Selling Property as an NRI: How Section 195 TDS Works and the Section 197 Lower-Deduction Route

When a non-resident Indian sells a flat in Mumbai or a plot in Pune, the single most expensive mistake is assuming the buyer will deduct 1% tax the way they would for a resident seller. That 1% rate under Section 194-IA, paid through Form 26QB, is reserved exclusively for resident sellers. The moment the seller is an NRI, the transaction shifts to Section 195, and the deduction is calculated on capital gains at rates that can reach roughly 14.95% of the gain, or worse, be applied to the entire sale value if no relief is obtained. This guide, built on the Income Tax Department's own resource Sale of Immovable Property by a NRI, walks through the statute, the arithmetic, and the two escape hatches - the Section 197 certificate and the Section 195(2) determination.

FEMA / DTAA Position

Under Section 6 of the Foreign Exchange Management Act, 1999, an NRI does not need fresh Reserve Bank of India permission to sell residential or commercial property in India, provided the property was acquired in accordance with the exchange-control law in force at the time of purchase. Agricultural land, plantation property and farmhouses cannot be purchased by an NRI at all, though such property inherited from a resident may be sold only to a resident Indian citizen. The USD 250,000-per-year Liberalised Remittance Scheme window referenced in Section 6 is a resident facility; NRIs instead repatriate through the NRO route discussed below. Read our FEMA glossary entry for the statutory framework.

On the treaty side, the Double Taxation Avoidance Agreement does not rescue an NRI from Indian tax on property gains. Under the standard Article 13 (Capital Gains) of India's treaties with the United States (in force 12 September 1991), the United Kingdom (26 October 1993) and the United Arab Emirates (22 September 1993), gains from the alienation of immovable property situated in India are taxable in the country where the property is located - India. India retains a domestic long-term rate of 12.5%; the treaty never renders these gains "exempt". The residence country then grants a foreign tax credit, as covered in our recent explainer on claiming DTAA relief with the TRC and Form 10F.

Tax Treatment in India

The character of the gain turns on the holding period. Immovable property held for more than 24 months before sale produces a long-term capital gain; property held for 24 months or less produces a short-term gain taxed at the seller's slab rate, which can reach 30% plus surcharge and 4% cess. The distinction matters because the buyer, acting as tax deductor, must apply the correct Section 195 rate.

For long-term gains, the Finance (No. 2) Act 2024 reset the rate to 12.5% without indexation for transfers on or after 23 July 2024. The 20%-with-indexation computation that previously applied survives only as a grandfathering option for land and buildings acquired before 23 July 2024, and that option is written for resident individuals and Hindu Undivided Families - a non-resident computes the long-term gain at the flat 12.5% without indexation. The table below contrasts the two deductor regimes.

The buyer of an NRI's property carries real compliance weight. They must obtain a Tax Deduction and Collection Account Number (TAN), deduct tax on the taxable long-term capital gains at the applicable rate, deposit it with the government, file the quarterly Form 27Q, and issue Form 16A to the seller. Failure to deduct exposes the buyer - not the seller - to the tax, interest under Sections 201(1A) at 1% or 1.5% per month, and penalty. This is why buyers routinely over-deduct.

Surcharge stacks on top of the 12.5% base. It applies at 10% where the seller's total income exceeds Rs 50 lakh, 15% above Rs 1 crore, and 25% above Rs 2 crore, but the surcharge on long-term capital gains is capped at 15% regardless of how high the gain runs. Adding 4% health-and-education cess on tax-plus-surcharge produces the effective long-term rates below.

Consider a concrete case. An NRI sells a Bengaluru apartment on 1 August 2026 for Rs 2 crore that was bought in 2015 for Rs 80 lakh. The long-term gain is Rs 1.2 crore. At 12.5% the base tax is Rs 15 lakh; the 15% surcharge adds Rs 2.25 lakh; 4% cess adds Rs 69,000, for a total liability of Rs 17.94 lakh - an effective 14.95% of the gain. Model your own figures with our NRI tax calculator before you sign.

Here lies the cash-flow trap. Section 195 requires deduction on the "sum chargeable to tax", but if the buyer has no authoritative figure for the gain, the conservative and legally safest course is to deduct on the gross sale value. On a Rs 2 crore sale that means roughly Rs 29.9 lakh withheld against a real liability of Rs 17.94 lakh - locking up over Rs 11 lakh until the NRI files a return and claims a refund the following year. Two statutory routes prevent this. Under Section 195(2), the buyer can apply to the Assessing Officer to determine the proportion of the sum that is actually chargeable to tax. More powerfully, under Section 197 the NRI seller files Form 13 for a certificate authorising nil or lower deduction, so tax bites only on the true gain. The certificate should be obtained before the sale deed is executed; the Income Tax Department processes these applications through its TRACES portal.

