Lower Deduction Certificate for TDS for NRIs selling their property in India.
Are you an NRI who has had to pay high withholding tax/TDS (about 22 to 23%) on sale of your Indian property? Are you unable to recover around 20% of the monetary value of your property immediately with the amount stuck in TDS – despite the actual Capital Gains Tax being much lower?
To tackle this, the Indian tax department has provided the option of a Lower Deduction Certificate (LDC). An LDC allows a significant reduction in the amount of Tax Deducted at Source (TDS). Mostly, it lowers the rate of TDS to between 5 to 10% which is more in line with the actual amount of capital gain on the property. This results in an upfront realization of around 90 to 95% of the monetary value of the property on sale.
This is a better alternative than trying to recover the excess TDS paid (TDS less Actual capital gain tax). Generally, after the filing of the ITR, the excess amount is recovered after a period of 15 to 24 months (depending on when the transaction was undertaken).
Below is an illustration to showcase this.
· Mr A, an NRI from the UK is selling a property in India to Mr B. The sale price is decided at INR 100 (in 2023).
· Mr A purchased the property asset in 2001 for INR 25. The current indexation is 3.31 (FY 22-23). The indexed cost of the property is 82.75. Ideally, Capital Gains Tax is INR 3.5 ((Sale price – indexed cost multiplied by 20.60 percent), (100- 82.75=17.25)*20.60%) Mr B insists on deducting INR 23 as taxes and passing on INR 77 to Mr A
Scenario 1 (With LDC)
Mr A applies for LDC. He pays around INR 3.5 (After applying for LDC) and recovers INR 96.5 from Mr B. In this case he is not required to obtain any refund and entire amount is recovered.
Scenario 2 (Without LDC)
Mr B insists on deducting INR 23 as taxes and passing on INR 77 to Mr A. The extra deduction of INR 19.5 will only be recovered after filing of ITR. For a January 23 transaction, tax return will be filed in July 23. The refund will only be issued 12 to 18 months from the ITR process.
Mr A’s INR 19.5 gets blocked for 12 to 18 months
TDS ON THE SALE OF IMMOVABLE PROPERTY
On purchase of a property, the buyer is required to deduct tax from the sale price and remit to the seller the remaining money. The amount of tax (withholding tax) to be deducted depends on the seller’s residency status.
If the seller is an Indian resident:
According to section 194IA, the tax must be deducted at 1% of the sale consideration if the price of such a transaction is Rs. 50 lakhs or higher.
If the seller is a Non-Resident Indian (NRI):
Under Sec 195, for any property, regardless of the transaction value, the tax must be withheld at 20% plus applicable cess (4%) & surcharge (10 or 15%) from the total sale consideration.
Therefore, even if the value of the property is less than INR 50 lakhs, the buyer must deduct the tax in the case of an NRI seller. The buyer is then required to deposit this sum with the income tax authorities on the seller’s behalf.
THE APPLICABILITY AND BENEFIT OF A LOWER DEDUCTION CERTIFICATE FOR NON-RESIDENT INDIANS (NRI):
At times the TDS amount may be greater than the seller’s actual tax liability.
In such a case, the NRI will face difficulties because they will be required to pay taxes in the form of TDS even if they have no taxable/ lesser income for the year. This excess tax paid will later have to be claimed as a refund.
The impact is:
1. Unnecessary blockage of funds until the refund is received.
2. To highlight the gap between the actual tax liability and the TDS deducted, the NRI must file their income tax return, even if they might be exempt from regular IT filing, if their total Indian income is less than the basic exemption limits applicable to them.
To alleviate this unnecessary burden on such NRIs, the income tax law provides for the option of obtaining a certificate from the Assessing Officer under Section 197. Considering the merits and facts of each case based on the application made, the AO can issue a certificate allowing either a lower rate of TDS compared to the effective rate or a NIL rate of TDS.
Here are examples to better elaborate on the cases were obtaining an LDC will be beneficial.
Case 1 (Favorable): A significant gap/difference between TDS deducted and actual tax liability exists:
The sale consideration of the immovable property is INR 4 crores, but the purchase cost (after indexation) was INR 2.5 crores. Capital gain of INR 1.5 crores after applying the capital gains provisions. Due to a long-term asset, TDS will be deducted at a rate of 23.92% (20% + SC15% + 4%Cess). As a result, the TDS will be 23.92% of RS. 4 crores, or Rs 95,68,000. The actual tax liability associated with the aforementioned transaction: is assessed at a rate of 23.92% (20% + SC 15% + cess) on the sum of INR 1.5 crores, or INR 35,88,000.
