If you are an NRI selling property in India and the buyer mentions deducting 1% TDS, stop the transaction. That 1% rate under Section 194IA applies only when the seller is a resident Indian. When you sell as an NRI, the buyer is required to deduct TDS under Section 195 of the Income Tax Act 1961 at rates that are significantly higher — in many cases, exceeding 12% of the full sale consideration, not just the gain.
Getting this wrong before the sale closes results in underpayment of TDS, penalties for the buyer, and demand notices for you. This post explains how NRI property sale TDS works, what the buyer must do, and how to reduce the deduction legally before you sign.
Quick answer
When an NRI sells immovable property in India, the buyer must deduct TDS under Section 195 at the applicable capital gains rate — not the flat 1% of Section 194IA. The NRI seller then files an ITR in India, takes credit for TDS deducted, and claims a refund if excess was withheld.
Before acting, check:
- Has the buyer confirmed they will deduct TDS under Section 195 (not Section 194IA)?
- Is the property held for more than 24 months? This determines whether long-term or short-term capital gains rates apply.
- Have you applied for a lower TDS certificate under Section 197 before the sale closes? Once the buyer has remitted TDS, the certificate has no retrospective effect.
The TDS Trap NRI Sellers Walk Into
Section 194IA requires a buyer to deduct 1% TDS when purchasing property worth ₹50 lakh or more from a resident Indian. The section is simple, widely known, and consistently misapplied to NRI transactions.
When the seller is a non-resident, Section 194IA does not apply. Section 195 governs TDS on all payments made to non-residents. Under Section 195, the buyer deducts at “rates in force” — which, for property sale proceeds, means the applicable capital gains tax rate, not a flat 1%.
The financial gap is significant. An NRI selling a property with long-term capital gains may face TDS of 12.5% or more on the entire sale consideration — before the capital gains amount is even computed. If the buyer deducts only 1%, both parties face exposure: the buyer for under-deduction, and the NRI seller for shortfall in advance tax.
NRI Property Selling in India: Which TDS Section Actually Applies?
The rule is this: the buyer must first determine the seller’s residential status. If the seller is a non-resident under FEMA and the Income Tax Act, Section 195 applies, not Section 194IA. The buyer must then:
- Obtain a TAN (Tax Deduction and Collection Account Number) if they do not already hold one — a TAN is required to deposit TDS and file the return
- Deduct TDS at the applicable rate at the time of payment or credit of consideration, whichever is earlier
- Deposit the TDS with the government within prescribed deadlines
- File a TDS return in Form 27Q — the quarterly return for payments to non-residents, distinct from Form 26QB used for resident sellers
- Issue a TDS certificate in Form 16A to the NRI seller
This is substantially more involved than the resident property transaction process. A buyer who has only dealt with resident sellers may be unfamiliar with Form 27Q, and banks often do not proactively guide them. It is in the NRI seller’s direct interest to confirm the buyer knows their obligations — or to engage a CA to coordinate both sides of the transaction.
What Rate Does the Buyer Deduct?
The rate depends on whether the property falls into long-term or short-term capital gains.
Long-term capital gains (LTCG): Property held for more than 24 months is a long-term capital asset. For sales completed on or after July 23, 2024, the LTCG tax rate is 12.5% without indexation — a change brought in by the Finance Act 2024, which removed the indexation option and reduced the rate from 20%. For sales before July 23, 2024, the rate was 20% with indexation.
Short-term capital gains (STCG): Property held for 24 months or less is a short-term capital asset. Gains are taxed at the applicable income tax slab rate — effectively 30% for most NRIs given the typical quantum of property gains.
In both cases, applicable surcharge (based on total income) and 4% health and education cess are added. TDS is deducted on the full sale consideration, not just the gain — which is why the effective TDS amount can feel disproportionately large.
A note on both tax laws. Section 195 (withholding on payments to non-residents) is in the Income Tax Act 1961. The Income Tax Act 2025 carries this buyer obligation forward — the duty to deduct at rates in force continues under the new framework. The Finance Act 2024 change to LTCG rates applies under both legislative frameworks for sales in the relevant period. Section references in the 2025 Act should be confirmed against the current bare Act at incometaxindia.gov.in.
Capital gains exemptions under Sections 54, 54F, and 54EC of the Income Tax Act 1961 are available to NRI sellers and are carried forward in the Income Tax Act 2025. The exact section references in the 2025 Act should be verified, as provisions may have been renumbered or consolidated.
How to Reduce the TDS Through Section 197
An NRI can apply to their Jurisdictional Assessing Officer for a lower TDS certificate under Section 197. This certificate directs the buyer to deduct TDS at a reduced rate — computed on the NRI’s expected actual tax liability for the year, rather than on the full consideration.
The application must be filed before the sale transaction is completed and TDS is deducted. Once the buyer has deposited TDS with the government, a Section 197 certificate cannot claw it back. Excess TDS can only be recovered through the ITR refund process, which takes considerably longer.
If you are reinvesting the gains under Section 54 or Section 54EC, your net tax liability after exemptions may be nil or minimal. A Section 197 certificate based on this position prevents overcollection entirely.
Capital Gains Exemptions Still Available to NRIs
NRIs can reduce or eliminate capital gains tax through reinvestment, provided the conditions are met:
Section 54: If the property sold is a residential house (long-term), gains reinvested in another residential property in India are exempt to the extent of reinvestment. Purchase window: 1 year before or 2 years after the sale. Construction window: 3 years after the sale.
Section 54F: Available when the asset sold is any long-term capital asset other than a residential house. The entire net consideration (not just the gain) must be reinvested in a residential property in India within the same timelines as Section 54.
