Section 195 TDS: What Buyers and Payers Must Deduct Before Remitting Money to an NRI

When a resident Indian buys a flat from another resident, the buyer deducts just 1 per cent under Section 194-IA. When the seller is a non-resident, that shortcut disappears: Section 195 of the Income-tax Act, 1961 requires the buyer to withhold tax at the full capital-gains rate before a single rupee reaches the seller. The same provision catches interest, rent, royalties and professional fees paid to anyone tax-resident outside India, which is why it sits at the centre of almost every cross-border payment a resident, company or fellow NRI ever makes. Its statutory text lives on incometax.gov.in and at indiacode.nic.in.

Section 195 is unusual in one respect that trips up nearly every first-time payer: there is no basic exemption threshold. For a resident payee, TDS often begins only above Rs 40,000 (bank interest) or Rs 2.4 lakh (rent); for a non-resident, the very first rupee of a sum "chargeable to tax under the Act" is within scope. Tax must be deducted at the time of credit or payment, whichever is earlier. Getting the mechanics wrong makes the payer -- not the NRI -- personally liable for the shortfall plus interest, so the 2026 buyer of an NRI-owned property carries real exposure.

FEMA / DTAA Position

Two statutes govern the money leaving India. The Foreign Exchange Management Act, 1999 controls whether the funds may cross the border at all, and the Income-tax Act, 1961 controls how much tax is withheld first. Under Section 6 of FEMA 1999, a capital-account transaction needs Reserve Bank permission unless it is specifically permitted, and the Liberalised Remittance Scheme lets a resident individual send up to USD 250,000 (about Rs 2.5 lakh in the older notation) abroad each financial year. A non-resident selling Indian property is not using LRS; the sale proceeds must route through the banking channel with tax cleared under Section 195 first.

On the tax side, Section 195 does not fix a single rate. It requires deduction "at the rates in force", and Section 90 lets the payee claim the lower of the Income-tax Act rate or the applicable Double Taxation Avoidance Agreement (DTAA) rate. In plain terms, the deductor applies whichever is lower once a valid treaty claim is on file. A refresher on the mechanics sits in our TDS glossary entry and DTAA glossary entry.

To claim the treaty rate rather than the higher domestic rate, the NRI must furnish a Tax Residency Certificate (TRC) from the country of residence plus Form 10F; without them the payer defaults to the Income-tax Act rate. The TRC concept is explained in our TRC glossary entry. One point the treaties settle firmly: India never surrenders its right to tax long-term capital gains on Indian assets. Across every major treaty the ceiling India retains on such gains is 12.5 per cent, and no DTAA treats those gains as exempt.

Read the dividend column carefully. The United States and Canada treaties both cap dividends at the lower 15 per cent rate only where the recipient holds at least 10 per cent of the voting stock; an ordinary portfolio holder faces 25 per cent under Article 10. The 12.5 per cent long-term capital-gains figure in the final column is not a treaty concession at all -- it is the domestic rate India applies after the 23 July 2024 Budget, and the treaties simply confirm India may levy it.

Tax Treatment in India

The single largest Section 195 event most families face is the sale of Indian property owned by an NRI. Since the 23 July 2024 Budget, long-term capital gains -- on immovable property held for more than 24 months -- are taxed at 12.5 per cent without indexation. Short-term gains, where the property is held for 24 months or less, are taxed at the seller's slab rate, which reaches 30 per cent at the top. The buyer must obtain a TAN and deduct on the full sale consideration unless the seller has secured a lower or nil deduction certificate.

Surcharge and the 4 per cent health-and-education cess sit on top of the base rate, which is why the effective withholding is always higher than the headline 12.5 per cent. Surcharge follows the Finance Act slabs: 10 per cent where the sum crosses Rs 50 lakh, and 15 per cent where it crosses Rs 1 crore. The table below works the arithmetic on a long-term property gain so a buyer can see the real cash to withhold.

For gains above Rs 2 crore, the deductor applies the surcharge slab notified in the Finance Act to the sum credited; because the numbers move with the seller's total income, run the figure through our NRI tax calculator and the DTAA benefit calculator rather than assuming a flat rate. Note that a common mistake is applying the 1 per cent Section 194-IA rate meant for resident sellers; that section does not apply to an NRI seller, and using it leaves the buyer short by more than 12 per cent.

Other recurring payments fall under the same section at different rates. Interest credited to an NRO account, rent paid to a non-resident landlord and fees for technical services are each "sums chargeable to tax" and attract deduction at the rates in force, reducible to the treaty ceilings shown above -- 15 per cent interest for a US or UK resident, 12.5 per cent for a UAE resident. If an NRI landlord in India receives monthly rent, the tenant is the deductor; our rental-income tax calculator sizes the withholding and the net remittance. Where the NRI has no Permanent Account Number on file, the payer cannot apply the treaty rate and must default to the higher domestic rate, so quoting the PAN before the first payment matters.

Compliance runs through two forms. For any foreign remittance the remitter files Form 15CA online, and for taxable sums above the notified limit a chartered accountant certifies Form 15CB confirming the rate applied -- both are hosted on the e-filing portal at incometax.gov.in. The bank will not release the remittance without them, and Rule 37BB spells out the narrow list of payments exempt from the 15CB requirement.

