A common misconception among Non-Resident Indians (NRIs) purchasing property in India from fellow NRIs can lead to severe financial and legal consequences. A recent query highlights a scenario where a buyer in the UAE was advised by the seller that no Tax Deducted at Source (TDS) was required because the seller's long-term capital gain was allegedly below the exemption limit. Tax experts clarify that this is a dangerous assumption.
No Basic Exemption for Non-Resident Sellers
The core of the issue lies in a critical difference in tax treatment between residents and non-residents. Section 112 of the Income Tax Act, 1961, allows only resident individuals to adjust their basic exemption limit against long-term capital gains. This beneficial provision is explicitly not available to non-residents.
Therefore, for an NRI seller, any capital gains arising from the transfer of immovable property located in India are fully taxable in the country. This rule applies irrespective of whether the seller's total income is below the basic exemption limit or if they have no other taxable income in India. In the mentioned case, the long-term capital gain of ₹2 lakh would be fully taxable at 12.5%, plus applicable cess and surcharge.
Strict TDS Obligation Under Section 195
The responsibility to ensure tax collection falls squarely on the buyer. Section 195 of the Income Tax Act mandates TDS on any payment to a non-resident that is chargeable to tax in India. An explanation to this section clearly states that this obligation applies regardless of the residential status of the payer. This means the rule governs transactions even between two non-residents, like two NRIs in the UAE.
As the buyer, you are legally required to deduct tax at source when making the sale consideration payment to the NRI seller. Failure to do so can lead to you being declared an "assessee in default" by the tax authorities. The consequences are severe: the tax that should have been deducted, along with interest and penalties, can be recovered directly from you, the buyer.
Risk of Being Treated as a Representative Assessee
The potential liability for the buyer extends even further. If the NRI seller also fails to pay the tax on their capital gains—possibly under a mistaken belief like the one in this query—the buyer faces additional risk. Under Section 163(1) of the Income Tax Act, the buyer can be treated as a "representative assessee" of the NRI seller.
This provision empowers the tax authorities to hold any buyer (resident or non-resident) who acquires property from a non-resident seller liable for the seller's tax obligations. In such a scenario, the authorities can directly enforce the payment of the seller's due taxes against the buyer. This makes due diligence and compliance with TDS rules non-negotiable for property buyers dealing with NRI sellers.
In summary, the advice given by the seller in this case is incorrect and could prove costly for both parties. Buyers must deduct TDS on payments for property purchased from NRI sellers without exception, and sellers must account for the full taxation of their capital gains in India, regardless of amount. Consulting a qualified tax professional before concluding such transactions is essential to avoid future litigation and financial loss.