Section 54EC: Up to ₹50 lakh of LTCG can be invested in specified long-term bonds — currently NHAI and REC bonds — within 6 months of the sale to claim exemption. These bonds carry a 5-year lock-in.
These exemptions are available to NRI sellers. However, TDS is deducted upfront on the full consideration regardless. The NRI claims the exemption in the ITR filed in India and receives a refund of excess TDS deducted.
Step by Step: Managing Your NRI Property Sale TDS:
Once the sale is complete, file your ITR in India for the relevant assessment year. Report the capital gains, claim applicable exemptions (Sections 54, 54F, or 54EC), and set off the TDS already deducted against your total tax liability. If TDS exceeds the tax owed, the refund is credited to your Indian bank account.
After settling taxes, you can repatriate the net sale proceeds from your NRO account — up to USD 1 million per financial year — after a CA issues Form 15CA and Form 15CB confirming that taxes have been paid on the amount being remitted.
When You Should Not Skip the Lower Certificate
The Section 197 certificate is worth applying for in most NRI property sales. Three situations make it especially important:
The property carries a modest gain relative to the sale price. TDS under Section 195 is computed on the full consideration. If you bought a property for ₹60 lakh and are selling for ₹80 lakh, the taxable gain is ₹20 lakh, but TDS may be deducted on ₹80 lakh at 12.5% — meaning ₹10 lakh held back, far exceeding your actual liability.
You are reinvesting the gains. If your net tax liability after Section 54 or 54EC exemptions is nil, paying full TDS upfront and then waiting for a refund ties up capital that you need for the reinvestment itself.
The buyer is inexperienced with NRI transactions. Errors in the TDS rate applied or the wrong form filed (26QB instead of 27Q) create compliance problems that are time-consuming and expensive to correct retroactively.
📋 Documents to Keep Ready
- Original purchase deed and sale deed (for computing cost of acquisition and gain)
- PAN card — mandatory for the NRI seller; all TDS is mapped to this
- Form 16A issued by the buyer confirming TDS deducted and deposited
- Section 197 lower TDS certificate, if obtained from the Assessing Officer
- Proof of reinvestment under Section 54/54F (new property purchase agreement or construction receipts) or Section 54EC bond certificates
- NRO account statements showing credit of net sale proceeds
- Form 15CA and Form 15CB (for repatriation of proceeds abroad from NRO account)
- Passport and overseas address proof confirming NRI status
Final Takeaway
The most expensive mistake in an NRI property sale is discovering after the transaction that TDS was deducted under the wrong section, at the wrong rate, or on the wrong form. Section 195 governs NRI property sale TDS, the rates are tied to capital gains classification, and the lower TDS certificate under Section 197 exists precisely to prevent the overcollection that a standard rate on the full consideration produces.
Apply for the certificate before signing, confirm the buyer will file Form 27Q, plan any reinvestment within the statutory timelines, and file your ITR to close the loop. A CA engaged early saves considerably more than the cost of correction later.
Facing questions about NRI property sale TDS, Section 197 applications, or capital gains planning before you sell? eTaxMate can review your transaction, compute your tax position, coordinate the TDS process with the buyer, and file your ITR accurately.
This blog post is for general information only and does not constitute professional advice. Tax laws are subject to change and their application depends on individual facts and circumstances. Readers should consult a qualified professional before taking any action based on this content. eTaxMate accepts no liability for any action taken based on the information in this post.
Frequently Asked Questions
1. What TDS does a buyer deduct when buying property from an NRI?
The buyer must deduct TDS under Section 195 of the Income Tax Act 1961, not the flat 1% of Section 194IA which applies only to resident sellers. For long-term gains (property held over 24 months), the rate is 12.5% without indexation for sales from July 23, 2024. For short-term gains, the effective rate is the NRI’s applicable slab rate, typically 30%. Surcharge and 4% cess are added to both.
2. Can an NRI reduce the TDS on a property sale?
Yes. By applying to the Jurisdictional Assessing Officer in Form 13, filed online through the TRACES portal, for a lower TDS certificate under Section 197 before the sale closes, the NRI can have TDS deducted at a rate matching their actual tax liability — often much lower than TDS on the full consideration. The certificate must be obtained before TDS is deposited; it has no retrospective effect.
3. Does Section 194IA (1% TDS) apply when an NRI sells property?
No. Section 194IA applies only when the seller is a resident Indian. When the seller is a non-resident, Section 195 applies — at significantly higher rates based on the capital gains tax applicable to the NRI’s gain. Buyers who mistakenly deduct only 1% expose both themselves and the NRI seller to tax department scrutiny.
4. What is Form 27Q and why does it matter for NRI property sales?
Form 27Q is the TDS return filed by the buyer for payments made to non-residents. It is different from Form 26QB, which is used for resident sellers. The buyer must file Form 27Q quarterly and issue a Form 16A TDS certificate to the NRI seller. Filing the wrong form is a compliance error that requires rectification.
5. Can NRIs claim Section 54 exemption on property sale gains?
Yes. NRIs can claim the Section 54 exemption by reinvesting long-term capital gains from a residential property into another residential property in India — purchased within 1 year before or 2 years after the sale, or constructed within 3 years. Section 54EC (investment in specified bonds up to Rs 50 lakh within 6 months) is also available. TDS is still deducted upfront; the exemption is claimed in the ITR to generate a refund.
6. Does the NRI need to file an ITR in India after selling property?
Yes. The NRI must file an ITR in India for the year of sale, report the capital gains, claim any available exemptions (Sections 54, 54F, or 54EC), and take credit for TDS deducted. If TDS exceeds the final tax liability, a refund is processed. Filing also confirms income and facilitates repatriation of proceeds from the NRO account.