Sale of Property in India by an NRI – TDS provisions for Buyers & Sellers

Buying or selling property is a significant financial milestone for anyone. However, when a resident Indian purchases property from a Non-Resident Indian (NRI), the transaction comes with a unique set of tax compliance challenges that are often overlooked. The process might seem standard on the surface, but the tax implications, particularly regarding Tax Deducted at Source (TDS), are vastly different and place a significant responsibility on the buyer. Understanding the nuances of a sale of property by NRI is not just beneficial; it’s a legal necessity to avoid steep penalties from the Income Tax Department. This guide will walk both buyers and NRI sellers through their respective obligations, covering the TDS provisions for property sale NRI and ensuring a smooth, compliant transaction for everyone involved.

Key Concepts in a Sale of Property by an NRI in India

Before diving into the tax specifics, it’s essential to understand the foundational legal concepts that govern the entire transaction. The residential status of the seller is the single most important factor that changes the rules of the game for the buyer.

Who is an NRI for Tax Purposes?

In the context of Indian tax law, a Non-Resident Indian (NRI) is an individual who is an Indian citizen but has not resided in India for a specified period during a financial year. According to the Income Tax Act, 1961, an individual is considered a “resident” if they meet either of these conditions in a financial year:

1. They are in India for 182 days or more.
2. They are in India for 60 days or more during that year AND have been in India for 365 days or more in the 4 preceding years.

If an individual does not meet either of these conditions, they are classified as a Non-Resident for tax purposes for that financial year. It is crucial for the buyer to verify the seller’s residential status at the time of the transaction, as this status, not their citizenship, dictates the applicable tax laws.

The NRI Property Sale Process in India: An Overview

The NRI property sale process India involves several legal checkpoints to ensure its validity. Beyond the standard procedures of title verification and property valuation, transactions involving NRIs must comply with the guidelines set by the Foreign Exchange Management Act (FEMA). These regulations govern how funds from the sale can be repatriated (transferred abroad) by the NRI seller. A well-drafted sale agreement that clearly outlines the sale consideration, payment terms, and the responsibilities of both parties is paramount. This agreement forms the basis for all subsequent tax calculations and compliance procedures.

TDS Provisions for Buyers When Purchasing Property from an NRI

As a buyer, your role in this transaction extends beyond simply paying the agreed-upon price. You are legally designated as the person responsible for deducting and depositing the correct amount of tax with the government. Failure to do so can have serious financial consequences for you.

What is TDS and Why is it Different for an NRI Seller?

TDS, or Tax Deducted at Source, is a mechanism where the government collects tax at the very source of income. When you buy property from a resident seller for over ₹50 lakhs, you deduct 1% TDS under Section 194IA. However, when the seller is an NRI, this rule does not apply. Instead, Section 195 of the Income Tax Act comes into play.

The difference is critical. Section 195 governs all payments made to non-residents and has no minimum threshold. This means TDS is applicable on the sale of property by NRI irrespective of the property’s value, even if it’s less than ₹50 lakhs. This is a common point of confusion for buyers and sellers TDS in India.

Here’s a clear comparison:

Feature	Sale from a Resident Seller (Sec 194IA)	Sale from an NRI Seller (Sec 195)
Applicable Section	Section 194IA of the Income Tax Act	Section 195 of the Income Tax Act
TDS Rate	1% of the sale consideration	20% (+ Surcharge & Cess) on the sale consideration
Threshold Limit	Applicable only if sale consideration is ₹50 lakhs or more	Applicable on the entire sale consideration, no threshold
Buyer’s Requirement	Buyer needs only a PAN	Buyer must have a TAN (Tax Deduction Account Number)
TDS Form for Deposit	Form 26QB	Form 27Q
TDS Certificate	Form 16B	Form 16A

How to Calculate and Deduct TDS

The calculation of TDS in an NRI property transaction is straightforward but requires careful attention.

