Section 195 TDS When You Pay an NRI: Buyer, Tenant and Payer Obligations and the Lower-Deduction Certificate

When a resident Indian writes a cheque to a non-resident — buying a flat from an NRI seller, paying monthly rent to an NRI landlord, or settling a professional invoice to a foreign company — Section 195 of the Income-tax Act, 1961 shifts the tax-collection burden onto the payer. The rule, on the statute book since 1961 and read in full on indiacode.nic.in, requires any person paying a non-resident any sum chargeable to tax under the Act (other than salary) to deduct income-tax at the rates in force, at the earlier of credit to the payee's account or actual payment.

Unlike Section 194-IA, which sets a 1% deduction on resident-to-resident property transfers of Rs 50 lakh and above, Section 195 carries no monetary floor: even a Rs 40,000 payment can trigger it if the recipient is a non-resident and the sum is chargeable to tax. That single design choice — securing tax from non-residents at the earliest point — makes the resident buyer or tenant a withholding agent, exposed to interest under Section 201 and disallowance under Section 40(a)(i) if the deduction is missed. This NRI Corner explains who must deduct, at what rate, and how the Section 197 lower-deduction certificate can cut a punishing 20%-plus withholding down to the seller's real liability.

FEMA / DTAA Position

The Foreign Exchange Management Act, 1999 and the Income-tax Act operate in parallel here: FEMA governs whether money may leave India, while the tax law governs how much of it the payer must first hand to the exchequer. When a resident buys immovable property from an NRI, the transaction is a capital-account dealing under Section 6 of FEMA, 1999, and the sale proceeds must be routed through the seller's NRO account before any repatriation abroad — a sequencing rule the RBI reiterates in its remittance framework on rbi.org.in.

The Double Taxation Avoidance Agreement then decides the ceiling on the Indian rate. Section 195 read with Section 90(2) allows the payer to apply the DTAA rate or the domestic rate, whichever is lower — but only where the non-resident furnishes a valid Tax Residency Certificate (TRC) and Form 10F. Crucially, no Indian treaty exempts capital gains on Indian immovable property or on shares of an Indian company; India retains the taxing right, and the long-term capital gains rate under Section 112 sits at 12.5% following Budget 2024 (effective 23 July 2024). The table below shows the treaty rates verified for three of the largest NRI corridors.

Two caveats travel with these numbers. Under the India-US treaty, the 15% dividend rate applies only where the recipient holds at least 10% of the voting stock; portfolio holdings are taxed at 25% under Article 10. And under the India-UAE treaty, the reduced rates require the NRI to prove a UAE establishment when producing the TRC, since a bare residency stamp will not satisfy the Assessing Officer. Capital gains, in every one of these treaties, remain taxable in India at 12.5% — never treat them as exempt.

Tax Treatment in India

The mechanics turn on the character of the payment. For an NRI selling a residential flat held for more than 24 months, the gain is long-term and falls under Section 112 at 12.5% (post-Budget 2024, without indexation), plus surcharge and a 4% health and education cess. Where the property was held for 24 months or less, the gain is short-term and taxed at the NRI's applicable slab rates, which top out at 30% for income above Rs 24 lakh under the FY 2025-26 new regime. The buyer must withhold on the character the seller cannot dispute at source — so absent a certificate, banks and conveyancing lawyers routinely deduct at the maximum figure.

Surcharge is where large deals bite. Base tax carries a surcharge of 10% between Rs 50 lakh and Rs 1 crore of income, 15% from Rs 1 crore to Rs 2 crore, and 25% above Rs 2 crore. But a vital relief applies to capital gains: the surcharge on income chargeable under Section 112 is capped at 15%, however large the gain. Layering that cap onto the 12.5% base and the 4% cess gives the effective ceiling on long-term property TDS.

