Guidelines to follow before buying property from NRIs

Ankur Gupta is in the IT sector and wants to purchase a property from an NRI. If yes, what precautions should he take? A lady who owns a house in his area is an NRI

 Yes; anyone can buy a property from NRI. However, before you can purchase property, you must go through a complicated process. You have to send money to NRI, which is not part of normal buying. FEMA and the Reserve Bank of India have to give consent to purchase property from NRI/PIO, without any prior approval. 

Proper due diligence is necessary

It is important, We must first do our due diligence on NRIs and their property. Sometimes, NRIs may claim to be Indian residents and can repatriate the sale proceeds from India without paying capital gains taxes in India. This could cause a problem for you. You must be sure that the person is not a resident. To ensure the status of an NRI you have to do proper due diligence.

We must visit the previous residence and area where NRIs live before travelling abroad. You can ask the neighbours for information about NRI status or check his passport. You might also obtain information from the previous employer or business concern to which he had affiliation.

Verify that the NRI is the true owner of the property.

If you have substantial evidence, you should publish the details in two newspapers – One local and one national. This will aid in the event of any future disputes regarding property ownership.

An NRI cannot visit India often to purchase or sell a property. A power of attorney is a document that an NRI uses to execute any sale/purchase /rental procedure in India

To execute any registration process, the NRI doesn’t have to be present in India. Therefore, One of their relatives or friends can facilitate the process in India. They will need to have a power of attorney to act on behalf of the NRI

Power of Attorney

The Power of Attorney (POA) , gives an individual the authority to act for another. The deed outlines the scope of the authority granted. The person who gives the power is the Principal/Donor/Grantor. The Attorney/Donee/Grantee/Agent is the person to whom it is granted.

NRIs typically issue two types of power of attorney. 

The General Power of Attorney 

 The Special Power of Attorney

When the Agent gets an authorisation to perform many transactions, the Principal grants a General Power of Attorney, on his behalf. These can include bank operations, estate operations and other operations.

 A Special Power of Attorney is a document when an Agent must only conduct specific transactions.

An NRI can execute a Power of Attorney in India or abroad. Execution of the power of attorney should take place on either plain or stamp paper, depending on the country of execution. 

The NRI must sign The POA (Power of Attorney), before a consulate official or notary in his country of residence. The consulate officer or notary must then attest the signature on the deed.

 It is a good idea to have the POA certified by the Indian consulate. This will make your POA more authentic. The POA must then be sent to India, where it is adjudicated within 3 months .

 Adjudication of the POA

In order to make the POA accepted as a valid document, it must be adjudicated and registered at the sub registrars office. The POA document cannot be altered or misused after it has been adjudicated. The document will be kept with the registration department after it has been registered. If anyone wishes to verify its authenticity, they can obtain a copy of the document up to ten years after the transaction took place.

An NRI may sometimes be able to execute a POA while they are physically present in India.

India’s stamp duty for POA registration is different from one state to the next.  the contents of the deed are determinants of this.

Section 195 Income Tax

A purchaser should be aware of section 195, which applies to property purchased from NRIs. This section states that tax deduction must be from the payment to the buyer before the seller can make the payment. It is known as TDS (tax deducted directly at source).

Section 195 provides that anyone responsible for paying NRIs any amount chargeable under the act must at the time credit such income to their account or at the moment of payment thereof in cash, cheque, draft, or other modes, deduct income tax at the applicable rates.

 Section 194-1A deals with TDS in real property transactions. This applies when you buy a property with a sale consideration greater than 50 lakh from Indian residents. TDS is at a rate of 1%. This section does not apply to property purchased from NRIs.

Section 195 states that the deduction of tax must be at source according to the current rate while making payments to NRIs. Section 2 (37A), 111 Finance Act defines the rate in force. The current effective rate is 20% on the sale consideration and not on capital gains derived from the sale transaction. This means there will be a charge of 20% tax on NRI property regardless of the amount of sale consideration.

Is there a provision for TDS in transactions where there is no capital gain? What is the procedure to get permission for lower/nil TDS?

You can save taxes on capital gains by investing the amount in tax saving bonds, or any other property according to the Income Tax Act. you can reduce the amount of capital gains if the capital gain amount has been reinvested. The entire capital gain amount is given back to the seller and he will not be subject to any tax liability.

Therefore, the seller can ask the purchaser not to deduct TDS from the sale consideration. You can contact your Assessing Officer to obtain a certificate for a lower or null deduction of TDS if there are no capital gains, or the tax payable upon capital gain is less than the deduction of TDS. You (the payer/purchaser/person responsible for the payment) can make the payment with lower/nil TDS if such a certificate has been granted. The payer must deduct tax if such a certificate has not been obtained. This applies even if the property is being sold at a loss.

Except for cases where NRIs or buyers get permission from the AO, the NRI’s tax deduction would exceed the amount. NRI must file his income tax return in India to claim the excess amount.

The Deduction of TDS

Before making any payment to NRI, you must deduct TDS from the amount of the sales consideration.  The payment of TDS must be from the total sales consideration for which both parties must have a PAN card. The purchaser is responsible for depositing the tax deduction (using challan to pay TDS) to the government within seven days of the month from the tax deduction.

After the payment of the TDS, you must file the TDS return electronically. You should provide all details about the seller including his address and PAN. You can issue the TDS certificate in Form16A to the seller within 15 days of the due date for furnishing the TDS return electronically after filing.

Hence, If you fail or neglect to pay the amount of deduction, you will be known as an Assessee In Default according to section 201 of Income Tax Act 1961. You will be subject to interest, penalties, and prosecution.

Claim for Refund of TDS Excessive Paid

Deduction of TDS from sale consideration is shown as payment of Excess taxes to the income tax division. By mentioning details of the capital gain and sale Income Tax Return for the Assessment Year, the NRI seller can claim the refund of excess taxes paid. To claim the refund of excess taxes, he must file his return by the deadline. If all details are correct, he will receive the refund amount from the income tax department after processing the return completion.

Repatriation of Funds

NRIs want to reinvest the proceeds of a sale in another country or simply transfer their funds to their NRE or foreign bank accounts. To transfer funds from his NRO to his NRE/Foreign Bank account, he must submit a Form 15CB certificate signed by a Chartered Accountant to the bank certifying that the correct amount of tax deduction and the reason for not-deduction of TDS. 

Online, he must also file Form 15CA with details of his Form 15CB certificate. After submitting the form, an NRI can repatriate any of his funds from India freely.

If you’re buying property from NRIs and you find the entire process too complicated and cumbersome, you can seek the help of a chartered accountant.