The Indian real estate market has long attracted interest from Non-Resident Indians (NRIs). Whether it’s for investment, emotional connection, or future planning, many NRIs own property in India. However, when an NRI decides to sell property in India, one of the critical aspects they must understand is the TDS on property sale by NRIs in India. This blog post delves deep into the taxation rules, TDS rates, the deduction process, and how to save tax on capital gains legally.

What is TDS on Property Sale?

TDS, or Tax Deducted at Source, is a mechanism where tax is collected at the point of transaction, particularly at the time of payment. In the case of property sales, the buyer is required to deduct TDS before making the payment to the seller.

For NRIs, property TDS applies at higher rates compared to resident Indians. This is because the entire sale consideration, not just the capital gain, is subject to TDS for NRIs, unless a lower deduction certificate is obtained.

TDS Rates for NRIs on Property Sale

TDS rates depend on the type of capital gain, short-term or long-term, which is determined by how long the property was held:

1. Long-Term Capital Gains (LTCG)

If the property is held for more than 24 months, the gains are considered long-term, and the TDS rate is:

• 20% on the capital gains (with applicable surcharge and cess)
• With surcharge and cess, the effective rate can range from 20.8% to over 23%, depending on the total income slab of the seller

2. Short-Term Capital Gains (STCG)

If the property is held for 24 months or less, the gains are short-term and taxed as per the applicable income tax slab rates of the NRI:

• The TDS can range from 30% to 37%, depending on the total income
• Surcharge and cess apply on top of the base rate

The buyer must deduct this TDS on the entire sale consideration, not just the capital gain portion.

Example:

• Suppose an NRI sells a property for ₹1.2 crore:
• If held for less than 2 years, TDS = 30% of ₹1.2 crore = ₹36 lakh + cess/surcharge.
• If held for more than 2 years, TDS = 20% of ₹1.2 crore = ₹24 lakh + cess/surcharge.
• Note: These are gross TDS figures—actual tax liability may be lower depending on capital gains, which is why tax planning is essential.

Who is Responsible for Deducting TDS?

The buyer must legally deduct and deposit TDS with the Income Tax Department when purchasing property from an NRI.

Buyer’s Responsibilities:

• Deduct TDS at the applicable rate from the sale value.
• Obtain a TAN (Tax Dedication and Collection Account Number) before making the payment.
• Deposit the TDS using Form 26QB within 30 days of deduction.
• Provide Form 16A (TDS certificate) to the NRI seller.

Failure to follow the correct TDS deduction and payment process can result in penalties for the buyer.

How to Calculate TDS on Sale of Property by NRIs

Calculating the correct TDS payable involves:

1. Determining the nature of capital gain (short-term or long-term).
2. Applying the applicable TDS rate.
3. Adding surcharge and cess, if applicable.
4. If the NRI has a Lower Deduction Certificate (LDC), use the approved rate.

Sample Calculation:

• Sale value: ₹1 crore
• Long-term holding: Yes
• Basic TDS: ₹20 lakh (20%)
• Cess (4%): ₹80,000
• Total TDS payable: ₹20.8 lakh

If an LDC is available specifying 5% TDS, then:

• TDS = ₹5 lakh, saving ₹15.8 lakh in upfront tax.

How to Save Tax on Capital Gains

When an NRI sells property in India, the capital gains—especially long-term gains—can be significant. However, the Income Tax Act offers legal ways to save tax on capital gains, which can also reduce your TDS payable. Here are the most effective methods:

1. Invest in Another Property – Section 54

Suppose you reinvest the long-term capital gains from the sale of a residential property into another residential property in India within the prescribed time frame. In that case, you can claim exemption under Section 54.

• Condition: You must purchase the new property within one year before or two years after the sale, or construct it within three years.
• Limit: You can claim exemption for investment in only one residential property (or two, if you meet the specific conditions under the Section 54 amendments).

2. Invest in Capital Gains Bonds – Section 54EC

Instead of buying property, NRIs can invest up to ₹50 lakhs in Capital Gains Bonds issued by NHAI or REC under Section 54EC.

• Lock-in Period: 5 years
• Timeline: You must invest within 6 months from the date of sale.
• Tax Benefit: The invested amount is exempt from long-term capital gains tax.

3. Indexation Benefits for Long-Term Capital Gains

For properties held for more than 2 years, NRIs can adjust the purchase price using indexation, which accounts for inflation and reduces the taxable gain. This method lowers the overall tax burden and affects the final tds payment on sale of property.

4. Apply for Lower Deduction Certificate (LDC)

By submitting Form 13 with supporting documents, NRIs can obtain a certificate that allows the buyer to deduct TDS at a reduced rate or not at all, based on actual capital gains. This is especially helpful if you’re eligible for exemptions under Section 54 or 54EC.

Conclusion

The process of TDS on property sale by NRIs in India may seem daunting, but with the right guidance and planning, it can be managed efficiently. Understanding the applicable TDS rates, ensuring correct deduction and timely filing, and exploring tax-saving options like Section 54 and 54EC can significantly reduce the tax burden.

Whether you’re an NRI planning to sell property in India or a buyer dealing with an NRI seller, professional advice and compliance with the Income Tax Act are essential. Keep all documentation ready, stay updated on tax rules, and don’t hesitate to consult a tax expert or chartered accountant.

By being proactive and informed, you can navigate the complexities of TDS on property sale by NRIs in India and ensure a smooth, tax-efficient transaction.