“Vipul, a Non-Resident Indian was devastated when the buyer of his residential property in India, worth Rs. 6.00 crores, told him that he will deduct income-tax at source under section 195, at the prescribed rate of 28.496%, amounting to Rs. 1.71 Crore approx. on the entire sale consideration. ”

Whenever, any person being NRI, sells immovable property, to resident Indians, will attract Section 195. For instance, Vipul, being a Non-Resident Indian wants to sell his property worth Rs.6.00 Crores in April 2021 in India. He was devastated when the buyer told him that he will deduct income-tax at source under section 195; at the prescribed rate of 28.496%, amounting to Rs. 1.71 Crores approx. on the entire sale consideration. Total capital gain on his property will be around Rs.90.00 Lakhs only after taking the valuation and cost inflation index into consideration and the capital gain tax would be around Rs. 18.72 Lakhs only. He will only be able to take a refund after filing his tax return in India by July 2022. Processing of the refund may take another 6 months. Till December 2022, then the refund amount of Rs. 1.52 Crores will remain blocked with the Income-Tax Department. He consulted one of his friends, a Chartered Accountant by profession. His CA friend suggested he apply for lower TDS or no TDS certificate as per Section 197 of income tax act.

Let’s now discuss about Section 195 and Section 197

Section 195

Any person making payment to non - resident or a foreign company like interest or any other sum (other than salaries) which is chargeable to the income-tax in India, tax at the rates in force shall be deducted at the time of making payment, it will come under the ambit of Section 195.In other words, we can say that whenever any person who is a resident of India, makes any payment to a non-resident person or a foreign company shall be liable to deduct TDS. People mostly tend to get confused with Section 194-IA which is related to selling of the immovable property (other than agricultural land) by the resident of India and TDS is charged at the rate of 1%, if the amount of the consideration exceeds RS. 50.00 Lakhs.

Whenever a non resident / NRI sells his/her property in India, difference between the sale consideration and the acquisition cost is called as Capital Gain and such capital gain is chargeable to the tax rate in force at the time of sale. By the rate in force it means taxes to be deducted at the rate as prescribed under the Finance Act. Tax rate to be charged on the capital gain depends on the holding period of the property. Effective TDS is calculated by adding the capital gain tax, education cess and surcharge, if applicable. If the property is held for less than 24 months, then it will be considered as Short-term capital and any gain/loss arising on it is to be termed as short term capital gain/loss. If the property is held for more than 24 months, then it is considered as Long Term Capital Asset and any gain or loss arising from it is to be called as long term capital gain/loss.

***Current Rates for Tax withholding and surcharge on Long term capital gain on sale of property***

Section 197

As per the applicable provisions contained in Section 197 of the Income Tax Act, it facilitates taxpayers in granting a nil or lower tax rate for deducting TDS. It is important to note that an application can be made to the Jurisdictional Assessing Officer for issuing the certificate either for deducting tax at the lower rate or at nil rates. On being satisfied, the Assessing Officer can issue a certificate accordingly and it will remain valid till the period mentioned in the certificate or its cancellation, whichever, is earlier. Application is to be made where the seller is assessed.

Procedure for Making an Application

By visiting the tax portal taxpayers can make an application, which is under the head Statements/Forms for obtaining certificate for no or lower deduction of TDS. This form can also be used by the taxpayers covered under Section 206C (relating to Tax Collection/TCS). Application is to be filed online by using Electronic Verification Code (EVC) or Digital Signature Certificate (DSC).

On receiving the application, the Assessing Officer has to calculate the current and estimated tax liability after considering the tax payable during the previous four financial years on the assessed income/returned income /estimated income, as the case may be. Advance tax payment, tax deducted at source (TDS) and tax collected at source (TCS) are also to be considered by the assessing officer.

Documents to be attached for obtaining no TDS or Lower rate TDS Certificate

Given below are the broad documents to be attached with the Jurisdictional Assessing Officer for obtaining the certificate:-

Application in Form 13
Copy of PAN Card
Copy of ITRs of three previous years.
Copy of Passport
Copy of bank statement
Copy of affidavit by NRI
Copy of Purchase Deed
Agreement to Sell
Provisional income computation showing tax liability and the capital gain.

If the Assessing officer is satisfied, he may issue the certificate to the taxpayer for No deduction or deduction at lower rate of TDS. The application is supposed to be disposed of in a maximum period of 30 days by the tax authorities.