Non Resident Indian: TDS or Capital Gains Tax what is a larger Concern?
Mr. Sukhbir Chaddha is a Non Resident Indian. He had bought a residential property in India in April 2009 for a sum of Rs 75 Lakhs and now in November 2015 he is selling the property for Rs 1.5 Crores.
Let’s understand what all are the implications of such transactions from the view point of Capital Gains Tax and TDS
Capital Gains Tax:
Date of Purchase: April 2009
Date of Sale: November 2015
Indexed cost of property: 1.22 crores [dm3_accordion]
[dm3_collapse label=”Click Here” state=”closed”]Cost Inflation
Index Year 2009 -10 : 632
Year 2014 -15 : 1024
Indexed Cost
7500000 * 1024/632 = 12151895
Fox this example lets round it off to 1.22 Crores[/dm3_collapse]
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Capital Gain: 1.5 Crores – 1.22 Crores = 28 Lakhs
Capital Gain Tax Liability: 28 Lakhs X 20 % = 5.56 Lakhs
Tax Deducted at Source (TDS):
If any NRI is selling property in India to a Resident Indian, TDS should be deducted by the buyer under Section 195 from total consideration value.
Current TDS Rate: 20 %
TDS: 1.5 Crores X 20 % = 30 lacs
Note : TDS rate for Resident Indian is 1% under Section 194/A4
Non deduction of TDS leads to penalty to the buyer
Let’s look at the situation now:
The seller of the home i.e. Mr. Chaddha has a tax liability of 5.56 lacs, against this tax liability the buyer would deduct a sum of 30 lacs /- as TDS and deposit it with the Income tax department. This means that Mr. Chaddha has to wait to file his Income Tax returns and then get a refund of the differential amount.
What is the way out?
The desired outcome of such a transaction should be:
- NRI receives the payment of 1.5 Crores with no TDS being deducted and
- His Tax Liability of 5,56,000/- need not arise[dm3_alert type=”info”]Use section 54 + NIL tax exemption from the Income Tax department[/dm3_alert] Step 1: Invest in a new Property at least 1 year before selling existing propertyas under section 54 ( Click here to read more about Section 54)(Minimum value of new property should be equal to Capital Gains arising out of selling existing property. In this case 28 lacs)Step 2: Apply for a NIL tax exemption certificate from the Income Tax department which the department will issue the certificate based on the assessmentStep 3: The original certificate can be given to the buyer who then need not deduct TDS.This way TDS is not deducted and since an investment into new property is already initiated Capital gains liability also does not arise.
