Purchase of Immovable Property from Non-Resident situated in India
Prior Approval of RBI:
Section 9 of FERA prohibits any payment by a resident to any non-resident except with prior general or special permission from Reserve Bank of India, even the earnest or token money to the non-resident, as a mark of completion of the negotiations for the transaction.
The first liability comes under section 195 of the Act (Other Payments to Non-Residents), as per the section, if any person
- who is responsible for paying to a non-resident, not being a company, or to a foreign company,
- any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries”) shall,
- at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier,
- deduct income-tax thereon at the rates in force.
Selling of immovable property by a Non Resident Indian is taxable under the income tax under Chapter XII-A of the Income Tax Act, more specifically under section 115E of the Income Tax Act 1961.
The rate of tax prescribed and in force is twenty per cent.
Tax should be deducted by the payer at the rate in force or any lesser rate as certified by the Assessing Officer in a Certificate issued by him.
The application for the deduction at lesser rate of tax can be made either by the payer or the recipient in the prescribed forms to the Assessing Officer with the necessary documents.
If the Non Resident Indian does not have Permanent Account Number, the rate of tax will be 20%, irrespective of any certificate issued by the Assessing Officer.
It means the liability for deduction of tax from the payment arises or not shall be understood once it is settled that the sum which is being paid to non-resident is chargeable to Income Tax.
To understand the same we should first understand
- Section 5- Scope of Total Income
- Section 9- Income deemed to accrue or arise in India
Let us understand section 5 first.
Section 5(2) is as follows:
(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which—
- is received or is deemed to be received in India in such year by or on behalf of such person or
- accrues or arises or is deemed to accrue or arise to him in India during such year.
Now it is clear that the payment being made to non – resident shall be included in the scope of Total Income once the any of the two conditions set out in section 5(2) satisfies. The first condition is clear, for second condition let us go through the sub section 1 of section 9 which is as follows:
(1) The following incomes shall be deemed to accrue or arise in India:—
- all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India or through the transfer of a capital asset situated in India.
From the above proposition it is clear that the payment being made to Non-resident for purchase of immovable property in India is chargeable to Income Tax since the income accruing to Non-Resident is from the transfer of capital asset which is situated in India.
Now once it is cleared that the sum payable is chargeable to Income Tax Act, TDS must be deducted under section 195. Question is how much TDS to be deducted and from which amount?
If you read the section 195(1), you will find that the section talks about the sum paying to Non-Resident. The sum means the whole amount of sale consideration to be paid. It means tax to be deducted from sale consideration paying, not from the capital gain.
Now Sub-section (2) to section 195 further provides that:
- in cases where the person is responsible
- for paying any sum chargeable to income-tax in India
- to a non-resident and
- he considers that the whole of the amount of payment may not be income assessable to
- tax in the hands of the recipient,
- he may make an application to the Assessing Officer to determine,
- by a general or special order, the appropriate proportion of the sum payable as being
- chargeable to tax and
- thereby obtain an advance ruling from the Assessing Officer
- with regard to the income assessable and the tax payable thereon.
- If that is done, the tax shall be deducted under section 195(1) only in that proportion in
- which the payment to the non-resident becomes taxable in India.
It means if no such application is made and instruction is received from the Assessing Officer in this regard TDS have to be deducted from whole amount paying as sale consideration.
The person responsible for payment shall obtain TAN number and deduct the TDS and issue the Non-Resident form 16A.
If the Non – Resident finds that his tax had been excessive deducted then he should compute his Income tax liability and claim the refund by filing his return of Income in India.
However, provisions under the Double Taxation Avoidance Agreements must be looked into to understand the stand taken there regarding taxation of capital gain.
In most of the DTAA made between India and other nations, capital gain is to be taxed in the country where the capital asset is situated.
It means there is no capital gain shall be taxed twice in the country of resident of non – resident.
To sum up the resident buying property from Non – Resident should deduct TDS from the whole sale consideration before making payment to him. The amount on which rate of TDS shall be applied is not the net income that sale consideration payable to NR minus cost of acquisition to him, but it is whole sale consideration.
Also last but not least, the provision is applicable on every person responsible for making payment to Non-Resident, be it individual, HUF, Firm, Company etc.