Acquiring property from a Non-Resident Indian (NRI) seller requires understanding a unique set of legal and tax obligations. This guide outlines the critical aspects to ensure a smooth and compliant transaction.
- TDS and Tax Requirements
When buying property from an NRI, Tax Deducted at Source (TDS) operates differently compared to transactions with resident sellers.
- For resident sellers, TDS of 1% applies only if the property value exceeds ₹50 lakh.
- For NRI sellers, TDS rates start at 12.5% and may increase depending on factors like surcharges and cess. Unlike resident transactions, TDS is calculated on the entire sale amount, not just the capital gains.
Buyers must use Form 27Q to report TDS for NRI transactions, unlike Form 26QB, which is used for resident sellers.
- TAN: A Mandatory Requirement
Obtaining a Tax Deduction and Collection Account Number (TAN) is essential for buyers when deducting TDS on payments to NRI sellers.
- TAN is different from a PAN and is required to deposit and report TDS accurately.
- Apply for TAN early, as it may take a couple of weeks to process. Neglecting this requirement can result in penalties for non-compliance.
- Adherence to Payment Guidelines
Payments must be routed to the NRI seller’s designated accounts, such as NRO, NRE, or FCNR accounts, as per FEMA (Foreign Exchange Management Act) rules. Depositing funds into a regular savings account is not permissible. Typically, transactions are carried out using the seller’s NRO account.
- Managing Power of Attorney (PoA)
If the NRI seller is not physically present in India, they can authorize a representative through a Power of Attorney (PoA).
- The PoA must be notarized and attested by the Indian consulate in the seller’s country of residence.
- Ensure that all PoA-related documents are valid and specific to the transaction. Even with a PoA, TDS must be deducted according to the NRI-specific rates.
- Co-Ownership Scenarios
For properties with multiple owners, the ownership details must be clearly specified in the sale deed. TDS should be deducted separately for each co-owner, based on their respective ownership stakes and residential statuses.
For instance, if one co-owner is an NRI and the other is a resident, the TDS rates must align with their respective categories.
- Request for Reduced TDS Deduction
In some cases, an NRI seller may request a lower TDS deduction certificate from the income tax authorities.
- Before making any adjustments to the TDS rate, ensure the certificate is authentic and valid.
- The seller may require your cooperation in providing documents like your TAN, sale agreement, and payment proofs to apply for the certificate.
- Legal Verification and Documentation
Proper due diligence is critical when dealing with an NRI seller. Key steps include:
- Confirming clear ownership by reviewing the title deed.
- Checking for any outstanding mortgages or claims on the property.
- Ensuring the seller’s PAN card is active.
- Verifying that no taxes or legal disputes are associated with the property.
- Consequences of Non-Compliance
Failing to comply with TDS requirements can result in serious penalties, such as:
- 1% interest per month on the unpaid TDS.
- A penalty equal to the TDS amount for non-deposit.
- Late filing fees for delayed submission of TDS returns.
To avoid these repercussions, ensure timely deduction, deposit, and reporting of TDS.
- Filing Income Tax Returns
It’s advisable to file an income tax return, even if your income falls below the taxable limit. Tax authorities often issue notices if they cannot trace the source of funds used for the property purchase. Maintaining transparency about your income source is crucial.
- Preserving Records for Future Use
Keep all transaction-related documents for future reference, including:
- The sale deed and purchase agreement.
- Loan-related documents, including allotment and disbursement records.
- Payment receipts and relevant bank statements.
- Copies of filed TDS returns and certificates.
These records are invaluable for resolving potential disputes or inquiries.
Final Insights
Purchasing property from an NRI seller involves adhering to specific legal and tax procedures. With careful planning and compliance, the process can be straightforward.
If you feel uncertain about any aspect, consult a professional to ensure every step is completed accurately. By following these guidelines, you can navigate the transaction smoothly while meeting all legal obligations.
Disclaimer: Aim of this article is to give basic knowledge about the topic to people who are not in touch with Indian tax norms. When anybody is dealing with these kinds of cases practically, he shall consider all relevant provisions of all applicable Laws like FEMA/Income Tax/RBI /Companies Act etc.
If you have any further questions or need assistance, feel free to reach out to us at admin@ushmaassociates.com or info@nricaservices.com, or contact us via call/WhatsApp at +91 9910075924.
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