Section 195 TDS: How Tax Is Withheld on Payments to NRIs on Property, Rent and Interest

When a resident buyer, a tenant or a bank in India pays money to a Non-Resident Indian, the law does not treat that payment like any other domestic transaction. Section 195 of the Income-tax Act 1961 places the burden of tax collection on the person making the payment, not on the NRI receiving it. Any person who pays a non-resident "any sum chargeable to tax" (other than salary) must deduct tax at source at the rates in force, either at the time of credit to the payee's account or at the time of actual payment, whichever is earlier. This single sentence, on the statute book since 1961, governs how tax is withheld when an NRI sells property, earns rent or receives interest in India, and it is the most common point of friction in cross-border personal finance.

This guide explains where Section 195 bites, how a Double Taxation Avoidance Agreement (DTAA) reduces the withholding, and how the money finally leaves India. Use our NRI income tax calculator to model the final liability before you sign anything.

FEMA / DTAA Position

Section 195 is a tax-collection mechanism, not a charging section. It only applies where the sum paid to the non-resident is itself "chargeable to tax" in India under the Income-tax Act 1961. The Supreme Court settled this in GE India Technology Centre v CIT (2010), holding that a payer need not deduct under Section 195 if the payment carries no element of income taxable in India, though where taxability is in doubt the payer must approach the Assessing Officer rather than decide unilaterally. The full text of Section 195 is on the public record at indiankanoon.org.

The Foreign Exchange Management Act 1999 (FEMA) governs whether the money can move at all, and the Income-tax Act governs how much tax is withheld before it does. The two run in parallel. Under FEMA, an NRI holds an NRO (Non-Resident Ordinary) account for India-source income such as rent and an NRE (Non-Resident External) or FCNR account for repatriable foreign earnings. Repatriation of the balance sitting in an NRO account is capped at USD 1 million per financial year under the Foreign Exchange Management (Remittance of Assets) Regulations 2016, and every such remittance must first clear the Section 195 withholding.

Where a DTAA exists between India and the payee's country of residence, the non-resident may claim the lower of the treaty rate and the domestic rate. Section 90(2) of the Income-tax Act expressly allows a taxpayer to be governed by whichever is more beneficial. The relief is not automatic: the NRI must furnish a Tax Residency Certificate (TRC) from the tax authority of the country of residence, file Form 10F electronically on the income-tax portal, and hold an Indian PAN. A crucial point that trips up many sellers: no Indian DTAA treats capital gains on Indian immovable property as "exempt". India retains the primary taxing right, and the treaty long-term capital gains position for the United States, the United Kingdom, the UAE and Singapore all sit at India's domestic 12.5% rate, not zero.

Tax Treatment in India

The rate the payer must apply under Section 195 is the "rate in force" for the specific stream of income. Because the deductor is deducting on the gross sum unless a lower certificate is produced, the numbers are large and the arithmetic matters. The table below sets out the domestic withholding position for the three transactions NRIs meet most often.

For property, the Budget 2024 reset applies. Long-term capital gains on immovable property acquired on or after 23 July 2024 are taxed at 12.5% without indexation under Section 112. Property acquired before that date is grandfathered: the seller may choose the old 20% rate with indexation or the new 12.5% without, whichever produces the lower tax. On top of the base rate sits a surcharge, capped at 15% for capital gains under the proviso to Section 112, plus a 4% health and education cess. A resident buying a flat worth over Rs 50 lakh from an NRI must therefore deduct at an effective 14.95% (12.5% base, plus 15% surcharge, plus 4% cess) on the long-term gain, and must do so using a TAN and by filing Form 27Q, not the Form 26QB used for resident sellers.

Rent paid to an NRI landlord is withheld at 30% under Section 195 because rental income is taxable in India at slab rates and the deductor applies the maximum marginal rate in the absence of a lower certificate. With the 4% cess this becomes 31.2% for annual rent below the surcharge thresholds. The tenant, even an individual paying Rs 40,000 a month, is legally the deductor and must obtain a TAN and file Form 27Q quarterly. Model the net figure with our rental income tax calculator before agreeing terms.

Interest is where the streams diverge sharply. Interest credited on an NRO account is fully taxable and withheld at 30% under Section 195. Interest on an NRE account is exempt under Section 10(4)(ii), and interest on an FCNR deposit is exempt under Section 10(15)(iv)(fa), so no TDS arises on either as long as the account holder qualifies as a non-resident under FEMA. This exemption is the single largest reason NRIs route repatriable funds through NRE and FCNR rather than NRO deposits.

One statutory trap deserves emphasis. Section 206AA requires TDS at the higher of the rate in force or 20% where the payee has no PAN. For non-residents, Rule 37BC relaxes this for interest, royalty, fees for technical services and capital gains, provided the NRI furnishes name, email, address, the TRC and a Tax Identification Number of the home country. Without those details, a US-resident NRI claiming the 15% treaty rate on interest can find 20% deducted instead.

Tax Treatment Abroad

Withholding in India is not the end of the story. The same income is usually taxable again in the NRI's country of residence, and the DTAA exists to prevent that double burden through the foreign-tax-credit mechanism. Under Article 25 of the India-US treaty and Article 24 of the India-UK treaty, the residence country grants a credit for the Indian tax paid, up to the amount of its own tax on that income. An NRI in the United States who has suffered 14.95% Indian tax on a property gain claims that as a foreign tax credit against US capital-gains tax on Form 1116, rather than paying both in full.

The treaty rates the payer applies at source vary by income stream and by country. The table below draws on India's notified DTAAs for four major NRI destinations.