Two procedural obligations catch first-time buyers off guard. First, the buyer must obtain a Tax Deduction and Collection Account Number (TAN) under Section 203A before deducting — a PAN will not do, unlike the Section 194-IA route where a resident buyer files Form 26QB with only a PAN. Second, the TDS on an NRI seller is reported on Form 27Q (the quarterly statement for payments to non-residents), and the seller receives a Form 16A certificate, not the property-specific Form 16B. Miss the TAN step and the deposit itself cannot be made correctly, exposing the buyer to interest of 1% per month for late deduction and 1.5% per month for late deposit under Section 201(1A). You can model a seller's true liability before agreeing a price using the NRI capital-gains tax calculator.

Rent follows the same statute but a different rate logic. A tenant paying an NRI landlord deducts under Section 195, not Section 194-IB (which covers resident landlords and applies a 2% rate for individuals paying above Rs 50,000 a month). Because rental income is taxed at slab rates, the tenant must withhold at the rate in force for the seller's bracket — in practice the maximum marginal rate plus surcharge and cess — unless the landlord produces a Section 197 certificate. A salaried resident renting an NRI-owned flat therefore needs a TAN and quarterly Form 27Q filings, a compliance load most tenants never anticipate; the NRI rental-income tax calculator shows the deduction against a 30% slab.

The escape valve is the certificate route. Under Section 195(2), the payer may apply to the Assessing Officer to determine the proportion of the sum that is actually chargeable; separately, under Section 197 the NRI payee may apply in Form 13 for a lower or nil deduction certificate. For a property sale, this is the single most valuable step: instead of the buyer withholding on the full sale consideration, the certificate directs deduction only on the computed capital gain, often turning a locked-up sum of several lakh into a fraction of it. Applications are filed on the TRACES portal at incometax.gov.in and typically require the sale agreement, cost documents and the seller's PAN.

Tax Treatment Abroad

Deducting tax in India does not end the story for the NRI, because the country of residence usually taxes worldwide income and then grants relief for the Indian tax already paid. The India-US treaty addresses this squarely in Article 24, which obliges the United States to allow a foreign tax credit for income tax paid to India — so an NRI in California who suffers 12.5% Indian LTCG withholding on a Mumbai flat generally credits that against the US tax on the same gain, subject to the US foreign-tax-credit limitation computed on Form 1116.

The credit is rarely a clean one-for-one match because the two systems measure the gain differently. India taxes the rupee gain at 12.5% from 23 July 2024 without indexation, while the US recomputes the gain in dollars using its own basis and holding-period rules, and taxes long-term gains at 0%, 15% or 20% depending on the taxpayer's bracket. Where the US rate exceeds the Indian rate, the resident tops up the difference; where the Indian tax is higher, the excess credit may carry over for up to 10 years under US rules but cannot be refunded. A UK-resident NRI faces a parallel mechanic, claiming relief under the India-UK treaty in force since 26 October 1993, while a UAE-resident NRI — living in a jurisdiction with no personal income tax — takes no credit at all and simply bears the Indian 12.5%. The foreign-tax-credit calculator helps estimate the residual liability once the Indian deduction is set off.

Timing is the practical trap. India's financial year runs 1 April to 31 March, the United States taxes on a calendar year, and the United Kingdom's tax year ends on 5 April — so the Indian TDS certificate (Form 16A) may land in a different foreign tax year than the gain it relates to. NRIs must preserve the Form 26AS / Annual Information Statement entry and the Form 16A to substantiate the credit, because foreign revenue authorities require documentary proof of the Indian tax actually paid, not merely deducted.

Repatriation Mechanics

Once the tax is settled, FEMA decides how the net proceeds move offshore, and the answer depends entirely on which account holds the money. Foreign earnings parked in an NRE account and foreign-currency deposits in an FCNR(B) account are fully repatriable — principal and interest — without any annual cap, because those funds never lost their foreign character. Indian-source receipts, including the sale proceeds of property and rent, must first sit in an NRO account and are then subject to the RBI's remittance ceiling.

