July, 2019 then, TDS certificate will be generated by 15th August, 2019.
4. Purchaser will have to obtain Tax Deduction and Collection Account Number (TAN) for doing the compliances mentioned above.
Bearing the above provisions in mind and the interest and penalty that would be applicable as per the Act if the above mentioned provisions are not complied with, it is essential that the purchaser is aware of these provisions and he/she complies with the same while purchasing the property from a Non-Resident.