It is evident that the TDS deducted from NRIs is INR 95,68,000, even though their actual tax liability is 35,88,000. There is a gap of 59,80,000 between the TDS deducted and the actual tax liability. The NRI would be required to file a tax return and wait for the refund for 15-24 months and not be able to use INR 59.80Lacs. In this case, the tax officer should be approached and after submitting the necessary documents an LDC should be obtained.
Case 2 (Favorable): A Long-Term Capital Loss exists:
The sale consideration of the immovable property is INR 4 crores. The purchase cost (after indexation) was INR 4.5 crores. There is a capital loss of INR 50 Lakhs after applying the capital gains provisions. Due to a long-term asset, TDS will be deducted at a rate of 23.92% (20% + SC15% + cess). As a result, the TDS will be 23.92% of INR 4 crores, or INR 95,68,000. Now the actual tax liability associated with the aforementioned transaction will be Nil (there is a capital loss of INR 50 Lacs)
It is evident that the TDS deducted from NRIs is INR 95,68,000, despite the fact that their actual tax liability is Nil. There is a gap of 59,80,000 between the TDS deducted and the actual tax liability. The NRIs will file their income tax return to claim the refund of the excess TDS paid. Resulting in an unnecessary blockage of funds until the filing of the tax return is done and the refund is received. In such a case the NRI should apply for an LDC.
Case 3 (Unfavorable): No significant gap/difference between TDS deducted and actual tax liability:
The sale consideration of the immovable property is INR 4 crores, but the purchase cost (after indexation) was INR 0.25 crore. There is a capital gain of INR 3.75 crores after applying the capital gains provisions. Due to a long-term asset, TDS will be deducted at a rate of 23.92% (20% + SC15% + cess). As a result, the TDS will be 23.92% of INR 4 crores, or INR 95,68,000. The actual tax liability associated with the aforementioned transaction has been calculated, it will be assessed at a rate of 23.92% (20% + SC 15% + cess) on the sum of Rs. 3.75 crores, or Rs. 89,70,000.
It is evident that the gap between TDS deducted and actual tax liability is not significant. In such a case, it would not be beneficial to obtain an LDC.
HOW TO OBTAIN A LOWER DEDUCTION CERTIFICATE u/s 197:
The application for obtaining a Lower/Nil Deduction Certificate must be made online. It falls under Form 13 on Traces, the government portal.
Below is the list of some standard documents required for making an application:
· Mobile and E-mail ID of the applicant.
· The agreement with the buyer for the sale of the property.
· TAN copy of the buyer. In case the buyer does not have one, he/ she can apply for it and get it in 1-2 weeks by filing Form 49B with the Income Tax Department.
· Copy of Passport of NRI/Foreign Citizen Seller.
· Circle Value of property involved, certified by the regulating authority.
· Properly stamped and executed purchase deed of the property and proof of ownership by the Owner.
· Bank account statement of the NRI held in India.
· ITR of the NRI for the last 2-3 years.
· Tax record and statement under 26AS for the last 2-3 years.
After the application has been submitted successfully, the assessing officer will examine the supporting materials and request additional information and supporting documentation if required before issuing the certificate or rejecting the application.
AO will issue a certificate under Section 197 once satisfied that a lower TDS deduction is appropriate. The TDS will be deducted in accordance with the TDS Rate specified in the certificate upon successful issuance of the lower deduction certificate.
The LDC generally takes 3-6 weeks to process as it involves AO sending the application to TDS officer and their seniors.
Validity of the LDC:
A certificate for a Lower / Nil deduction is given for a specific fiscal year at a specific rate which is in line with actual capital gains calculated. Unless it is revoked by the assessing officer prior to expiration, it remains valid from the date of issuance through the end of the applicable financial year.
When purchasing a property from an NRI, the option of deducting tax at source at a lower rate is also available. The NRI seller must submit Form 13 to the Income Tax Jurisdictional Assessing Officer in order to request a lower TDS deduction.
The buyer of the property would be required to deduct TDS on the total consideration in accordance with the rate specified in the lower deduction certificate.