Generally, in all property sale transactions, it happens that the actual tax liability in the hands of tax payer (non-resident seller) is lesser than the proposed TDS on that transaction.
The pain of Non-resident property seller can be understood by an example. E.g. An NRI agrees to sell a property @ Rs 1.50 Crore, and property purchase cost (after indexation) in the hands of NRI is Rs 1.45 Crore. Hence, a capital gain arises for Rs 5 Lakh only. Now, as per Non-Resident TDS provisions (Sec 195), considering property is long term asset (i.e. holding period exceed 2 years) the applicable TDS is 23.92% (20% + SC 15% + cess 4%) of sale amount i.e. Rs 35.88 Lakh. Though actual tax liability is Rs 1.04 Lakh only i.e. 80% of Rs 5 Lakh (20% + 4% cess; SC not applicable on below 50 Lakh Rs gain).
Hence, in the above situation, as per applicable NRI TDS provisions 35.88 Lakh TDS will be deducted against actual tax liability of Rs 1.04 Lakh. Though, NRI can claim the the excess TDS refund (Rs 34.84 Lakh) through filing of ITR. However, it is a time taking process. If TDS deducted on full amount, Non-resident money will be blocked with Income Tax Department for a long time, which causes loss of bank interest also.
Hence, this is a Genuine Hardship on the Non-residents (NRIs, OCIs) in relation to their property sale matter transactions in India.
To overcome this situation, Income Tax Act provides for Lower TDS Certificate (or also called as TDS Exemption Certificate) under section 197 of Income Tax Act.
TDS deduction at lower rate
If tax deducted at source is more than your tax liability, then you can opt for a tax refund at the end of the year for the excess TDS. However, if you wish to avoid this cumbersome process, you can apply for a certificate that allows you to file for a lower TDS rate . Please note that you must apply before you execute the sale agreement. The assessing officer will determine the TDS after calculating the capital gains. This will put the money in your hands instantly instead of waiting for a refund.
Exemption under section 54
It is available when there is a long term capital gain on the sale of house property of the NRI. The house property may be self-occupied or let out. Please note – you do not have to invest the entire sale receipt, but the amount of capital gains. Of course, your purchase price of the new property may be higher than the amount of capital gains. However, your exemption shall be limited to the total capital gain on sale.
Also, you can purchase this property either one year before the sale or 2 years after the sale of your property. You are also allowed to invest the gains in the construction of a property, but construction must be completed within 3 years from the date of sale.
In the Budget for 2014-15, it was clarified that only ONE house property can be purchased or constructed from the capital gains to claim this exemption.
Also starting from the assessment year 2015-16 (or financial year 2014-15) it is mandatory that this new house property must be situated in India. The exemption under section 54 shall not be available for properties bought or constructed outside India to claim this exemption. (Do remember that this exemption can be taken back if you sell this new property within 3 years of its purchase).
If you have not been able to invest your capital gains until the date of filing of return (usually 31st July) of the financial year in which you have sold your property, you are allowed to deposit your gains in a PSU bank or other banks as per the Capital Gains Account Scheme, 1988. And in your return claim this as an exemption from your capital gains, you don’t have to pay tax on it.
Exemption under section 54F
It is available when there is a long term capital gain on the sale of any capital asset other than a residential house property. To claim this exemption, the NRI has to purchase one house property, within one year before the date of transfer or 2 years after the date of transfer or construct one house property within 3 years after the date of transfer of the capital asset. This new house property must be situated in India and should not be sold within 3 years of its purchase or construction.
Also, the NRI should not own more than one house property (besides the new house) and nor should the NRI purchase within a period of 2 years or construct within a period of 3 years any other residential house.
Here the entire sale receipt is required to be invested. If the entire sale receipt is invested then the capital gains are fully exempt otherwise the exemption is allowed proportionately.
Exemption is also available under section 54 EC
If you can save the tax on your long term capital gains by investing them in certain bonds. Bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) have been specified for this purpose. These are redeemable after 5 years (Prior to 2018, it was 3 years) and must not be sold before the lapse of 5 years (Prior to 2018, it was 3 years) from the date of sale of the house property.
Note that you cannot claim this investment under any other deduction. You are allowed a period of 6 months to invest in these bonds – though to be able to claim this exemption, you will have to invest before the return filing date.
The Budget for 2014 has specified that you are allowed to invest a maximum of Rs 50 lakhs in a financial year in these bonds. The NRI must make these investments and show relevant proofs to the Buyer – to make sure TDS is not deducted on the capital gains. The NRI can also claim excess TDS deducted at the time of return filing and claim a refund.
Repatriation of funds
If you wish to repatriate the proceeds from the sale of a property, you will need to submit Forms 15CA and 15CB. While you can fill out and submit Form 15CA yourself, Form 15CB has to be signed and submitted by a chartered accountant. You can repatriate up to USD 1 million a year outside India.