For Non-Resident Indians (NRIs) selling property in India, adhering to tax compliance under the Income Tax Act, 1961, is crucial to prevent excessive tax deductions and transaction delays. One major challenge NRIs face is the high rate of Tax Deducted at Source (TDS), which significantly reduces net sale proceeds. 

Key Topics Covered: 

• How NRIs can reduce TDS on property sales using Form 13 (Section 197).

• Importance of updating PAN status and linking it with Aadhar.

• Consequences of non-compliance on property sales, financial transactions, and investments.

By following these tax guidelines, NRIs can minimize tax liability, avoid penalties, and ensure seamless property transactions in India. 

Common Issues Faced by NRIs When Selling Property 

Many NRIs and buyers are unaware of the tax deduction process involved in property transactions. Common questions include: 

• Can NRIs apply for a lower TDS deduction?

• What is Form 13, and when should it be submitted?

• What documents are required for a lower TDS rate?

• How does an inoperative PAN affect financial transactions?

• What penalties apply for not linking PAN with Aadhar?

Understanding these factors is crucial for compliance and avoiding transaction delays. 

Case Study: NRI Selling Property in India & Compliance Issues 

Scenario: 

• Mr. A, an NRI, is selling his residential property in India.

• The buyer (a resident Indian) must deduct TDS before transferring the sale proceeds.

• Mr. A realizes the TDS deduction rate is much higher than his actual tax liability.

• He also discovers his PAN is inactive as it is not linked with Aadhar.

Key Questions & Answers: 

1. Can Mr. A apply for a lower TDS deduction?

• Yes, by submitting Form 13 under Section 197, NRIs can request a lower TDS rate.

• If approved, the Income Tax Department issues a certificate specifying the applicable TDS rate, preventing excess tax deductions.

2. Documents Required for Form 13 Filing:

• Sale agreement of the property.

• Purchase agreement and bank statements showing the purchase price.

• Tax records (Form 26AS) for the last three years.

• Computation of capital gains and estimated tax liability.

• Passport copy as proof of NRI status.

3. Impact of an Inoperative PAN on Transactions:

• Banking and investment restrictions on:

• Mutual funds and stock market transactions.

• SIP investments and insurance policies.

• Property transactions and tax refund claims.

• Higher TDS rates apply under Section 206AA of the Income Tax Act.

4. What Happens If the Buyer Deducts TDS at a Higher Rate?

• The default TDS rate for NRIs is 12.5% on long-term capital gains, plus surcharge and cess.

• Without Form 13, the buyer must deduct TDS at this rate and remit it to the government.

• The NRI seller can claim a refund later by filing an Income Tax Return (ITR), but this process can take months.

Why NRIs Must Ensure Tax Compliance Before Selling Property 

• Filing Form 13 allows lower TDS deduction, increasing net sale proceeds.

• Updating PAN prevents financial restrictions on property and investment transactions.

• Linking PAN with Aadhar avoids penalties, investment restrictions, and higher TDS rates.

Many NRIs fail to take proactive tax planning steps, leading to delayed transactions and excessive tax deductions. 

Legal Provisions for NRIs Selling Property 

The Income Tax Act, 1961, specifies TDS deduction rules for NRI property sales and PAN compliance. 

Key Legal Provisions: 

• Section 195 – TDS Deduction on Sale of Property by an NRI

• The buyer must deduct TDS before making payment to the NRI seller.

• The default TDS rate is 12.5% (plus surcharge and cess) on long-term capital gains.

• Section 197 – Form 13 for Lower TDS Deduction

• NRIs can apply for a reduced tax deduction rate if their actual tax liability is lower than the default rate.

• Section 139AA – PAN & Aadhar Linking Requirement

• PAN must be linked with Aadhar to remain “Operative.”

• Failure to link PAN results in:

• Higher TDS deduction under Section 206AA.

• No tax refunds or interest on refunds during the inactive period.

• Restrictions on financial transactions like mutual funds, SIPs, insurance, and stock trading.

Consequences of Non-Compliance 

For the NRI Seller: 

• Higher TDS rates apply if Form 13 is not filed.

• An inactive PAN can block tax refunds and delay transactions.

• Failure to update PAN affects investment transactions and KYC verification.

For the Resident Buyer: 

• Must deduct TDS at the prescribed rate before making payment to the NRI seller.

• Failure to deduct TDS properly can result in penalties and legal action.

• The buyer must obtain TAN (Tax Deduction and Collection Account Number) for TDS deduction compliance.

For Investment & Financial Transactions: 

• Inactive PAN restricts KYC verification, affecting mutual funds, SIPs, and insurance policies.

• Higher tax deductions on bank interest and other incomes under Section 206AA.

• Delays in receiving tax refunds due to PAN inactivity.

Final Thought: Ensure Compliance Before Selling Property as an NRI 

Selling property in India as an NRI requires proper tax planning and documentation. By filing Form 13 for lower TDS deduction and keeping PAN updated and linked with Aadhar, NRIs can: 

• Reduce tax liability at the time of sale.

• Ensure smooth financial transactions and compliance.

• Avoid penalties and delays in receiving payments or refunds.

Need Help with Property Tax Compliance? 

If you are an NRI planning to sell property in India, ensuring proper tax compliance is essential. 

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