TDS on Property Sale by an NRI: What Section 195 Actually Requires
Buying property from an NRI seller comes with a materially different, and much higher, TDS obligation than buying from a resident seller — a distinction that catches many buyers off guard when they assume the familiar 1% TDS rate applies universally.
Why NRI property sales are treated differently
For a resident seller, TDS on property sale under Section 194-IA is a flat 1% of the sale consideration (where the value exceeds the specified threshold). For an NRI seller, the applicable provision is instead Section 195, which requires TDS at a substantially higher rate — based on the applicable capital gains tax rate on the transaction (differing for short-term versus long-term capital gains, plus applicable surcharge and cess) — rather than the flat 1% rate that applies to resident sellers. This reflects the underlying policy concern that it is administratively much harder for tax authorities to pursue an NRI seller directly for tax collection after the fact, making upfront withholding by the buyer the more reliable collection mechanism.
The buyer's specific compliance burden
The buyer needs a TAN
Unlike TDS under Section 194-IA (which a resident buyer can typically discharge using their PAN through a simplified process), TDS deduction under Section 195 generally requires the buyer to obtain a Tax Deduction and Collection Account Number (TAN) and file the TDS return through the standard TDS compliance process (Form 27Q, applicable to payments to non-residents) — this is an additional procedural step a resident buyer purchasing from an NRI seller needs to specifically undertake, and is often overlooked until late in the transaction.
How a Lower Deduction Certificate reduces the burden
Because the standard Section 195 TDS rate is based on the applicable tax rate on the full sale consideration characterisation by default (rather than automatically accounting for the seller's actual cost of acquisition, indexation benefit, or exemptions the seller may be entitled to claim), the resulting TDS deducted can often be far higher than the NRI seller's actual final tax liability on the transaction — leading to the seller having to claim a refund only after filing their return. To avoid this cash-flow mismatch, an NRI seller can apply to the tax department for a Lower (or Nil) Deduction Certificate under Section 197, which — if granted — allows the buyer to deduct TDS at a reduced rate more closely reflecting the seller's actual expected tax liability, rather than the higher default rate.
Practical steps for both parties in an NRI property transaction
- The buyer should obtain a TAN early in the transaction process, and confirm the seller's NRI/resident status clearly and in writing before determining which TDS provision (194-IA vs 195) applies.
- The seller, if their actual tax liability is likely to be meaningfully lower than the default TDS rate would produce, should apply for a Lower Deduction Certificate well before the transaction closes, since processing this application takes time and should not be left until the last moment before payment.
- Both parties should ensure the TDS actually deducted is properly deposited and reported (Form 27Q), and that the seller receives the corresponding TDS certificate (Form 16A) needed to claim credit for the tax deducted when filing their own return.