TDS When Buying Property From an NRI (Section 195)

Short answer: When you buy immovable property in India from a Non-Resident Indian (NRI), you must deduct Tax Deducted at Source (TDS) under Section 195 of the Income-tax Act. The TDS is calculated on the total sale price, not just the capital gain. The rate depends on the seller's holding period: 12.5% for long-term gains and 30% for short-term gains, plus applicable surcharge and cess. The buyer must obtain a TAN to complete this process.

What is Section 195 and why does it apply to property buyers?

Section 195 requires any person responsible for paying any sum chargeable to tax to a non-resident to deduct income tax at the rates in force. When an NRI sells a property situated in India, the resulting capital gain is income that is taxable in India. Therefore, as the buyer making the payment, you are legally obligated to deduct this tax at the source before paying the NRI seller. This provision ensures that the tax due to the Indian government from the non-resident is collected efficiently.

What are the TDS rates for buying property from an NRI?

The TDS rate is determined by the nature of the capital gain for the NRI seller, which depends on how long they held the property.

• Long-Term Capital Gain (LTCG): If the NRI held the property for more than 24 months, the gain is long-term. The applicable tax rate is 12.5% (as per changes effective from 23 July 2024), plus any applicable surcharge and cess.
• Short-Term Capital Gain (STCG): If the property was held for 24 months or less, the gain is short-term. It is taxed at the NRI's applicable income tax slab rates. For NRIs, this is generally the maximum marginal rate of 30%, plus applicable surcharge and cess.

Here is a summary of the rates (excluding surcharge and cess for simplicity):

Holding Period	Type of Gain	Base TDS Rate	Rate including Cess (4%)
More than 24 months	Long-Term (LTCG)	12.5%	13%
24 months or less	Short-Term (STCG)	30%	31.2%

Surcharge is an additional tax levied on high-income earners and will apply if the NRI's total income in India exceeds ₹50 lakhs. The buyer must factor this into the TDS calculation.

How is the TDS amount calculated on the property sale?

By default, TDS must be deducted on the entire sale consideration, not on the calculated capital gains amount. This is a crucial point of difference from TDS on property purchased from a resident. For example, if you buy a property from an NRI for ₹1 Crore, you must calculate TDS on the full ₹1 Crore, even if the seller's actual profit is much lower. This can lead to a significant portion of the sale proceeds being locked up as TDS, which the NRI seller would then have to claim as a refund by filing an income tax return in India. To avoid this, the seller can use a specific provision.

What is a Lower Deduction Certificate (Form 13)?

A Lower Deduction Certificate is the most practical solution to the problem of high TDS on the entire sale value. The NRI seller can make an application to their Assessing Officer (AO) in Form 13, providing details of the transaction and a calculation of their actual capital gains and tax liability. If the AO is satisfied that the actual tax liability is lower than the TDS calculated on the total sale price, they will issue a certificate under Section 197. This certificate directs the buyer to deduct tax at a specified lower rate or deduct a specific, smaller amount. This is highly beneficial for the NRI seller as it improves their cash flow significantly.

What are the compliance steps for the buyer after deducting TDS?

As a buyer, you must follow these steps meticulously to be compliant:

1. Obtain TAN: You must apply for and obtain a Tax Deduction and Collection Account Number (TAN). Unlike buying from a resident (where PAN is sufficient), TAN is mandatory for deducting tax under Section 195.
2. Deduct TDS: Calculate and deduct the correct TDS amount from the sale consideration on or before making the payment to the NRI seller.
3. Deposit TDS: Deposit the deducted tax with the government using Challan No./ITNS 281. The due date is the 7th of the month following the month in which TDS was deducted.
4. File Form 27Q: You must file a quarterly TDS return in Form 27Q, which is specifically for payments made to non-residents. The due dates are July 31, October 31, January 31, and May 31 for the respective quarters.
5. Issue Form 16A: After filing Form 27Q, you must download the TDS certificate (Form 16A) from the TRACES portal and provide it to the NRI seller. This is their proof of tax payment.

Feature	Buying from a Resident (Sec 194-IA)	Buying from a Non-Resident (Sec 195)
Applicable Section	Section 194-IA	Section 195
TDS Rate	1%	Varies (12.5% or 30% + surcharge & cess)
Basis for TDS	Total sale consideration	Total sale consideration (unless a Form 13 certificate is obtained)
Threshold	Sale consideration ≥ ₹50 lakhs	No threshold; applies from ₹1
TAN Requirement	No, PAN is sufficient	Yes, TAN is mandatory for the buyer
TDS Form	Form 26QB	Form 27Q
TDS Certificate	Form 16B	Form 16A

Worked example

Mr. Armaan, a resident of Bengaluru, is buying a residential flat in Jayanagar from Ms. Sunita, an NRI living in Dubai. The transaction takes place in September 2026.

• Sale Consideration: ₹95,00,000
• Ms. Sunita purchased the flat in: April 2017 for ₹45,00,000
• Holding Period: Over 9 years (more than 24 months), so it is a Long-Term Capital Gain (LTCG).