Section 54 offers genuine relief for the gain itself: long-term gains on a residential house are exempt to the extent reinvested in another residential house in India, within one year before or two years after the sale (three years for construction). Separately, Section 54EC allows investment of up to Rs 50 lakh in NHAI, REC, PFC or IRFC bonds within six months of transfer. Neither exemption removes the buyer's deduction duty - it is claimed either through the Section 197 certificate or in the income-tax return.

Tax Treatment Abroad

Because India taxes the gain at source, the NRI's home country becomes the arena for double-tax relief rather than a second full charge. The mechanism is the foreign tax credit under the relevant treaty's Article on elimination of double taxation, read with the resident-country's domestic rules. The three most common corridors work as follows.

A US-resident NRI reports the Indian property sale on Schedule D of Form 1040 and claims the Indian tax paid as a foreign tax credit on Form 1116, limited to the US tax attributable to that gain. A UK-resident NRI, taxed on worldwide gains, claims relief for Indian tax under the UK-India treaty. A UAE-resident faces no personal capital-gains tax at home, so the 14.95% Indian charge is effectively final. In every case the credit is only as good as the documentation - the Form 16A issued by the buyer and the challan proving deposit are the evidence the foreign tax authority will demand. Our note on residential status under Section 6 and the 120-day rule explains why establishing non-resident status in the year of sale is the first step.

Repatriation Mechanics

Getting the net proceeds out of India is a distinct exercise governed by RBI's exchange-control rules, and it hinges on which account receives the money. The three NRI account types behave very differently.

Sale proceeds of immovable property in India are ordinarily credited to the NRO account. From there, RBI permits repatriation of up to USD 1 million per financial year (April to March) across all NRO balances and asset sales combined, after taxes are paid. Where the property was originally purchased with funds remitted from abroad or from an NRE/FCNR account, the sale proceeds of up to two residential properties may be repatriated without counting against that limit, subject to the original purchase conditions.

Every remittance abroad from the NRO account requires the two-part certification in Form 15CA and Form 15CB. Form 15CB is a certificate from a chartered accountant confirming the nature of the payment and that the correct tax has been deducted; Form 15CA is the remitter's undertaking filed on the income-tax portal. The authorised dealer bank will not process the outward remittance without both. Plan the sequencing with our repatriation calculator so the USD 1 million ceiling and the 15CA/15CB paperwork do not delay your transfer. If the property was earning rent before sale, that income sits in the NRO account too, and our rental-income tax calculator covers the 30%-plus TDS the tenant or platform should have been deducting under Section 195 all along.

FAQ

Does the buyer deduct 1% TDS when I sell my Indian property as an NRI?

No. The 1% deduction under Section 194-IA via Form 26QB applies only to resident sellers. For an NRI seller the buyer must deduct under Section 195 on the capital gains - an effective 13% to 14.95% for long-term gains after surcharge and 4% cess, or slab rate up to 30% for short-term gains.

What is the long-term capital gains tax rate for an NRI property sale in 2026?

For transfers on or after 23 July 2024, long-term gains on immovable property are taxed at 12.5% without indexation. Surcharge (up to a 15% cap for capital gains) and 4% cess apply, giving effective rates of 13% up to Rs 50 lakh of income, 14.30% between Rs 50 lakh and Rs 1 crore, and 14.95% above Rs 1 crore.

How does the Section 197 lower-deduction certificate help?

Without it, a cautious buyer deducts Section 195 tax on the gross sale value rather than the gain, locking up excess cash until you file a return. Filing Form 13 under Section 197 secures a certificate for nil or lower deduction, so tax is withheld only on the actual taxable gain. Apply through the TRACES portal before executing the sale deed.

Can I claim exemption from capital gains tax on the sale?

Yes, through reinvestment. Section 54 exempts long-term gains reinvested in another Indian residential house within one year before or two years after the sale (three years for construction). Section 54EC allows up to Rs 50 lakh in NHAI, REC, PFC or IRFC bonds within six months. These reduce the gain but must be reflected in the Section 197 certificate or the return.

How much of my property sale proceeds can I repatriate abroad?

From the NRO account, RBI allows repatriation of up to USD 1 million per financial year after taxes. If the property was bought with foreign-sourced or NRE/FCNR funds, proceeds of up to two residential properties may be repatriated outside that limit. Every transfer needs Form 15CA and a chartered accountant's Form 15CB.

Will I be taxed again in my country of residence?

India taxes the gain at source under Article 13 of the DTAA; your residence country then grants a foreign tax credit for the Indian tax paid - it is never treated as exempt. US residents use Form 1116, UK residents claim treaty relief, and UAE residents face no home capital-gains tax. Retain the buyer's Form 16A and the tax-deposit challan as proof.

What happens if the buyer does not deduct or deposit the TDS?

The liability shifts to the buyer, who becomes an assessee-in-default under Section 201, facing the unpaid tax, interest at 1% to 1.5% per month under Section 201(1A), and penalty. This is why buyers insist on either a Section 197 certificate or over-deduction, and why NRI sellers should secure the certificate early to keep the transaction moving.