Lower Deduction Certificate

Who is a Non-Resident?

A person who has not lived in India for a predetermined amount of time is referred to as a "Non-Resident". Whether a person is a resident or non-resident for a given year depends on their residential status throughout that year.

How do I determine my Residential Status?

The length of time a person has actually spent physically in India is used to evaluate their residential status. The status of a resident has nothing to do with a person's citizenship or place of residence. Another possibility is that an American citizen may be a resident in India for income tax purposes in a specific year while an Indian citizen is a non-resident for that same reason.

Types of Non-Resident :

Under the Income Tax Act 1961, a non-resident is broadly classified under the following three heads:

  • Non-Resident Indian/Person of Indian Origin.
  • Foreign Company.
  • Other Non-Resident Person.

Salient Features

The residential status for each prior year, or the financial year under consideration, must be determined. The evaluation year's residential status is not significant. Additionally, you can have been a resident one year and a non-resident the next. Therefore, it must be calculated for each prior year.
It is quite likely that you had dual residency status in the previous year, meaning that you might have been a resident of both India and another nation, such the United States, at the same time. It might occur as a result of the various rules that various nations have established for determining residential status.

Who is Non-Resident Indian?

The term "Non-Resident Indian (NRI)" refers to a person who is an Indian citizen or a person of Indian ancestry but is not a resident of India. Non-Resident Indians in India are primarily governed by two Acts:

  • The income Tax Act, 1961 &
  • Foreign Exchange and Management Act, 1999(FEMA).

In both legislation, the phrase "Non-Resident Indian" has various definitions. One must realise, though, that the FEMA Act has no bearing on income tax matters; all that is required is that you abide by the rules set forth in the Income Tax Act of 1961.
Person of Indian origin (PIO) - A person is said to be of Indian origin if he or any of his parents or any of his grandparents were born in undivided India.

How to determine Residential Status?

So, as defined above, “a non-resident is a person who is not resident in India,” therefore, we need to understand who is considered a Resident in India.
You are considered a “Resident in India” for a financial year

  • If you were in India for a period of 182 days (6 months) or more during the Financial year; OR
  • If you have stayed in India for 2 months, 60 days in the financial year and for a total of 365 days in the preceding 4 years.

There are certain exceptions to the above condition of 60 Days:

  • If you are an Indian citizen who has left India in the Financial year as a crew member of an Indian ship or for the purposes of employment abroad, or
  • If you are a PIO or a citizen of India who comes on a visit to India;

Then the second condition of 60 Days and 365 days will not apply to you, which means that in the above situations, you will be considered resident in India if and only if you were present in India in the relevant financial year for a period of 182 days or more.

Do NRI’s have to pay taxes in India for income earned abroad?

The answer is YES. After you have determined your residential status, the next step is to identify income taxable in India as per your residential status.

  • For Resident Individuals: Your Global income is taxable in India, i.e., income earned, whether in India or outside India, is taxable in India.
  • For Non-Resident Indians: Only income earned or accrued in India or deemed to be so is taxable in India. Therefore, your income from any country besides India is not taxable in India.

What is Income Earned or Accrued in India?

India follows the “source rule” basis of taxation, i.e., all the income which accrues or arises from or through a source in India is taxable in India. Therefore, identifying the source of Income is of utmost importance. If it is established that the income has its source in India, whether direct or indirect, such income would become taxable in India. A list of such incomes are:

  • Any salary received in India.
  • Any salary received for services rendered in India.
  • Rental income (if any) received from a property situated in India.
  • Capital gain (if any) arising on account of transfer of property or asset in India.
  • Any income from deposits in India such as interest on fixed deposits
  • Any interest received on the savings bank account, etc.

Lower Deduction Certificate (LDC) for TDS on Non-Resident Indian (NRI) Property Sale.
Are you an NRI selling a property in India but unable to recoup the full sale proceeds since there is a very high withholding tax or TDS (about 22–23%) on such a sale even if the actual capital gains tax is substantially lower?

The option to apply for a Lower Deduction Certificate (LDC), which permits TDS to be deducted at lower rates between 5 and 10% (in line with the actual capital gain), has been made available by the tax department. In contrast to recovering the additional deduction (TDS - actual capital gain) after ITR filing and refund, which typically bars that amount for 15 to 24 months (depending on when the transaction was conducted), the same results in the upfront realisation of roughly 90 to 95 percent of the property value. We are best Lower Deduction Certificate Provider (LDC) In Pune & PCMC

Illustration :

Mr. A, an NRI from the UK, is asking INR 100 for a piece of real estate in India. The buyer is adamant about passing on INR 77 to Mr. A while deducting INR 23 in taxes.
Mr. A paid INR 25 for this asset in 2001, and as of FY 22-23, his indexed cost of the asset is now INR 82.75 (using indexation 3.31).The best capital gain tax payment for him would be around INR 3.5 (capital gain 100-82.75= 17.25*20.60%). There is an additional deduction of INR 19.5 that will only be refunded after ITR filing.
He will carry out the deal in January of 23 and submit his tax return for the fiscal year (FY) 22–23 on July 23. Only when the ITR has been processed, which usually takes 12 to 18 months after the transaction, will the refund be given.As a result, Mr. A will be unable to use INR 19.5 for 12 to 18 months.He ought to apply for LDC in such circumstances.


