The Benefits of Lower Deduction Certificate for NRIs: Save Money and Avoid Tax Litigation

Lower Deduction Certificate (LDC)

Selling a property located in India can be hectic for Non-Resident Indians (NRIs). The tax structuring in India is quite complicated, NRIs have to pay long-term capital tax at the rate of 20% plus applicable surcharge and cess on their capital gains. To make matters more complex, there is also confusion about TDS deductions on the sale of property for NRIs.

As per the Income Tax Act of 1961, lower deduction certificate (LDC) come into picture which are available to reduce or avoid the high tax rate imposed on domestic transactions this includes the sale of properties located in India.

In the case of NRIs, they have to pay tax on capital gain on the sale of a house property situated in India. The amount of tax payable on this gain will depend upon the period of holding i.e. whether it is a short-term or long-term capital gain.

In this article, we will consider some important things about TDS deductions on the sale of property for NRIs.

What is a Lower Tax Deduction or LDC?

TDS (Tax Deduction at Source) is an amount of tax deducted from a person's income for various reasons. In India, the payer deducts TDS from individuals at the rate set by the Income Tax Act of 1961.

However, there are cases when this amount deducted is more than the recipient's actual tax liability, especially in the sale of immovable property of NRI (Non-resident Indian). This often leads to unnecessary blockage of funds until the taxpayer receives the refund.

In the case of NRIs, they can apply for a lower deduction certificate in Form 13 online on the TRACES portal of the Income Tax Department. This application is made under Section 197 of the Income-tax Act, 1961, and it is used to request either no deduction of tax or deduction of tax at a lower rate.

However, in practical situations, the assessing officer does not always give a certificate at the Nil TDS rate. This means that the rate of TDS for a buyer may range from 1% to 4% depending upon states to states against LDC for houses and properties of NRIs.

Important things to consider:

1.   Confusion Regarding TDS Rates

When it comes to Tax Deducted at Source (TDS) on the sale of property for Non-Resident Indians (NRIs), It is important to note that section 194IA is not applicable if the seller is an NRI i.e. 1% TDS is applicable only to Indian resident  sellers.

At the same time, it is mandatory for the buyer to deduct 20% TDS subject to applicable surcharge and cess on the sale price of the property if the capital gain is considered a long-term capital gain. Furthermore, TDS will be 30% subject to applicable surcharge and cess in case of short-term capital gain, regardless of the NRI’s income tax slab.

Thus, For NRI and OCI, TDS is deducted at the maximum rate charged in India, i.e., @ 20% for long-term assets and @ 30% for short-term assets. A surcharge and a 4% cess are also applied to the above rate.

As a result, the effective rate of TDS on the sale of property by NRIs would be as follows:

2:   Lower Deduction Rate on Advance Received

In India, Non-Resident Indians (NRIs) are subject to certain tax laws when receiving advance payments from Indian residents. When an NRI receives an advance payment, they are required to deduct a tax amount of 20% TDS (Tax Deducted at Source) plus surcharge and 4% cess unless they have obtained a Low Deduction Certificate (LDC) from the assessing officer.

However, an NRI is only eligible to obtain an LDC on the remaining payment after receiving the advance payment. This means that they cannot obtain an LDC on the entire payment.

In some cases, the assessing officer may provide an LDC on the whole amount, but this is not always guaranteed. Therefore, it is important for NRIs to be cautious when receiving advance payments and to not take a big advance, as they will be subject to the 20% TDS rate on that amount.

3:   Things that the seller should take care of after the TDS deduction

As an NRI seller, there are certain steps that need to be taken after the TDS deduction by the buyer. Some of these steps are:

* Obtain a copy of the TDS challan: It is important for the NRI seller to obtain a copy of the TDS challan from the buyer after the TDS deduction. This helps to ensure that the buyer has deposited the TDS with the government.

* Ensure TDS return filing: The buyer is responsible for filing the TDS return on or before the due date. The NRI seller should ensure that the buyer has filed the TDS return on time to avoid any penalty or interest charges.

* Obtain a TDS certificate: Once the TDS return is filed, the buyer will receive a TDS certificate. The NRI seller should obtain a copy of this certificate from the buyer as proof of TDS deduction.

* Check Form 26AS: The NRI seller should also check their Form 26AS to ensure that the TDS deduction is reflected correctly in their tax statement. Form 26AS is a consolidated tax statement that shows the TDS deducted by the buyer and deposited with the government.

* By following these steps, the NRI seller can ensure that the TDS deduction is correctly reflected in their tax statement and avoid any penalties or interest charges for non-compliance with tax laws.

4: In the Loan cases

When dealing with loan cases, the entire amount of money is received in the seller's account without any deduction on TDS.

It is essential to keep in mind that even though all the amount goes into the seller's account, there is still a need for TDS.

TDS is an important tax compliance, and the seller should be refunded the TDS amount so that they can fulfill their TDS necessary compliances and deposit TDS returns on their behalf.

The TDS amount should be refunded to the purchaser for making the payment of TDS and deposit on their behalf. This helps them to meet their respective financial obligations.

Is Getting LDC Beneficial for NRIs?

Getting LDC beneficial for NRI depends on their specific circumstances and transaction. In general, obtaining an LDC (Low Deduction Certificate) can be beneficial for an NRI as it allows them to deduct a lower TDS (Tax Deducted at Source) rate on their income or capital gains from selling property in India.

However, in some cases, obtaining an LDC may not be beneficial for the NRI. For example, if the capital gain on the sale of the property is significant, the tax savings from obtaining an LDC may not be substantial compared to the tax liability.

In such cases, it may be advisable for the NRI to simply deduct the entire TDS on the sale consideration and claim the refund of the excess tax through their income tax return.

Ultimately, the decision to obtain an LDC should be based on a careful analysis of the specific circumstances of the transaction and the potential tax implications.

It is always advisable for an NRI to consult with a qualified tax professional or financial advisor to determine the most appropriate course of action.

What happens if the properties were purchased before 2001?

For NRIs who have purchased a property before April 1, 2001, the income tax department has fixed 2001 as the base year for the purpose of calculating the cost of acquisition. This means that the cost of acquisition will be determined based on the fair market value of the property as on April 1, 2001.

In such cases, the NRI will have to use the indexed cost of acquisition to calculate the capital gains tax liability. Indexation allows the NRI to adjust the cost of acquisition based on inflation using the Cost Inflation Index (CII) published by the income tax department.

The indexed cost of acquisition is calculated by multiplying the actual cost of acquisition by the CII of the year of sale divided by the CII of the year of acquisition.

If the value of the property as on April 1, 2001, is not known, the NRI can get a valuation report from a registered valuer to determine the fair market value of the property as of that date.

This valuation report can be used to calculate the indexed cost of acquisition and determine the capital gains tax liability.

Final Thoughts

A  Lower Deduction Certificate (LDC) can be an essential tool for taxpayers, particularly Non-Resident Indians (NRIs) selling property in India, to avoid unnecessary deductions and ensure proper tax compliance.

The LDC allows for a tax deduction at a lower rate, preventing the blockage of funds and facilitating smoother financial management.

It is crucial for taxpayers to understand the TDS provisions, the 2001 Valuation, and the importance of filing returns on time to avoid penalties and interest charges.

Are you an NRI or involved in a financial transaction with an NRI? Connect with a qualified tax professional or financial advisor!

Unlock the Benefits: Get Your Lower Deduction Certificate (LDC) Now for Smooth Property Transactions in India! For More queries: contact us at  info@manishanilgupta.com

Disclaimer: The information given above is to provide general guidance to the readers. This information should not be sought as a substitute for legal opinion.