TDS on NRI Property Purchase: How Form 26A Can Protect Buyers from Section 201 Defaults
When purchasing property from a Non-Resident Indian (NRI), tax compliance around Tax Deducted at Source (TDS) becomes a critical issue for buyers. Failure to correctly deduct and deposit TDS under Section 195 of the Income Tax Act can result in the buyer being held liable for tax defaults under Section 201(1). However, a recent ruling by the Income Tax Appellate Tribunal (ITAT), Mumbai has provided significant relief to buyers, emphasizing the protective role of Form 26A. This blog explores the complexities around TDS on NRI property purchases, the importance of Form 26A, and practical steps buyers can take to avoid penalties.
Understanding TDS on Property Purchases from NRIs
TDS obligations differ substantially when purchasing property from an NRI compared to resident sellers. Under Section 195 of the Income Tax Act, the buyer (known as the deductor) must withhold tax on the amount paid to the NRI seller (the deductee) before transferring the sale proceeds.
- The prescribed TDS rate on purchase from NRIs typically includes 20% long-term capital gains tax plus applicable surcharge and cess, or 30% for short-term capital gains.
- Buyers are required to obtain and use a TAN (Tax Deduction Account Number) for deducting and depositing TDS.
- They must file TDS returns quarterly and issue TDS certificates to sellers as proof of deduction.
- Failure to deduct or deposit TDS can lead to personal liability of the buyer for the unpaid tax under Section 201 of the Income Tax Act.
This regulatory framework aims to ensure taxes due on capital gains by NRIs are collected at source, but it can create practical challenges and risks for buyers, especially if compliance details are missed or delayed.
The Crucial Role of Form 26A in Shielding Buyers
Form 26A serves as a certification from the deductee (NRI seller) confirming that the specified tax on the transaction has been duly paid. Recent legal developments have emphasized the importance of this document in protecting buyers from tax default responsibilities.
The ITAT Mumbai ruling clarified:
- Relief under the first proviso of Section 201(1) is available to buyers if they can furnish Form 26A certifying payment of the tax by the deductee.
- Even if the buyer initially faces a demand notice for default in TDS payment, providing Form 26A verifies that the seller has ultimately paid the tax, thus shielding the buyer.
- In a particular case, although the certificate was received post-appeal, the matter was remanded for verification, indicating the tribunal’s willingness to protect buyers upon due proof.
This ruling is important because it shifts some burden away from buyers, who otherwise risk being penalized for non-payment despite deducting tax in good faith, or when deductee has settled the tax liability independently.
Practical Compliance Tips for Buyers Purchasing Property from NRIs
To ensure smooth transactions and avoid being penalized under Section 201, buyers should adopt rigorous documentation and procedural controls:
- Deduct and Deposit TDS Promptly: Deduct TDS at the prescribed rate from the sale consideration and deposit it timely using the TAN.
- File Quarterly TDS Returns: Submit Form 27Q for non-resident TDS returns quarterly and adhere to deadlines for TDS certificate issuance (Form 16A).
- Obtain Form 26A from the Seller: The buyer should request the deductee to furnish Form 26A, certifying tax payment, which can be presented if tax default notices arise.
- Maintain Records to Show Compliance: Keep copies of payment challans, TDS certificates, and correspondence with sellers regarding tax payment status.
- Seek Professional Assistance: Engage tax experts to handle complex cross-border compliance, including applying for lower TDS certificates for sellers and reconciling Form 26AS tax credits.
Through meticulous adherence to compliance norms and documentation, buyers can protect themselves against adverse consequences, safeguard transactions, and avoid penalty exposure under Section 201.
Conclusion
The ITAT Mumbai ruling reinforces that presentation of Form 26A certifying the deductee’s tax payment provides crucial relief to buyers from tax default liability under Section 201 of the Income Tax Act. For buyers purchasing property from NRIs, this means diligent TDS deduction along with obtaining proper tax payment certification from sellers is essential.
In the increasingly scrutinized arena of NRI property transactions, enhanced understanding of TDS provisions and relevant documentation safeguards is key for smooth and compliant dealings.
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