Applicability of withholding tax on sale of property:
When purchasing a property, the buyer is required to subtract tax from the transaction price and send the remaining funds to the seller. Whether or whether the seller is a resident will affect how much tax can be subtracted.
Section 194IA states that if the seller is an Indian resident and the sale price is Rs. 50 lakhs or more, the tax must be subtracted at a rate of 1% of the sale consideration.
However, if the seller is a non-resident Indian (NRI), tax must be withheld at the rate of 20% together with any applicable cess and surcharge (10 or 15%), regardless of the transaction value of the property. TDS on transfers of real estate from non-residents to residents were governed by Section 195. Therefore, in the event of an NRI seller, the buyer must deduct the tax even if the value of the property is less than INR 50 lakhs. Then, on the seller's behalf, the buyer is required to deposit this amount with the tax authorities.

Relevance and benefits of obtaining Lower/Nil Deduction Certificate :

In some circumstances, the TDS amount may exceed the seller's actual tax obligation. The NRI will have issues in this situation since they will be compelled to pay taxes in the form of TDS even if they have no taxable income or a lower income than they should have for the year, which they would then claim as a refund. As a result, money are unnecessarily blocked until the reimbursement is received. In addition, even if they are not otherwise required to do so because their total Indian income is below the basic exemption limit that applies to them, NRIs must file their income tax return in order to claim the refund of excess TDS paid in order to close the gap between TDS deducted and actual tax liability.
The income tax law gives these NRIs the option of seeking a certificate from the Assessing Officer under Section 197 in order to lessen this unneeded burden. The AO can issue a certificate granting either a lower rate of TDS compared to the effective rate or a NIL rate of TDS based on the application presented and the merits and facts of each case.

Let’s use an example to better understand the cases where it will be beneficial to obtain LDC.

Case 1 (Favorable) :

Where there is a significant gap/difference between TDS deducted and actual tax liability. An immovable property has a sale price of INR 4 crores, however the acquisition price (after indexation) was INR 2.5 crores.After the capital gains provisions are applied, there is a capital gain of INR 1.5 crores. TDS will be taken out at a rate of 23.92% (20% + SC15% + 4%Cess) due to a long-term asset. The TDS will therefore be 23.92% of RS. 4 crores, or RS. 95,68,000. The amount of INR 1.5 crores, or INR 35,88,000, which represents the real tax liability associated with the aforementioned transaction, will be assessed at a rate of 23.92% (20% + SC 15% + cess). Despite the fact that the TDS deducted from NRIs is INR 95,68,000 and their actual tax burden is actually INR 35,88,000, it is clear that this is the case.

Case 2 (Favorable) :

Where there is a Long-Term Capital Loss. Consideration for a real estate saleDespite the property's INR 4 crore price, the buying price (after indexation) was INR 4.5 crores. After using the capital, there is a capital loss of INR 50 Lakhs.gains clauses. TDS will be taken out at a rate of due to a long-term asset.21.92 percent (20% + SC15% + cess). Consequently, the TDS will be 23.92 percent on INR 4 crores.or INR 95,68,000. The actual tax obligation related to the aforementioned is now.Transaction value will be 0 (resulting in a capital loss of 50 lacs) It is clear thatDespite the fact that the TDS collected from NRIs is less than their actual tax, it is INR 95,68,000. It is not liable. TDS deducted and actual tax are separated by 59,80,000.

Case 2 (Unfavorable) :

when the difference between the TDS deducted and the actual tax liability is negligible. An immovable property has a sale price of INR 4 crores, however the acquisition price (after indexation) was INR 0.25 crore.After the capital gains provisions are applied, there is a capital gain of INR 3.75 crores. TDS will be taken out at a rate of 23.92% (20% + SC15% + cess) due to a long-term asset. The TDS will therefore be INR 95,68,000, or 23.92% of INR 4 crores. After calculating the actual tax due for the aforementioned transaction, a rate of 23.92% (20% + SC 15% + cess) will be applied on the sum of Rs. 3.75 crores, or Rs. 89,70,000. It is clear that the difference between TDS deducted.

Below is the list of some standard documents required for making an application under u/s 197 to support Form 13.

  • Mobile and E-mail ID of the applicant.
  • The agreement entered into with the buyer for the sale of the property.
  • TAN copy of the buyer. In case the buyer does not have one, he/ she can apply for it and get it in 1-2 weeks by filing Form 49B with the Income Tax Department.
  • Copy of Passport of NRI/Foreign Citizen Seller.
  • Circle Value of property involved, certified by the regulating authority.
  • Properly stamped and executed purchase deed of the property and proof of ownership by the Owner.
  • Bank account statement of the NRI held in India.
  • ITR of the NRI for the last 2-3 years.

Tax record and statement under 26AS for the last 2-3 years.

After the application has been submitted successfully, the assessing officer will examine the supporting materials and request additional information and supporting documentation if required before issuing the certificate or rejecting the application. AO will issue a certificate under Section 197 once satisfied that a lower TDS deduction is appropriate. The TDS will be deducted in accordance with the TDS Rate specified in the Certificate upon successful issuance of the lower deduction certificate. The LDC generally would take 3-6 weeks to process as it involves AO sending the application to TDS officer and their seniors.

Validity of LDC :

A certificate for a Lower/Nil deduction is issued for a specific fiscal year at a specified rate that is consistent with the computed actual capital gains. Unless the assessing officer revokes it beforeIt is still in effect from the day it was issued until the endof the relevant fiscal year. When buying real estate from an NRI,the choice of lower-rate source tax deduction is also available. Form 13 must be submitted by the NRI vendor to Income Tax.asking the Jurisdictional Assessing Officer for a reduced TDSdeduction. The property's purchaser would have to subtractTDS on the full amount of the consideration at the given ratein the certificate of lesser deduction.