Two caveats sit behind these numbers. The India-US treaty charges 15% on dividends only where the recipient holds at least 10% of the voting stock of the paying company (a parent-subsidiary relationship under Article 10); ordinary portfolio investors pay 25%. For Singapore, the 2017 Protocol removed the old capital-gains exemption, so gains on Indian company shares acquired on or after 1 April 2017 are taxable in India, and the treaty carries a Limitation of Benefits clause requiring genuine economic substance in Singapore, not a shell. The UAE treaty, effective from 22 September 1993, taxes capital gains on shares of an Indian company in India and requires proof of a UAE establishment for the TRC. In every one of these four treaties, long-term capital gains on Indian immovable property remain taxable in India at 12.5%; the treaty never exempts them.

Where the residence country levies no personal income tax, as the UAE does not, the foreign-tax-credit mechanism has nothing to offset, and the Indian withholding is simply the final cost. That does not make the income tax-free; it makes India the only taxing jurisdiction.

Repatriation Mechanics

Getting the after-tax money out of India is a two-form procedure that runs on top of the Section 195 deduction. Under Rule 37BB of the Income-tax Rules, before an authorised dealer bank remits a taxable sum abroad, the remitter must file Form 15CA online and, for most taxable remittances above Rs 5 lakh in a financial year, obtain Form 15CB, a certificate from a practising Chartered Accountant confirming the nature of the payment and that the correct tax has been deducted. Both forms are filed on the income-tax portal at incometax.gov.in and the bank will not release the funds without them.

The account through which the money sits determines how freely it moves. The position is summarised below.

Sale proceeds of Indian property, once taxed, sit in the NRO account and fall under the USD 1 million annual ceiling set by the Reserve Bank of India under the Remittance of Assets Regulations 2016. The RBI's Master Direction on remittance, available at rbi.org.in, confirms that a person of Indian origin may remit up to USD 1 million per financial year out of balances in the NRO account, subject to payment of applicable taxes and production of the Form 15CA and 15CB documentation. Use our repatriation calculator to check how a large property sale sequences against this annual limit.

The single most effective way to reduce the cash locked up in withholding is to apply, before the transaction, for a lower or nil deduction. The payer can move an application under Section 195(2) asking the Assessing Officer to determine the appropriate proportion of the sum that is chargeable, so that TDS is deducted only on the taxable gain rather than the gross consideration. Alternatively, the NRI payee can apply under Section 197 for a certificate authorising deduction at a lower rate. Without either, a resident buyer of a Rs 2 crore flat from an NRI must deduct on the whole Rs 2 crore, not merely on the gain, and the seller waits until the following year's return for the refund. The certificate route converts a cash-flow problem into a paperwork problem.

For a fuller treatment of the FEMA side of moving money home, see our companion pieces on the USD 1 million NRO repatriation limit and what FEMA allows NRIs and OCIs to buy and sell. Whether you are treated as a non-resident at all in a given year turns on the day-count test explained in our Section 6 residential-status guide.

FAQ

At what rate is TDS deducted when I sell my flat in India as an NRI?

For a long-term gain on property held over 24 months, the base rate is 12.5% without indexation under Section 112 for property acquired on or after 23 July 2024. Adding the 15% surcharge cap and 4% cess, the effective withholding is 14.95% on the gain. The buyer must deduct using a TAN and file Form 27Q. If no lower-deduction certificate is obtained, the deduction is on the full sale consideration, not just the gain, which is why a Section 195(2) or Section 197 application before the sale is worthwhile.

Do I pay TDS on my NRE fixed deposit interest?

No. Interest on an NRE account is exempt under Section 10(4)(ii) and interest on an FCNR deposit is exempt under Section 10(15)(iv)(fa), so no TDS is deducted, provided you qualify as a non-resident under FEMA. By contrast, interest on an NRO account is fully taxable and withheld at 30% under Section 195, reducible to 12.5% to 15% under most DTAAs if you furnish a TRC, Form 10F and PAN.

My tenant is an individual. Does he really have to deduct TDS?

Yes. Section 195 makes any person paying rent to a non-resident the deductor, with no exemption for individuals or small amounts. The rate is 30% plus 4% cess. The tenant must obtain a TAN and file Form 27Q quarterly. This differs from rent paid to a resident, where a salaried individual paying under Rs 50,000 a month has no TDS obligation at all.

How does the DTAA reduce my TDS, and what documents do I need?

Section 90(2) lets you apply the lower of the treaty rate and the domestic rate. To claim it you must furnish a Tax Residency Certificate from your country of residence, file Form 10F electronically on incometax.gov.in, and quote your Indian PAN. Without a PAN, Section 206AA can force deduction at 20%, though Rule 37BC relaxes this for interest, royalty, FTS and capital gains if you supply your name, address, email, TRC and foreign Tax Identification Number.

Can the treaty make my Indian capital gains tax-free?

No. None of India's DTAAs with the United States, the United Kingdom, the UAE or Singapore exempt long-term capital gains on Indian immovable property. India retains the primary taxing right at 12.5%. Your country of residence then grants a foreign tax credit for the Indian tax paid, so you are not taxed twice, but the Indian tax is not eliminated.

How much can I repatriate after selling property?

Sale proceeds sit in your NRO account and are repatriable up to USD 1 million per financial year under the RBI Remittance of Assets Regulations 2016, after the Section 195 tax is paid and Forms 15CA and 15CB are filed. NRE and FCNR balances, by contrast, are fully repatriable without this ceiling because they represent already-taxed or exempt foreign funds.

What is Form 27Q and who files it?

Form 27Q is the quarterly TDS return for payments to non-residents, filed by the deductor (the buyer, tenant or bank), not the NRI. It reports the tax withheld under Section 195 and is distinct from Form 26QB, which residents use for purchases from resident sellers.