I have been residing in the UAE for the past few years. I am in the process of purchasing a house in India from a fellow Indian, who is also a resident of the UAE. The seller has informed me that there is no need for me to deduct TDS since he claims that the long-term capital gain is only around ₹2 lakh, which is below the exemption limit, and that he has no other income in India other than interest on his non-resident external (NRE) account. Is it correct?
–Name withheld on request
The capital gains provisions contained in section 112 of the Income Tax Act, 1961 (“ITA”) permit only resident individuals to adjust the basic exemption limit against long-term capital gains, such that tax is levied only on the amount exceeding such limit. This beneficial treatment is not available to non-residents. Accordingly, where the seller is a non-resident, capital gains arising from the transfer of immovable property situated in India are taxable in India irrespective of whether the seller’s total income is below the basic exemption limit or whether the seller has any other taxable income in India. Consequently, the capital gain of ₹2 lakh referred to above would be fully taxable in India at the rate of 12.5% plus cess.
Further, under the provisions of Section 195 applicable to payments made to non-residents, tax is required to be deducted at source on any sum that is chargeable to tax in India in the hands of the non-resident. Explanation 2 to section 195 clarifies that this obligation applies irrespective of the residential status of the payer and, therefore, extends even to transactions between two non-residents. Accordingly, you are statutorily required to deduct tax at source at the time of payment of the sale consideration to the NRI seller. In the event of a failure to deduct the requisite tax, you may be treated as an assessee in default by the tax authorities, and the tax that ought to have been deducted by you (along with applicable interest and penalties) may be recovered from you.
Further, if the seller also fails to discharge the tax liability on long-term capital gains, under a mistaken belief, you may alternatively be regarded as a representative assessee of the NRI seller under section 163(1) of the ITA. Any buyer (whether resident or non-resident) who acquires immovable property from a non-resident can be treated as a representative assessee of the non-resident seller and may be held liable to discharge the seller’s tax obligations. In such circumstances, the tax authorities are empowered to directly enforce the seller’s tax liability against you.
Harshal Bhuta is partner at P. R. Bhuta & Co. CAs