The headline rule is the USD 1 million per financial year limit under the Foreign Exchange Management (Remittance of Assets) Regulations, 2016, published on rbi.org.in. An NRI may remit up to USD 1 million (aggregate) from NRO balances — including inherited assets and property sale proceeds — in each financial year running 1 April to 31 March. A separate FEMA restriction caps the repatriation of residential-property sale proceeds at not more than two such properties, a point sellers with a larger portfolio must plan around before booking gains.

Every outward remittance from the NRO account additionally requires two forms under Section 195(6) read with Rule 37BB: Form 15CA, a self-declaration by the remitter, and Form 15CB, a certificate from a practising chartered accountant confirming the tax has been correctly withheld. Authorised-dealer banks will not process the transfer without both, and they cross-check the TDS deposited against the Form 27Q filing. To size the net figure that will actually reach an overseas account after the 12.5% withholding, the NRO repatriation calculator applies the USD 1 million ceiling and the deduction together.

A final planning note: because the buyer's TDS is a payment against the seller's liability and not the liability itself, an NRI whose actual tax is lower than the amount withheld must claim the excess as a refund by filing an income-tax return in India for the relevant assessment year.

FAQ

Does the resident buyer of an NRI's flat really need a TAN?

Yes. Deduction under Section 195 must be reported on Form 27Q and deposited against a Tax Deduction and Collection Account Number obtained under Section 203A. The Section 194-IA route (Form 26QB with only a PAN) is available only when the seller is a resident; it does not apply to NRI sellers, so the buyer must apply for a TAN before completing the purchase.

At what rate is TDS deducted when I buy property from an NRI?

For a property the NRI held for more than 24 months, the gain is long-term and TDS is computed at 12.5% under Section 112 (Budget 2024, effective 23 July 2024), plus surcharge capped at 15% for capital gains and a 4% cess — an effective ceiling of about 14.95%. If the holding period is 24 months or less, the short-term gain is taxed at slab rates up to 30%. Without a Section 197 certificate, deduction is on the full sale consideration, not just the gain.

How does a Section 197 lower-deduction certificate help?

An NRI seller applies in Form 13 on the TRACES portal for a certificate that directs the buyer to withhold only on the actual capital gain rather than the entire sale price. On a Rs 1 crore sale with a Rs 20 lakh gain, this can cut the amount locked in TDS from roughly Rs 12.5 lakh (on the full price) to under Rs 3 lakh (on the gain) — a decisive cash-flow difference the seller should secure before registration.

Can capital gains ever be treated as exempt under a DTAA?

No. None of the India-US (1991), India-UK (1993) or India-UAE (1993) treaties exempt capital gains on Indian immovable property or Indian company shares. India retains the taxing right, and the long-term rate is 12.5% under Section 112. Treaties reduce rates on dividends and interest, but capital gains on Indian assets remain taxable in India.

How much can I repatriate from my NRO account after selling property?

Up to USD 1 million per financial year (1 April to 31 March) under the FEMA (Remittance of Assets) Regulations, 2016, covering sale proceeds and inherited assets. Repatriation of residential-property sale proceeds is additionally limited to not more than two such properties. Each remittance needs Form 15CA and a chartered accountant's Form 15CB.

What if the tenant of my NRI-owned flat forgets to deduct TDS?

Rent to an NRI landlord is covered by Section 195, not Section 194-IB, so the tenant is the withholding agent. A tenant who fails to deduct faces interest at 1% per month under Section 201(1A) and possible disallowance, and remains liable for the tax itself. Tenants of NRI landlords should obtain a TAN and file Form 27Q quarterly, or ask the landlord for a Section 197 certificate.

Will my country of residence tax the same gain again?

Usually it will tax worldwide income but grant a foreign tax credit for the Indian tax. A US-resident NRI credits the Indian 12.5% against US tax under Article 24 of the treaty (via Form 1116); a UK resident claims parallel relief under the 1993 treaty; a UAE resident, facing no personal income tax, simply bears the Indian rate. Keep the Form 16A and Form 26AS as proof of Indian tax paid.