I have been a domiciled tax resident of the UK for many years. Usually, I spend 4-5 months of winter every year in India. Because of the 120-day rule, I no longer qualify as a non-resident in India. I have identified a buyer to sell my property in Bengaluru when I travel to the country this year. The prospective buyer informs me that she will deduct TDS at a 20% rate. Is this proper? What would be the taxation on a such property sale for me?
—Name withheld on request
Since you have highlighted the 120-day visit rule, I assume that you are a person of Indian origin for that purpose of ascertaining residency under Indian tax laws (i.e. you or one of your parents or grandparents was born in an undivided India). I also assume that you earn more than ₹15 lakh income in India. You are correct that a person of Indian origin having more than ₹15 lakh income in India becomes a ‘resident’ if (a) their visit to India in a particular financial year amount to more than or equal to 120 days and (b) they would have stayed in India cumulatively for more than or equal to 365 days for the previous four financial years. However, if the individual’s period of stay remains below 182 days in the respective financial year, then this person qualifies as a ‘not ordinarily resident’.
In your case, since you spend 4-5 months every year in India, you will qualify as a ‘resident but not ordinarily resident’ (RNOR). For RNOR tax status, though incomes accruing outside India (barring some) are not taxable in India, incomes accruing in India remain taxable in India. Therefore, gains on the sale of Indian property will be taxable in India. ‘Resident’ includes RNOR, thus the buyer needs to deduct TDS at 1% (no additional surcharge or cess) while paying you the gross sale consideration and not at 20%. This is on account of the reason that you are still a ‘resident’ although living outside India. If the property qualifies as a long-term asset (holding of more than 2 years), then gains (after indexation) would be taxed at 20% (plus applicable surcharge and cess). Otherwise, capital gains would be taxed as normal income at the applicable slab rates.
However, since you are a tax resident of UK (and also domiciled in UK), you may explore opting for the provisions of the double taxation avoidance agreement (DTAA) if they are more favourable in your case than the Indian tax provisions. In order to be eligible for applying under DTAA provisions, the tie-breaker test under DTAA should result in ascertainment if your tax residence is the UK. Assuming you become a UK resident under the tie-breaker test, TDS would apply at full rate on capital gains amount, i.e. 20% (plus applicable surcharge and cess) for long-term capital gains, and 30% (plus applicable surcharge and cess) for short-term capital gains.
Most likely, TDS at 1% on gross sale proceeds would turn out to be lower than TDS at 20% or 30% on the amount of capital gains. Also, the India-UK DTAA does not give any concession from taxation of capital gains in India. Accordingly, the tax liability for a non-resident on the sale of property in India remains the same as that of a resident even after application of the DTAA. Since the Indian tax law provisions relating to TDS may remain more favourable to apply in your case, there would not be any need to resort to DTAA provisions after all.
Harshal Bhuta is a partner at chartered accountancy firm P.R. Bhuta & Co.
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Published: 13 May 2024, 04:49 PM IST