Tax Treatment Abroad

Withholding in India is not the end of the story, because the country where the NRI lives usually taxes worldwide income. The DTAA exists precisely to stop the same gain being taxed twice: under the credit method in Article 23 or Article 24 of the relevant treaty, the residence country allows a foreign tax credit for the tax already paid in India. A US resident claims the credit on Form 1116, an Australian resident under the Article 23 credit method, and so on, each offsetting Indian tax up to the ceiling of their own liability on that income.

The credit is capped, not unlimited. If India withholds 14.30 per cent on a property gain but the residence country's own rate on that gain is only 10 per cent, the credit is limited to 10 per cent and the extra 4.30 per cent is not refunded abroad -- it can only be recovered by filing an Indian return if the actual Indian liability is lower than the amount withheld. Our foreign-tax-credit calculator models this interaction so an NRI can see whether the Indian TDS is fully creditable at home or leaves a residual.

Timing mismatches complicate the credit. India runs its tax year from 1 April to 31 March, the United States on a calendar year to 31 December, and the United Kingdom from 6 April to 5 April; when the Indian TDS falls in a different foreign tax year from the income, the credit may have to be claimed a year later. This is why the TRC, which states the exact period of residence, is filed at the time of deduction rather than after -- it fixes which treaty year governs the 12.5 per cent Indian ceiling.

Repatriation Mechanics

Once tax is deducted, the after-tax money still has to leave India through the right account, and the account type decides how freely it moves. Sale proceeds and rent from Indian assets are credited to a Non-Resident Ordinary (NRO) account; salary or savings earned abroad sit in a Non-Resident External (NRE) account; and foreign-currency term deposits sit in an FCNR(B) account. The distinctions are set out in our NRO glossary entry, NRE glossary entry and FCNR glossary entry.

Balances in an NRE or FCNR(B) account are fully and freely repatriable, principal and interest, because the money originated abroad. NRO balances are different: an NRI may repatriate up to USD 1 million per financial year from an NRO account after tax, under the FEMA framework administered by the Reserve Bank at rbi.org.in. That USD 1 million ceiling is the practical bottleneck for anyone selling a large Indian property, and our repatriation calculator checks a planned remittance against the annual limit.

The repatriation itself repeats the Section 195 documentation. The bank requires Form 15CA and, for the NRO route, Form 15CB certifying that the correct tax was withheld on the underlying gain before the funds are converted and sent -- the same forms described earlier, filed again at the remittance stage. Because the USD 1 million window resets on 1 April each year, a seller whose after-tax proceeds exceed the ceiling typically splits the remittance across two financial years to move the whole amount without a specific Reserve Bank approval.

FAQ

Does Section 195 apply if the NRI's capital gain is actually nil?

Yes, the section still applies to the payment, but the NRI can apply to the Assessing Officer for a lower or nil deduction certificate before the sale. Absent that certificate, the buyer must deduct on the sum chargeable to tax; the effective long-term rate begins at 13.00 per cent including the 4 per cent cess. The NRI then recovers any excess by filing an Indian return.

Is the 1 per cent property TDS enough when I buy from an NRI?

No. The 1 per cent rate under Section 194-IA applies only to resident sellers. For a non-resident seller, Section 195 governs and the effective withholding on a long-term gain runs from 13.00 per cent up to 14.95 per cent once surcharge and the 4 per cent cess are added, as shown in the table above.

Can the treaty ever make the capital gain exempt in India?

No. Across the United States, United Kingdom, UAE, Canada, Singapore and Australia treaties, India retains the right to tax long-term capital gains on Indian assets at 12.5 per cent. No DTAA treats those gains as exempt, so any adviser claiming a zero-tax exit on Indian property is misreading the treaty.

What documents let me apply the lower treaty rate?

A valid Tax Residency Certificate for the relevant period plus Form 10F, filed before the payment. With these on record the deductor applies the lower of the Income-tax Act rate or the DTAA ceiling -- for example 15 per cent on interest for a US or UK resident, or 12.5 per cent for a UAE resident. Without them the higher domestic rate applies, and without a PAN the treaty rate cannot be used at all.

How much can I actually send abroad after selling property?

From an NRO account an NRI may repatriate up to USD 1 million per financial year after tax, under the FEMA framework at rbi.org.in. NRE and FCNR(B) balances are fully repatriable without that cap. A sale exceeding USD 1 million after tax is usually split across financial years, since the limit resets on 1 April.

Who is liable if the buyer forgets to deduct?

The buyer, not the NRI. Under Section 195 the payer who fails to deduct is treated as an assessee-in-default, liable for the tax that should have been withheld -- beginning at 13.00 per cent on a long-term gain -- plus interest, which is why obtaining a TAN and filing Form 15CA before payment is not optional.

Do I need a chartered accountant's certificate to remit?

For most taxable foreign remittances, yes: Form 15CB, signed by a chartered accountant certifying the rate applied, accompanies the Form 15CA filed on incometax.gov.in. Rule 37BB lists the limited categories exempt from 15CB, but a property-sale remittance to an NRI is not among them.