29 May 2026When you buy property from an NRI seller in India, the transaction carries a tax obligation that most buyers are completely unprepared for. Under Section 195 of the Income Tax Act, 1961, the buyer is responsible for deducting TDS from the sale consideration before making payment to the NRI. Get this wrong and you face penalties, interest, and potential prosecution — even though you are the buyer, not the seller.
This guide covers everything a property buyer needs to know in 2026 when purchasing from an NRI seller.
Why the Buyer Bears the TDS Obligation
The logic behind Section 195 is straightforward: the NRI seller will leave India with the sale proceeds, and recovering tax from them later is difficult. The law therefore places the deduction obligation on the buyer — the party who is present in India, has the funds, and controls the payment. The buyer acts as a withholding agent on behalf of the Indian Revenue.
This is fundamentally different from Section 194-IA, which applies when an Indian resident buys property from another Indian resident. That section requires 1% TDS. Section 195 applies specifically to payments to non-residents and the rates are significantly higher.
TDS Rates Under Section 195 for Property Purchase from NRI
The applicable TDS rate depends on whether the property qualifies as a long-term or short-term capital asset in the hands of the NRI seller:
Long-Term Capital Gain (LTCG) — held more than 24 months:
Base rate: 20% on net long-term capital gains (indexation benefit available for properties acquired before 23 July 2024)
For properties acquired on or after 23 July 2024: 12.5% without indexation benefit (per the Finance (No. 2) Act, 2024)
Surcharge: Applicable at 10% (income between ₹50 lakh and ₹1 crore), 15% (₹1 crore to ₹2 crore), or 25% (above ₹2 crore)
Health and Education Cess: 4% on tax plus surcharge
Effective rate including surcharge and cess can reach 22.88% or higher on the gross sale price
Short-Term Capital Gain (STCG) — held 24 months or less:
Taxed at slab rates applicable to the NRI
Effective TDS rate can reach 30% plus surcharge and cess, going up to approximately 34.32%
The critical point: TDS under Section 195 is deducted on the gross sale consideration, not on the capital gain. Unless a lower deduction certificate has been obtained under Section 197, you must deduct at the applicable rate on the full payment amount.
Determining Whether the Property Is Long-Term or Short-Term
As the buyer, you need to establish the holding period. This requires the NRI seller to provide:
- Original purchase documents (sale deed or allotment letter with date)
- Registration certificate showing date of registration in the seller's name
- For inherited or gifted property: the original owner's date of acquisition is used for computing the holding period
If the NRI seller cannot or will not provide documentation of the purchase date, you should default to the higher rate (treating it as STCG) to protect yourself from a shortfall deduction notice.
The Section 197 Lower Deduction Certificate: How It Changes Your Obligation
An NRI seller who has computed their actual capital gains liability may find that TDS at the standard rate will far exceed their actual tax due. In such cases, the seller can apply to the Assessing Officer under Section 197 for a lower or nil deduction certificate.
If the seller provides you with a valid Section 197 certificate before you make payment, you must deduct TDS at the rate specified in that certificate — which may be significantly lower than the standard rate, or even nil. This is the seller's right under the statute.
As the buyer, verify the certificate carefully:
- Certificate must be in Form 13A (issued by the AO)
- It must specifically mention the buyer's name and PAN and the property transaction details
- It must be valid for the current financial year
- The PAN on the certificate must match the seller's PAN on the sale deed
Keep the original certificate safely — you will need it when filing Form 27Q to justify the lower deduction.
Form 27Q: Filing Requirements for the Buyer
TDS deducted from payment to an NRI must be deposited and reported through Form 27Q — not Form 26QB (which applies to resident-to-resident transactions). This is where many buyers go wrong by filing the wrong form.
TAN Requirement: To deduct TDS under Section 195 and file Form 27Q, you need a Tax Deduction Account Number (TAN). If you do not already have a TAN (most individual buyers do not), apply immediately through Form 49B. Processing takes approximately 7–10 working days.
Challan 281: After deducting TDS, deposit the amount to the government using Challan ITNS 281, selecting Section 195 and specifying the seller's PAN.
Form 27Q Filing Due Dates:
- Q1 (April–June): 31 July
- Q2 (July–September): 31 October
- Q3 (October–December): 31 January
- Q4 (January–March): 31 May
Late filing attracts a fee under Section 234E of ₹200 per day until the return is filed, subject to a cap of the TDS amount. This is automatic — there is no waiver provision.
Form 16A: After filing Form 27Q, you must issue a TDS certificate in Form 16A to the NRI seller within 15 days of the due date for filing. The seller needs this to claim credit for TDS deducted and to file their ITR in India.
Practical Step-by-Step Checklist for Buyers
- Before signing the sale agreement: Confirm the seller is an NRI (passport, visa status, bank account type — NRE/NRO). Establish holding period. Check whether seller intends to apply for Section 197 certificate.