• TDS Rate: The standard TDS rate applicable is 20%, plus a surcharge (if applicable based on the total income) and a 4% Health and Education Cess. This effectively brings the rate to 20.8% in most cases, and it can go higher if a surcharge is levied.
• Calculation Base: This is the most crucial point. TDS is deducted on the total sale consideration of the property, not just on the capital gains amount that the NRI seller earns. For example, if you buy a property from an NRI for ₹80 lakhs, you must deduct TDS on the full ₹80 lakhs, not on the profit the seller made.
• Impact of Long-Term Capital Gains: Even if the property is a long-term capital asset for the seller (held for more than 24 months), the default TDS deduction rate of 20% (plus surcharge and cess) on the entire sale value remains applicable. The buyer cannot unilaterally decide to deduct tax only on the estimated capital gains. The only way to reduce this high TDS amount is if the NRI seller provides a Lower Deduction Certificate, which we will discuss later.

Step-by-Step Compliance Guide for the Buyer

If you are buying property from an NRI, follow these steps meticulously to ensure you are fully compliant:

1. Obtain a TAN: Your first step is to apply for and obtain a Tax Deduction and Collection Account Number (TAN). Unlike a transaction with a resident where your PAN is sufficient, TAN is mandatory for deducting TDS under Section 195. You can apply for a TAN online through the NSDL portal.
2. Deduct TDS: At the time of making the payment to the NRI seller, calculate the TDS at the applicable rate (e.g., 20.8%) on the total sale price and deduct this amount from the payment. You will pay the net amount (Sale Price – TDS) to the seller.
3. Deposit TDS with the Government: The deducted TDS must be deposited with the government online on or before the 7th of the following month in which the deduction was made. This payment is made using Challan No./ITNS 281, and you will need to file a statement in Form 27Q on a quarterly basis.
4. Issue TDS Certificate: After filing Form 27Q, you must download the TDS certificate, Form 16A, from the TRACES portal and provide it to the NRI seller. This form is the seller’s proof that tax has been deducted and paid on their behalf, which they will need to claim credit when filing their Indian Income Tax Return.

Penalties for Non-Compliance

The Income Tax Department is very strict about compliance with TDS provisions. If the buyer fails to deduct or deposit the TDS on time:

• Interest: Interest will be levied at 1% per month for non-deduction of TDS and 1.5% per month for non-payment of TDS after deduction.
• Penalty: A penalty equivalent to the amount of TDS not deducted or paid can be imposed.
• Disallowance of Expense: In some cases, the expenditure (the cost of the property) could be disallowed for tax purposes, though this is more relevant in business transactions.

Understanding NRI Property Taxation in India

While the buyer handles the TDS deduction, the final tax liability rests with the NRI seller. The TDS deducted is merely an advance tax paid against their total tax liability on the capital gains earned from the sale. Understanding the tax implications for NRI property sale is key for the seller to manage their finances effectively.

Calculating Capital Gains Tax

The profit or gain arising from the sale of a property is termed “Capital Gains.” The tax on these gains depends on the holding period of the property. For a detailed breakdown, you can read our guide on How are capital gains taxed for NRIs on the sale of property in India?.

• Short-Term vs. Long-Term: For immovable property like a house or land, if it is held for 24 months or less, the gain is a Short-Term Capital Gain (STCG). If held for more than 24 months, it is a Long-Term Capital Gain (LTCG).
• Short-Term Capital Gains (STCG): These are added to the NRI’s other income in India and are taxed at the applicable income tax slab rates for the financial year.
• Long-Term Capital Gains (LTCG): These are taxed at a flat rate of 20% after the benefit of indexation. Indexation is a process that adjusts the purchase price of the property for inflation, which effectively reduces the quantum of the taxable gain. This is one of the most important real estate sale NRI tax rules.

