Selling Indian property as a non-resident: TDS, Form 13 and repatriation

For a resident seller, tax on a property sale is largely settled at the return-filing stage. For a non-resident, it is settled by the buyer, at the point of payment, on the whole sale consideration.

That difference is the source of nearly every unpleasant surprise NRIs experience when they sell Indian property, and it is entirely avoidable with planning that has to happen before the transaction, not after.

Why the buyer deducts, and why it is on the gross amount

When a non-resident sells immovable property in India, the buyer is obliged to deduct tax at source under Section 195 of the Income Tax Act before paying the seller. Unlike the flat rate that applies when the seller is resident, deduction from a non-resident is at rates applicable to capital gains, plus applicable surcharge and cess.

The critical mechanical point is this: in the absence of a certificate directing otherwise, the deduction is computed on the entire sale consideration, not on your gain.

Consider what that means. If you bought for a certain sum years ago and sell for more, your actual taxable gain may be a fraction of the sale price. But the deduction is calculated on the whole amount. A very large sum can be withheld against a much smaller genuine liability, and you recover the difference only by filing a return and waiting for a refund, which can take a year or more.

The lower deduction certificate

The remedy is a certificate under Section 197, applied for using Form 13 on the income tax portal. It directs the buyer to deduct at a lower rate, or in some cases nil, based on your computed actual gain rather than the gross consideration.

This is the single most valuable piece of planning in an NRI property sale, and the one most often missed. In many transactions the amount it frees up exceeds every other cost of the sale combined.

What the application involves

• A computation of your expected capital gain, with the purchase documentation supporting your cost of acquisition
• Details of the proposed transaction, including the buyer and the agreed consideration
• Evidence of any improvement costs you intend to claim
• Your PAN, which must be active and correctly linked, and your Indian tax filing history

Timing

Applications are not instant. Processing takes time, queries are often raised, and the certificate has to be in the buyer's hands before payment is made. Start well before you expect to close, and tell your buyer at the outset that you are applying, because their obligation is affected by it and a buyer who is not told may simply deduct at the full rate to protect themselves.

Your PAN and your filing history

An inactive PAN, a mismatch between the PAN and the property records, or a history of unfiled returns will all slow a Form 13 application or sink it. If you have owned Indian property for years without filing Indian returns because the rental income seemed small, resolve that before you plan a sale rather than during one.

Repatriating the proceeds

Sale proceeds of immovable property held by a non-resident are credited to an NRO account. Moving money out of an NRO account abroad is permitted within the limits and conditions set under FEMA, and requires certification from a chartered accountant confirming the tax position, typically on Forms 15CA and 15CB.

Two things determine whether this goes smoothly:

• Whether your tax is settled. The certification is about tax compliance. Unresolved liabilities stall repatriation.
• How the property was originally funded. The route and limits differ depending on whether the property was acquired from funds remitted from abroad, from NRE or FCNR balances, or from rupee resources in India. Documentation of the original acquisition matters years later, which is a good reason to keep it.

If the property was inherited

Inherited property brings its own questions: establishing cost of acquisition by reference to the previous owner, evidencing the chain of succession, and in some cases obtaining prior approval before repatriating. Start earlier than you think you need to.

What to do before you decide to sell

1. Locate the original purchase documentation, including proof of how the purchase was funded
2. Confirm your PAN is active and your Indian filings are current
3. Have the capital gain computed properly, including indexation and improvement costs where they apply
4. Apply for the Section 197 certificate before agreeing a completion date
5. Speak to your bank early about the repatriation route and what they will require
6. Engage a chartered accountant for the certification, not at the end but at the start

None of this is difficult. All of it is much harder retrospectively.