- Apply for TAN: Do this immediately — do not wait until close to completion. You need TAN to deposit TDS.
- Compute TDS amount: Get CA assistance to determine the correct rate (LTCG or STCG, surcharge applicable based on estimated gain). If no Section 197 certificate is available, deduct on gross consideration at the applicable rate.
- Deduct TDS at payment: Withhold the TDS amount from each payment instalment. TDS applies on every instalment, not just the final payment.
- Deposit TDS: Deposit using Challan 281 within 7 days of the end of the month in which deduction is made (for the last month of the quarter, deposit by 31 May/31 July/31 October/31 January as applicable).
- File Form 27Q: File the quarterly TDS return within due dates. Use a CA or TDS consultant — the form has several NRI-specific fields that must be filled correctly.
- Issue Form 16A: Provide TDS certificate to seller promptly so they can file their ITR.
- Register sale deed only after TDS compliance is in order: Sub-registrars in several states now require evidence of Form 27Q filing or at least TDS deposit before registration. Check local requirements.
What If TDS Is Not Deducted or Is Short-Deducted?
If you fail to deduct TDS or deduct less than the required amount, you as the buyer become a defaulting deductor under Section 201 of the Income Tax Act. Consequences include:
- Interest under Section 201(1A): 1% per month from the date TDS was deductible to the date of actual deduction, and 1.5% per month from date of deduction to date of deposit
- Penalty under Section 271C: Equal to the amount of TDS not deducted
- Disallowance of purchase cost: The buyer's purchase consideration may be subject to additional tax treatment if TDS was not deducted
- Prosecution in extreme cases under Section 276B
These are serious consequences. The NRI seller eventually paying tax on their Indian income does not extinguish your liability as the deductor if you failed to deduct.
DTAA Considerations That May Reduce TDS
India has Double Taxation Avoidance Agreements (DTAA) with over 90 countries. Where the NRI seller is resident in a country with which India has a DTAA, the tax rate under the treaty may be lower than the domestic rate. The seller can claim DTAA benefit by providing:
- Tax Residency Certificate (TRC) from their country of residence — the format varies by country
- Form 10F self-declaration
- PAN (without PAN, DTAA benefit cannot be given and TDS is at the higher of the applicable rate or 20%)
If the seller provides these documents and DTAA benefit is applicable, the buyer can deduct at the DTAA rate. This must be processed through a Section 197 certificate — the buyer cannot unilaterally apply DTAA benefit without the AO's endorsement.
Frequently Asked Questions
Q: The NRI seller says they have no tax liability because the property was their primary residence. Do I still need to deduct TDS?
A: Yes, you must still deduct unless the seller produces a nil deduction certificate under Section 197. The exemption under Section 54 (reinvestment in another property) or Section 54EC (investment in specified bonds) is a claim the seller makes in their ITR — it does not automatically reduce your TDS obligation. Only a Section 197 certificate from the AO eliminates or reduces your deduction requirement.
Q: The property is jointly owned by an Indian resident and an NRI. What TDS applies?
A: TDS under Section 194-IA at 1% applies to the resident's share of consideration. TDS under Section 195 at the full applicable rate applies to the NRI's share. You need to compute both separately and file both Form 26QB (for the resident's share) and Form 27Q (for the NRI's share).
Q: We are paying in instalments over 18 months. When do we deduct TDS?
A: TDS is deductible at the time of each credit or payment to the seller, whichever is earlier. Each instalment is subject to TDS at the applicable rate on that instalment amount. You cannot wait until the final payment to deduct the full TDS.
Q: The builder is collecting payment on behalf of the NRI seller. Do we pay TDS to the builder?
A: No. TDS must be deposited directly to the government via Challan 281 in the seller's PAN, not paid to the builder or any intermediary. The net amount (sale consideration minus TDS) is what you pay to the seller or their authorised representative.
Q: Can the NRI seller refuse to sell if I insist on deducting TDS?
A: The NRI seller cannot legally require you to waive TDS — doing so would make you liable for the tax, interest, and penalties. The proper solution is for the seller to obtain a Section 197 certificate if they believe their actual liability is lower. Some sellers include clauses in the agreement requiring buyers not to deduct TDS — these clauses are legally ineffective and you should not agree to them.
How We Can Help
At Regi Tom Antony And Associates, we regularly assist property buyers in NRI transactions with TDS computation, TAN application, Form 27Q preparation and filing, and coordination with the seller's CA for Section 197 certificate facilitation. Given the complexity and the personal liability involved, this is not an area where buyers should rely on the seller's CA or a property agent.
If you are in the process of buying a property from an NRI, contact us early — ideally before you sign the agreement of sale. The TDS structure is negotiable in terms of timing and mechanics; getting the framework right from the start prevents expensive corrections later.
This article is for general information only. Tax rules change; verify current provisions with a qualified CA before your transaction.