Want to buy a house from an NRI? Your home loan might be capped at 60% of the property value.

However, his plan fell apart when he approached a bank to apply for a home loan. The loan manager informed him that the loan would not cover the 23.92% TDS or withholding tax that he has to deposit with the Income Tax Department.

In a property sale, the buyer has to deposit 20% (surcharge and additional duties) of the total sale value of the property and not just the profit as TDS if the seller is an NRI.

“This meant I had to pay almost 50% of the value out of my own pocket, which was impossible for me,” said Chitransh, who wished to use only his first name. “I asked the seller if I could use the deposit for TDS, but he said I could only use about 10% of the 25% I had to pay him in the first month as he needed the remaining funds for his son’s wedding.

“I still had to almost ₹35 lakh more than I had budgeted for. I am a permanent employee and don’t have that much money to spare,” he added. The seller found another buyer and the deal fell through for Chitransh.

If the seller is an NRI and TDS of 20.8-23.9% (including surcharge and 4% cess) is payable on sale of a property, it is a sore point not only for the seller but also for the buyer.

The seller has to set aside a substantial amount as TDS until he gets a refund, while the buyer may face liquidity problems, says Urvil Modi, founder and managing director of Samriddhi Wealth Management, a Sebi-registered investment adviser. Chitransh is a case in point.

“The TDS component is a serious problem for buyers as banks are not financing it,” Modi said.

This is because TDS is considered an expense related to the transaction, which banks cannot finance. “TDS is part of the customers’ own contribution out of the 20-25% required under the loan-to-value (LTV) norms,” ​​said Manu Singh, head of housing finance at Kotak Mahindra Bank.

The LTV ratio is the percentage of the total value of the property that the bank can finance as a loan. The Reserve Bank of India has capped the LTV ratio for home loans at 75-90%, although this value varies depending on the value of the property. For example, if the LTV ratio of the loan is 80%, the buyer will have to pay at least 20% himself.

Expenses associated with a property transaction do not constitute a loan under the LTV terms. “If the property is purchased from a developer, all the expenses as per cost statement will not be covered by a home loan. In case of resale, TDS is one such expense,” Singh said.

Dishank Asija, real estate consultant and owner of Namo Property Consultant, said mint He has seen many deals where the seller was an NRI failing because of TDS. “Such buyers refuse to do business with NRI sellers again,” he said.

Options for the buyer

In this situation, the buyer has two options: he can ask the NRI seller to get a lower TDS certificate or pay the TDS from the deposit.

NRI sellers can apply for a lower TDS certificate by filing Form 13 on the Income Tax portal. It is recommended to apply for it well in advance as it may take up to two months to be issued. However, the seller can apply for it only after the buyer is identified as the buyer’s TAN has to be provided among the many documents that need to be submitted along with Form 13.

This solution comes with its own challenges. First, the NRI seller may not always agree to apply for this certificate, Asija said.

“To get this certificate, the NRI has to hire a chartered accountant, an additional expense that many sellers do not want to incur,” said Asija. “Also, they do not want to add another month or two to the already lengthy process. Compared to a transaction between residents, which takes up to 45 days, sales involving an NRI usually have a timeline of two to four months. Many NRIs choose to apply for a refund later rather than wait for the certificate.”

He added that several buyers back out of the purchase for the same reason if they are in a hurry to move into the new house – a disadvantage for NRIs who want to apply for the certificate.

Second, even if the seller applies for the certificate, there is no guarantee that the tax officer will reduce the TDS. “While applying for lower TDS, previous ITRs will also be required from the NRI. Most NRIs in India do not file ITR if they have no income. In cases where ITRs are not available, the tax officer is unlikely to reduce the TDS to the minimum rates of 1-5%,” Modi said.

The TDS will not be reduced even if the NRI has other income and corresponding tax liability in the same year.

Therefore, the second option is the best choice for the buyer. “The buyer should try to educate the NRI seller about the TDS provisions at the inception of the deal so that he can easily overcome these challenges,” Modi said.

Refinance TDS

Singh said mintthat banks can later refinance the TDS amount after the buyer provides them with the registered title proof and TDS challan. It would be helpful if buyers inquire about this option from their loan managers.

However, note that most banks will offer this as a top-up loan if the buyer has already utilised the allowable LTV ratio on the home loan. For example, if the LTV ratio is 75% and the buyer has financed 75% of the property value, he cannot get the TDS refinanced as part of the same loan as the bank cannot exceed the LTV ratio. He can get a top-up loan which comes with a higher interest rate.