When an NRI sells immovable property in India, capital gains arising from that sale are fully taxable in India under the Income-tax Act, 1961, even if the total gain is below the basic exemption limit that applies to resident taxpayers. NRIs do not benefit from the basic exemption limit on long-term capital gains, so the entire gain is taxable in India.
As per the provisions of Section 195 under the Income-tax Act, any payment made to a non-resident that is taxable in India must, at the time of crediting or payment, deduct the respective TDS. The sale of a property by a non-resident Indian (NRI) always creates capital gains tax liability, no matter what the amount is; therefore, in such a case, it is prudent for the buyer to deduct TDS before passing on the money to the seller.
While Section 194IA, which covers sales between resident taxpayers, imposes a 1% TDS obligation only when the sale value exceeds Rs. 50 lakh; there is no such threshold under Section 195 for TDS on non-resident payments. Hence, the application of TDS is universal, even if the transfer value or profit derived is below the limit usually established for resident taxpayers.
The determination of the TDS rates depends on the duration of holding of the property before its sale; hence, the nature of the capital gain is important. During the long-term holding period (more than 24 months), the tax rate of 20% plus applicable surcharge and cess is imposed on the gain amount.
In the case of short-term capital gain (holding period of 24 months or less), the tax on such profits is levied at the slab rates applicable to NRIs. A buyer without a lower deduction certificate from the tax authorities tends to deduct tax on the entire sale consideration instead of just the calculated gain portion to avoid noncompliance risk.
The NRI seller’s view that the tax liability is lower could be one reason the seller might secure a TDS certificate from the Income-tax Department through Form 13 under Section 197 for reduced or nil TDS. Upon issuance, the buyer shall deduct tax at the lower prescribed rate.
An error in TDS deduction can result in the buyer being treated as an assessee in default, with the tax department potentially standing to collect interest and penalties. Hence, TDS applies when purchasing a property from an NRI even when the capital gain is below the threshold for resident tax.
According to Indian tax law, all capital gains of NRIs from property sales are subject to tax, and TDS is imposed under Section 195 with no lower limit. Buyers should scrupulously ensure compliance to avoid penalties.