Step 1: Calculate Ms. Sunita's actual capital gains tax liability.

• Indexed Cost of Acquisition: We need the Cost Inflation Index (CII). Let's assume CII for FY 2017-18 was 272 and for FY 2026-27 is 415 (hypothetical).
• Indexed Cost = ₹45,00,000 x (415 / 272) = ₹68,69,485
• Long-Term Capital Gain (LTCG): ₹95,00,000 - ₹68,69,485 = ₹26,30,515
• Tax on LTCG: @ 12.5% = ₹26,30,515 x 12.5% = ₹3,28,814
• Surcharge: Nil, as the total income (gain) is less than ₹50 lakhs.
• Health & Education Cess: @ 4% on tax = ₹3,28,814 x 4% = ₹13,153
• Total Actual Tax: ₹3,28,814 + ₹13,153 = ₹3,41,967

Step 2: Calculate Mr. Armaan's TDS obligation.

• Scenario A: Without a Lower Deduction Certificate

  • Mr. Armaan must deduct TDS on the full sale value.
  • TDS Rate for LTCG = 12.5% + 4% Cess = 13%.
  • TDS Amount: ₹95,00,000 x 13% = ₹12,35,000
  • Mr. Armaan will pay ₹82,65,000 to Ms. Sunita and deposit ₹12,35,000 as TDS.

• Scenario B: With a Lower Deduction Certificate (Form 13)

  • Ms. Sunita applies to the Income Tax Department and obtains a certificate directing Mr. Armaan to deduct TDS equal to her actual tax liability.
  • TDS Amount: ₹3,41,967
  • Mr. Armaan will pay ₹91,58,033 to Ms. Sunita and deposit ₹3,41,967 as TDS.

This example clearly shows the significant cash flow advantage for the NRI seller in obtaining a Lower Deduction Certificate.

Common mistakes

1. Applying Section 194-IA: Confusing the rules for buying from a resident (1% TDS above ₹50 Lakhs) with the rules for buying from an NRI (Section 195).
2. Forgetting to obtain a TAN: A buyer must have a TAN to deduct and deposit tax under Section 195. Failure to do so will prevent compliance.
3. Deducting TDS on gain without a certificate: The default rule is to deduct TDS on the entire sale consideration. Deducting on the gain portion is only allowed if the buyer has received a specific certificate under Section 197 from the tax department.
4. Incorrect TDS Rate Calculation: Forgetting to add the applicable surcharge (if income exceeds ₹50 lakhs) and the 4% Health and Education Cess to the base tax rate.
5. Failure to File Form 27Q: Not filing the quarterly TDS return is a non-compliance that attracts late fees and penalties.

How SP & SC helps

Navigating the complexities of Section 195 can be daunting for a property buyer. At SP & SC, we provide end-to-end assistance for both parties in an NRI property transaction. For buyers, we manage the entire TDS compliance process: TAN application, accurate TDS calculation, tax deposit, timely filing of Form 27Q, and issuance of Form 16A. For NRI sellers, our team expertly handles the application for a Lower Deduction Certificate (Form 13) to ensure minimum tax withholding and maximum liquidity. For complete peace of mind on property transactions involving NRIs, visit our TDS compliance services page.

Frequently asked questions

Do I need a TAN to buy property from an NRI?

Yes, as a buyer, you are mandatorily required to obtain a Tax Deduction and Collection Account Number (TAN) to deduct tax under Section 195. Your PAN is not sufficient for this compliance.

What if the property value is less than ₹50 lakhs?

The ₹50 lakh threshold for TDS applies only to property purchases from resident Indians under Section 194-IA. For purchases from an NRI, Section 195 applies, and there is no minimum threshold. TDS must be deducted regardless of the property's value.

Can the NRI seller claim a refund for excess TDS?

Yes. If a higher TDS amount is deducted (e.g., on the entire sale value), the NRI seller can file their Indian income tax return, declare the capital gain, show the TDS credit from Form 16A, and claim a refund of the excess tax paid.

How do I verify the seller's residential status?

It is the buyer's duty to correctly ascertain the seller's residential status. You should request a declaration from the seller, review their passport for entry/exit stamps to check their stay in India for the relevant financial year, and include a specific clause in the sale agreement where the seller confirms their non-resident status.

What are the due dates for depositing TDS and filing Form 27Q?

TDS must be deposited by the 7th day of the month following the month of deduction. Form 27Q is a quarterly TDS return, and its due dates are July 31, October 31, January 31, and May 31 for the quarters ending in June, September, December, and March, respectively.

Get a fixed-fee quote

If you are buying property from an NRI or are an NRI planning to sell your property in India, the compliance requirements can be complex. Share your documents with us, and we will provide a clear, written fixed-fee quote for handling the entire process, from TAN application and TDS calculations to filing returns and applying for lower deduction certificates. Contact SP & SC or message us on WhatsApp at +91 90356 74566. Our team of CAs and advocates will manage your transaction's tax compliance end-to-end.