In case of NRI (Non-Residents of India), TDS i.e; tax deduction at source is explained as per section 195 of the Income Tax act which says any person responsible for paying the same to a non-resident, not being a company, or to a foreign company, any interest (not being interest on securities) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries” 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 the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force .

This brings us to two interesting questions –

Do buyer needs to deduct the tax? As per the act if one is paying any “sum” to a Non-Resident, where such sum is chargeable under the Act, one is required to deduct tax. Hence the buyer is liable to deduct tax from the payment made to the seller.

Do buyer needs to deduct the tax on the whole transaction value or the portion of capital gain?
The important phrase in the section is “sum chargeable under the provisions of the Act”. This means that whatever be the amount paid, buyer has to deduct tax on that sum, not the profit earned by the seller on it. In other words, buyer cannot compute the Long term or short term capital gain and deduct the tax due on it. The liability to deduct tax is on the gross amount paid.

Rate at which tax to be deducted:

As per Sec 195, tax has to be deducted at the ‘rates in force’. ‘Rates in force’ is defined u/s 2(37A)(iii) as the rate specified in the Finance Act. Currently the effective rate is 20%.

What is the provision on TDS if there is no capital gain in the transaction?

If there is no capital gain at all in the transaction or the tax payable on capital gain is less that the TDS deducted, then the payer can approach the assessing officer and get a certificate of lower or nil deduction of TDS. This is provided in subsection (2) of Section 195. Alternatively, u/s 195(3), payee also can approach the AO (Assessing Office) and get the certificate. Unless such certificate is not obtained, the payer has to deduct tax, even in case where the property is sold at a loss.

In most of the cases (apart from one’s where NRI or buyer gets the permission from the AO) the tax deducted for the NRI would be in excess. NRI Needs to file his return of income in India and claim the refund of access amount.

Process for Deducting the TDS: 

The purchaser should have his Permanent Account Number (PAN) before he enters into any such transactions. The purchaser before deducting income tax from such payment, should apply for and get a Tax deduction Account Number (TAN) as per section 203A of the Income Tax Act 1961.

The purchaser should collect the Permanent Account Number (PAN) of the said Non resident Indian before deducting the tax. The purchaser should deposit, (by using challan for payment of TDS), the income tax so deducted, with the government (through banks authorized to collect direct taxes) within seven days from the end of the month in which such tax is deducted. The purchase should file the TDS returns electronically, and issue TDS certificate to the seller.

As an example:-  If one buys a property from an NRI at a transaction value of say 50,00,000/- , the buyer will need to deduct a TDS on the entire amount paid by the buyer to the NRI seller. In this case if the TDS rate is 20% the buyer will deduct 10,00,000/- and deposit as TDS with tax authorities and pay only 40,00,000/- to the NRI Seller.

Resident buying property from NRI needs to deduct TDS from the entire sale consideration before making payment to the NRI.