By FMTeam Rajesh finally found his dream apartment in Bengaluru after months of searching. The 3 BHK was perfect, the price was reasonable, and the seller agreed to all his terms quickly. There was just one detail Rajesh did not pay much attention to — the seller, Mr. Kapoor, had moved to Canada 15 years ago and was now a Non-Resident Indian.
Rajesh deducted 1% TDS, the standard amount he had always heard about for property purchases above ₹50 lakh, and proceeded with the deal.
Six months later, the Income Tax Department sent him a notice demanding an additional ₹18 lakh as TDS shortfall, plus interest and penalty. Why? Because TDS rules for buying property from an NRI are completely different from those for a resident seller, and Rajesh had broken almost every one of them without knowing.
This mistake happens regularly across India. Here is everything you need to know before buying a property from an NRI.
Why NRI Property TDS Rules Are Different
When you buy property from a resident Indian, the TDS rate is a simple 1% on the sale value above ₹50 lakh under Section 194-IA.
When you buy from an NRI, the rules shift to Section 195, which is far stricter:
- TDS applies regardless of property value
- The rate depends on capital gains, not just the sale price
- The buyer has to take a TAN number
- The buyer must file separate TDS returns
- Penalties for mistakes are severe
The government treats NRI property transactions as high-risk for tax evasion, so the responsibility on the buyer is much higher.
The Applicable TDS Rates
The exact rate depends on whether the property is held for long term or short term.
For Long-Term Capital Gains (Property Held Over 24 Months)
- Base rate: 12.5% (after Budget 2024-25 changes)
- Surcharge (if applicable based on sale price): 10% to 37%
- Health and Education Cess: 4%
Effective TDS can range from 12.5% to over 14.95% depending on the sale value.
For Short-Term Capital Gains (Property Held Under 24 Months)
- TDS at 30% of the sale value
- Plus applicable surcharge and cess
- Effective rate can go up to 34.32%
This is a massive difference from the 1% you would deduct for a resident seller.
TDS Is on Sale Value, Not Profit
This is the most painful surprise for buyers.
Without proper paperwork, TDS is deducted on the entire sale consideration, not just the capital gain. So even if the NRI is selling at a small profit or even a loss, the buyer must still deduct the full TDS percentage on the total sale price.
For example, if the property sale price is ₹1 crore and held over 24 months, the buyer must deduct ₹12.5 lakh (plus surcharge and cess) regardless of the actual capital gain.
The NRI seller can claim a refund later by filing returns in India, but the TDS must still be deposited upfront.
How to Reduce the TDS Legally
There is one powerful way to reduce TDS to the actual capital gains amount instead of the full sale value.
The NRI seller must apply for a Lower Deduction Certificate (LDC) under Section 197 from the Income Tax Department. This certificate authorises a reduced TDS rate based on the actual capital gains.
Process for Obtaining LDC
- NRI applies in Form 13 online on the TRACES portal
- Submits documents including purchase deed, indexed cost, expected sale price
- Income Tax Officer reviews and issues a certificate within 30 to 45 days
- The buyer deducts TDS at the rate mentioned in the certificate
For a property with low actual capital gains, the LDC can reduce TDS dramatically. This single document can save lakhs.
Step-by-Step Compliance for the Buyer
If you are buying a property from an NRI, here is exactly what you must do.
Step 1: Apply for a TAN
The buyer must obtain a Tax Deduction Account Number (TAN) from the Income Tax Department. Apply online at https://www.tin-nsdl.com
This is mandatory. TDS under Section 195 cannot be deposited without a TAN.
Step 2: Verify the Seller’s Residential Status
Get the seller to provide:
- A copy of passport showing arrival/departure stamps
- Proof of foreign residence
- A self-declaration of NRI status under FEMA and Income Tax Act
Do not rely on verbal assurance. The buyer’s liability is fixed by the seller’s actual status, not what is claimed.
Step 3: Ask for the LDC Before Closing
Insist that the NRI seller obtain an LDC before the transaction. If they refuse, you must deduct full TDS on the sale value. Make this a condition of the agreement.
