Guidelines for NRIs on TDS on Immovable Property and Obtaining Lower Deduction Certificate

What is TDS on Immovable Property?
Under the Income Tax Act in India, the sale of immovable property is subject to tax deduction at source (TDS). It is a mechanism in which the payer deducts a certain percentage of tax from the payment made to the recipient and deposits it with the Government on behalf of the recipient. In case of a sale of immovable property, the buyer is required to deduct TDS and deposit it with the Government.

The rate of TDS differs basis the residential status of the seller, viz.:

• For an Indian Resident seller, TDS rate is 1% for the sale consideration exceeding Rs.50 lakh.
• Fora Non-Resident seller, TDS rate is 20% of the sale consideration irrespective of the transaction value.

Accordingly, in case of an NRI seller, the tax has to be deducted by the buyer even if the value of such property is less than Rs.50 lakhs. This can be a significant amount, especially if the property sold is of a high value.

What is a Lower Deduction Certificate and How to Obtain it?
A Lower Deduction Certificate (LDC) is a certificate issued by the Income Tax Department that allows the recipient to reduce the rate of tax deduction at source (TDS) on certain payments.

In some cases, the TDS amount might be more than the seller’s actual tax liability. Specially, NRI seller may require paying higher amount of tax in form of TDS even after not having any taxable income for the year, thereby ending up claiming huge refunds. This situation can also create an unnecessary blockage of funds. In order to eliminate this issue, the Income Tax Department allows the NRI seller to obtain a Lower Deduction Certificate as per the provisions of section 197, providing either a reduce rate of TDS or a NIL rate of TDS, on a case to case basis.

To obtain LDC, the non-resident seller must file an application in Form 13 online on Income Tax Traces Portal. The application should be supported by following relevant details / documents:

1. Agreement of sale & purchase of the property
2. TAN number of the buyer. In case the buyer does not have TAN, he can apply for it and get it within a week by filing Form 49B with the Income Tax Department.
3. Copy of ITR & Computation of NRI Income for last 3 yrs.
4. Copy of Tax Statement / Form 26AS of NRI for last 3 yrs.
5. Copy of Bank statement reflecting payment for the purchase of property.
6. Proof of NRI (Passport or any other document signifying the residence of the applicant abroad).
7. Documents to support deduction under section 54, if any.

Once the application is made, the Assessing Officer (AO) will review the application and supporting documents and may request additional information if required. Once the AO is satisfied with the application, he will online issue an LDC specifying the reduced TDS rate, which the taxpayer can download from the Income Tax Traces portal. The LDC will also mention its validity period.

The non-resident seller must submit the LDC to the buyer to deduct TDS at the reduced rate mentioned in the LDC. The non-resident seller can then file their income tax return and claim a refund for any excess TDS deducted.

It is important to ensure that the application and supporting documents are accurate and complete as the Income Tax Department may reject an incomplete or an inaccurate LDC application or in case if it deems that the proposed TDS rate is too low.

To summarise, a Lower Rate Certificate can be a useful tool for taxpayers who believe that the TDS rate is higher than their actual tax liability. It is essential to ensure that the application for LDC and supporting documents are accurate and complete. If approved, the LDC can result in significant savings for the recipient.