A Smart Move: Applying for a Lower/Nil Deduction Certificate

As we saw, the buyer deducts a hefty 20%+ TDS on the entire sale value, which can block a significant amount of the seller’s funds, especially when the actual capital gain is much lower. For example, on a ₹1 crore sale, the TDS would be over ₹20 lakh, even if the actual capital gains tax liability after indexation is only ₹5 lakh.

To solve this problem, the Income Tax Act provides a crucial remedy. The NRI seller can apply to their Assessing Officer (AO) by filing Form 13 to obtain a Lower or Nil Deduction Certificate. Our detailed guide, Lower TDS Deduction Certificate (Form 13): Who Should Apply and How?, walks you through the entire process.

Here’s how it works:

• The NRI seller submits an application in Form 13, providing details of the property, the sale transaction, and a calculation of their estimated capital gains.
• The AO reviews the application and, upon being satisfied with the calculation, issues a certificate addressed to the buyer.
• This certificate specifies the exact rate at which TDS should be deducted (which could be a lower rate or even zero).
• The buyer can then deduct TDS at this certified rate instead of the default 20%+.

This is a proactive step that every NRI seller should take. It significantly improves cash flow by ensuring that only the tax on the actual profit is deducted upfront, rather than a large chunk of the entire sale price.

Claiming a TDS Refund

What if the seller could not obtain a Lower Deduction Certificate on time and the buyer has already deducted the full TDS? In such a scenario, the NRI seller is not at a loss. They can file their Income Tax Return (ITR) in India for the relevant financial year, declare the capital gains, and claim a refund of the excess TDS that was deducted. The ITR will show the actual tax liability, and the difference between the TDS paid and the actual tax due will be refunded by the Income Tax Department. To understand the complete procedure, refer to our simple guide on How to Claim a TDS Refund: A Simple Guide.

Conclusion: Ensuring a Smooth Transaction

The legal and tax framework surrounding the sale of property by NRI is designed to ensure proper tax collection at the source. For buyers, the responsibilities are clear and non-negotiable: obtaining a TAN and deducting TDS under Section 195 is a mandatory legal duty. For sellers, being proactive by applying for a lower TDS certificate through Form 13 is the key to managing cash flow and avoiding unnecessary fund blockages. By understanding and adhering to these distinct roles, both parties can navigate the transaction smoothly, ensuring full compliance and protecting themselves from any future legal or financial complications.

Navigating the property transfer tax for NRI India can be complex. From obtaining a TAN for the buyer to assisting the seller with Form 13 applications, TaxRobo ensures your property transaction is seamless and fully compliant. Contact our experts today!

FAQs on Sale of Property by NRI

1. Is TAN mandatory for the buyer when purchasing property from an NRI?

Answer: Yes, it is absolutely mandatory. Unlike the TDS deduction process for a resident seller (under Section 194IA), where the buyer’s PAN is sufficient, Section 195 requires the buyer to obtain a Tax Deduction and Collection Account Number (TAN) to deduct and deposit TDS for a transaction with an NRI seller.

2. What happens if the property is jointly owned by a Resident Indian and an NRI?

Answer: The TDS provisions must be applied separately to each co-owner’s share. TDS under Section 195 (at 20%+) will apply only to the portion of the sale consideration being paid to the NRI co-owner. For the resident co-owner’s share, TDS rules under Section 194IA (at 1%) would apply, but only if their individual share of the property value exceeds ₹50 lakhs or the total property value exceeds ₹50 lakhs.

3. Can an NRI seller save on capital gains tax by reinvesting in another property?

Answer: Yes. An NRI is eligible to claim tax exemptions on long-term capital gains under the same conditions that apply to a resident. This includes exemptions under Section 54 (reinvestment of capital gains in another residential house in India) and Section 54F (reinvestment of the net sale consideration in a residential house in India).

4. Does GST apply to the sale of property by an NRI?

Answer: No, GST does not apply to the sale of a completed property (i.e., a resale property where a completion certificate has been issued) or the sale of land. This rule is the same for both resident and NRI sellers. GST is only applicable to the sale of under-construction properties directly from a developer.