A sale transaction between a non-resident (NRI) seller and resident buyer needs planning by seller and buyer shall take abundant caution. In most of the cases, misconceptions in the minds of buyers resulting into serious non-compliances and lack of awareness among sellers resulting into liquidity crunch.
Through this article, I am making an effort to present the following,
- How a non-resident seller can avoid liquidity crunch;
- What are responsibilities of a buyer dealing with NRI Seller and consequences of non-compliance.
Planning by Seller
Liquidity planning: Most of the NRIs sell their property with a prospect to invest in equally important avenue. Hence, planning the liquidity is critical. One thing that seriously impact liquidity is withholding of sale consideration in the form Tax, which is our so called "TDS".
Generally, TDS rate is 20% (excluding cess & surcharge), which means that the seller gets in hand only Rs. 8,00,000 out of every Rs. 10,00,000 and Rs. 2,00,000 will be withheld as TDS. Taxes withheld will be available for offset with taxes while filing income tax return but the taxes withheld is abnormally high as against the tax liability arising from the transaction.
Assuming the sale consideration of the property is Rs. 1 Crore and the cost to acquire the property is Rs. 80 Lacs. So, the capital gain is Rs. 20 lacs and the tax thereon is Rs. 4 lacs (20 lacs * 20%). However, the taxes with held is Rs.20 lacs. Hence, you would be eligible for a refund of Rs. 16 lacs subsequently after filing income tax returns. In most of the cases, taxes so arise on sale of property is computed on capital gain which is much lesser then at least 5% of Sale consideration.
Planning: In order to avoid higher deduction at 20% and subsequent claiming of refund, the seller shall assess the capital gain and compute the taxes payable. Identify the rate of taxes payable against sale consideration. If such rate is less than 20%, seller can apply for Lower Deduction Certificate in Form 13 online trough TRACES website. Considering the merits of the case, Income tax department issues a certificate instructing the buyer to deduct TDS at lower rate.
Responsibilities of buyer
1. General presumption is that the buyer needs to deduct tax at a rate of 1% and the buyer need not obtain Tax deduction Account Number (TAN), which is not true in case of a deal with NRI.
Rate of Deduction - Rate of deduction in case of NRI seller is governed by Section 195 of the Income-tax act ("the act"). Relevant Extract of Section 195 is as under,
"Any person responsible for paying to a non resident (company or non company) any sum which is chargeable under the provisions of the Act, shall at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of cheque or draft or by any other mode, whichever is earlier, deduct income tax thereon at the rate in force."
Normally, the rate of deduction is perceived as 20% of the Sale consideration or such lower rate certified by Income Tax Department allowing lower/non deduction.
2. As the tax deduction is governed by Section 195 of the Act, buyer needs to apply for TAN in Form 49B. TAN Application can be filed through tin-nsdl website.
3. Remittance of TDS: TDS shall be deducted as and when the buyer makes payment to NRI and remit the same within 7th of subsequent month. Upon remittance, buyer shall be able to generate payment challans.
Consequences of non-compliance
Failure to deduct TDS
- Interest - liable to pay interest at the rate of 1% per month from the date on which it was deductible till the time it is deducted.
- Penalty - As per Section 271C of the Act, buyer shall be liable to pay a penalty as imposed by the Joint Commissioner subject to the maximum of the sum equal to the amount of tax which such person failed to deduct.
Failure to pay TDS
- Interest - Interest chargeable at the rate of 1.5% per month or part of the month from the date on which it was deducted till the date of payment.
- Penalty - As per section 221, the Assessing Officer may direct to pay for a penalty for non failure to pay TDS amount subject to the maximum of total amount of tax in arrears.
It may be noted that a reasonable opportunity of being heard will be given to the person before levying of the penalty.
4. Filing of TDS Returns: The buyer shall file quarterly TDS returns in Form 27Q linking the payment challans with PAN of the Seller.
Consequences of Non-compliance
Penalty for non-filing of TDS Returns - liable to pay Rs. 100 per day of default subject to the maximum of the total amount of TDS.
Disclaimer: The opinions expressed in this article are those of the author in general. They do not purport to reflect opinions or views and readers are advised to take professional recommendations based on the facts & circumstances of the transaction/s.
The author is a Chartered Accountant based in Bangalore and can also be reached at email@example.com.