There are several challenges faced by individuals who have purchased the property from non-residents, one of the challenge is struggling with income tax.
First of all, it is quite difficult to discover that whether the seller is a resident or non-resident in India according to the I-T Act and his tax status. For the property purchased from a non-resident, the tax is required to be deducted at 20 percent, while in some cases even higher as opposed to 1 percent where the seller is a tax resident.
The buyer can face prosecution in case of wrong deduction and penalties apply. According to section 194-IA, when the property is purchased from a resident, TDS obligations kick in only if the sale consideration is above Rs 50 lakh.
If the seller is a non-resident, TDS obligations apply in all cases irrespective of the quantum, according to section 195.
To be on the safer side we should know how to identify if the seller is a non-resident.
According to tax laws, lay buyers often get confused between residency and nationality. To know if the seller is a non-resident then you can check if the seller has given a power of attorney to someone else, it’s likely he is a non-resident. Tax residency in India is determined based on the number of days the individual has spent in India in the relevant financial year as well as a look-back period of four financial years said the officials. You must obtain the stay details in India of the seller, which include copies of passport covering this period.
If you are buying the property then you should get the agreement or sale deed verified by an advocate to safeguard their interests from disputes arising out of arrears of income tax liabilities, if any.