Step 4: Deduct TDS at Each Payment
If payments are made in tranches (booking, registration, possession), TDS must be deducted at each payment, not just at the final one. Many buyers miss this and face penalties.
Step 5: Deposit TDS Within 7 Days
The TDS deducted must be deposited with the government within 7 days of the end of the month in which the deduction was made. Use Challan ITNS 281.
Step 6: File TDS Returns (Form 27Q)
Quarterly TDS returns must be filed in Form 27Q. This is different from Form 26QB used for resident sellers.
Step 7: Issue Form 16A to the Seller
After filing the return, issue a TDS certificate in Form 16A to the NRI seller within 15 days. They will need it to claim any refund or credit.
Common Buyer Mistakes That Trigger Notices
- Deducting only 1% as TDS, treating the NRI like a resident seller
- Forgetting to obtain a TAN before the transaction
- Filing Form 26QB instead of Form 27Q
- Missing the 7-day deposit deadline
- Ignoring TDS on advance or token payments
- Not asking for the LDC and over-deducting unnecessarily
- Trusting the seller’s claim of being a resident without verification
Each of these can lead to notices, interest, and penalties.
Penalties for Non-Compliance
The cost of mistakes is heavy.
- Interest at 1% per month for late deduction
- Interest at 1.5% per month for late deposit
- Penalty equal to the TDS amount for non-deduction in some cases
- Disallowance of the purchase cost in the buyer’s tax records, affecting future capital gains
- Notices from Income Tax Department and potential prosecution
The penalty falls on the buyer, not the seller. This is why due diligence matters more than price negotiation.
Repatriation Rules for the NRI Seller
The NRI seller can repatriate the sale proceeds abroad, but only within limits and subject to:
- Maximum of USD 1 million per financial year
- TDS already deducted and deposited
- Submission of Form 15CA and Form 15CB through a Chartered Accountant
- Sale proceeds being deposited only into an NRO account first
The buyer is not responsible for repatriation but should ensure all documentation is in order before final settlement.
Practical Tips for Buyers
- Hire a CA experienced in NRI transactions before signing the agreement
- Include LDC as a condition of the sale in the agreement to sell
- Pay through banking channels only; never in cash
- Ensure stamp duty is paid on the actual sale value, not understated
- Keep all TDS challans, returns, and certificates filed for at least 7 years
A small upfront investment in professional help saves lakhs in potential penalties later.
Final Thoughts
Buying property from an NRI is not the same as buying from a resident. The tax compliance burden is heavier, the rules are sharper, and the penalties are real. Most buyers walk into these transactions assuming the 1% TDS rule applies, only to discover the truth months later when notices arrive.
The good news is that with proper planning — verifying NRI status, obtaining a TAN, insisting on an LDC, and filing the right forms on time — the entire process becomes manageable. The deal goes through smoothly, the seller gets fair treatment, and you walk away with a property and a clean tax record.
Never let the urgency of closing a deal override the diligence of compliance. The few extra weeks spent on paperwork are far cheaper than years of tax disputes.
FAQs
Q. Does the 1% TDS rule apply when buying from an NRI?
No. Section 195 applies to NRI sellers, with rates of 12.5% (long-term) or 30% (short-term), plus surcharge and cess.
Q. Is TAN mandatory for the buyer?
Yes. Without a TAN, TDS under Section 195 cannot be deposited.
Q. Can the NRI seller avoid TDS by claiming reinvestment exemption?
Not at the TDS stage. They can claim it later through a tax return or via an LDC.
Q. Is GST applicable on resale of property?
No. GST applies only to under-construction properties from a developer.
Q. Can TDS be deposited in installments?
Each payment to the seller must have its own TDS deduction and deposit within 7 days.
Q. What if the seller refuses to apply for an LDC?
The buyer must deduct full TDS on the sale value. This is non-negotiable.
Q. Can the buyer recover excess TDS later?
No. Only the seller can claim the refund by filing their Indian tax return.