[Practical Guide] to Lower or NIL TDS Certificate for NRIs

A Lower or NIL TDS (Tax Deducted at Source) Certificate is a specific authorization provided by the Income Tax Department of India to an individual or an entity. This certificate allows the payer (the one who makes the payment and is responsible for deducting TDS) to deduct tax at a lower rate or not deduct tax at all, depending on the certificate's specifications.

The issuance of such certificate helps in managing cash flow for taxpayers who would otherwise have their funds locked up in excess TDS deductions, waiting for refunds after filing their income tax returns.

By CA. Ajay R. Vaswani – B.Com, LLB, LCS, FCA, DISA (ICAI) | Founder – ARAS and Company Chartered Accountants, Nagpur

This article emphasizes applying for a Lower or NIL TDS Certificate for cases where NRIs sell their immovable property in India.

Whenever a property is being purchased, at the time of purchase, the buyer must deduct TDS at the rate of 1% from the value of sale consideration and pay the balance to the seller if he happens to be a resident of India for transactions where the sale value exceeds Rs 50 Lacs or more under section 194IA. Online return cum challan is to be filed in the form of 26QB for the same.

However, if the seller happens to be a non-resident of India (NRI), the tax to be deducted would be at a higher rate of 20%, irrespective of the value of the sale consideration. So even if the value is below Rs 50 Lacs, TDS at a rate of 20% is applicable. The amount deducted is to be deposited to tax authorities through challan, and the TDS return is to be filed for payment under section 195.

The higher rate of 20% is prescribed considering the tax rate on the taxability of long-term capital arising out of the sale of immovable property and because the NRI community at large is non-taxpayers or non-filers of Income Tax returns in India.

Since the TDS at the rate of 20% is to be deducted from the sale value of the transaction and not on the actual capital gain, the TDS amount is bound to happen to be more than the actual tax liability. In such a scenario, the assessee ends up paying more tax amount in the form of TDS and later claims a refund by way of filing the income tax return. Genuine difficulty is caused to the assessee in such cases, specifically where there is no or negligible capital gain or in case of capital loss. The funds are blocked until the refund is processed back by the income tax department resulting in unnecessary withholding of capital.

To eliminate such a situation of creating a burden on non-resident Indian assessees, the Income tax law provides an option to apply for a Lower Deduction Certificate to the concerned assessing officer (AO) under the provisions of section 197, allowing TDS to be deducted at a NIL rate in case of long-term capital loss or at a rate as commensurate to cover the effective tax liability of the taxpayer.

Lower or NIL TDS certificate serve as a powerful tool for NRIs selling immovable property in India, allowing them to reduce or eliminate the TDS deduction on the sale proceeds. By obtaining these certificates, NRIs can retain a higher portion of the sale proceeds and minimize their tax liability.

Application by an NRI for issuance of a lower deduction certificate under section 197 of the Income-tax Act, 1961, for no deduction of tax or deduction of tax at a lower rate has to be made in Form 13 online. In case there is more than one seller, the application has to be made separately for all sellers.

Documents and Details to be submitted along with the application are as follows:

1. PAN card
2. Property purchase deed
3. Payment schedule/details of purchase for the source of funds
4. Agreement/Memorandum of understanding for the sale of property
5. Valuation certificate as per section 50C for income tax purpose
6. Computation of capital gain
7. Bank statement reflecting token amount received from the buyer
8. Proof of Non-Resident Indian (OCI card, Passport, Residency VISA, Employment Letter, Entry and Exit Stamps etc)
9. Proof of expenses being claimed if any
10. Copy of Income Tax Return, 26AS and Computation for last 3 years
11. TAN of the Buyer
12. Communication details
13. Supporting documents if claiming exemption under section 54

Once the application is filed successfully, the assessing officer will review the documents/information submitted and ask for further queries and documents before issuing the certificate/rejecting the application. The application can be filed in the city having jurisdiction over the property or that of an assessed. On being satisfied that a lower deduction of TDS is justified, AO shall issue a certificate. On successful issuance of the lower deduction certificate, the TDS will be deducted as per the TDS Rate stated in the Certificate. Surcharge and Education, as applicable, are to be added as per the rules. This certificate would be issued online, and the taxpayer can download it from the portal.

The power of the assessing officer is to issue a minimum rate of lower TDS certificates at a rate of 3%; however, for a rate below that, prior approval of CIT is needed to be taken by the AO, in most cases, which is accorded.

The usual time taken is 30 – 45 days to get the certificate from the assessing officer after the successful application is made. A lower deduction certificate is issued for a particular period, It holds its validity from the date of issuance till the end of the validity date as mentioned in the certificate which is end of the relevant financial year or unless cancelled by the assessing officer before its expiry.

Example to Consider the benefits of applying for a lower TDS certificate: