Buying Property From an NRI? Section 195 TDS Is Not 1% — What the Buyer Must Deduct and File

When you buy a flat or a plot from a resident seller, you deduct a tidy 1% under Section 194-IA of the Income-tax Act 1961 and move on. The instant the seller is a non-resident, that 1% rule switches off completely. Any sum paid to a non-resident that is "chargeable to tax" is governed by Section 195, and the Income Tax Department's own TDS compliance guidance (incometax.gov.in) is explicit that the buyer becomes the withholding agent. Deduct under the wrong section and the buyer -- not the seller -- carries the liability, including interest under Section 201 running from the date the tax ought to have been deducted.

The gap between "1%" and what Section 195 actually demands is wide. On a long-term gain the current rate is 12.5% of the gain (for transfers on or after 23 July 2024, without indexation) plus applicable surcharge and 4% health-and-education cess; where the seller has not furnished a PAN, the withholding floor is 20% under Section 206AA. This piece maps the FEMA and treaty position, the exact Indian mechanics the buyer must run, how the seller's home country gives credit, and how the sale money finally leaves India.

FEMA / DTAA Position

The purchase itself is legal without any Reserve Bank approval. Under Section 6 of the Foreign Exchange Management Act 1999, a capital-account transaction needs RBI permission unless it is specifically permitted, and the acquisition and transfer of immovable property in India by a non-resident is a permitted class -- with one hard exclusion. An NRI or OCI cardholder may buy and sell residential and commercial property freely, but is barred from acquiring agricultural land, plantation property or a farmhouse (see our note on OCI-cardholder rights and the agricultural-land bar). The resident buyer's own outward remittances, by contrast, sit inside the Liberalised Remittance Scheme ceiling of USD 250,000 per financial year set under FEMA Section 6.

For the tax that Section 195 protects, the treaty question is: who gets to tax the gain? Across India's Double Taxation Avoidance Agreements the answer for immovable property is the same -- the country where the property is situated retains the primary right to tax the gain. India therefore taxes the capital gain on Indian land at its domestic rate of 12.5%, and the DTAA does not make that gain "exempt" in India. The India-United States treaty, in force since 12 September 1991, allocates the taxing right to the situs state and then requires the residence state to relieve double taxation through a foreign tax credit under Article 24.

Two documents make the treaty operational for the seller: a Tax Residency Certificate (TRC) from the home tax authority and Form 10F filed on the Indian portal. Without both, the deductor cannot apply the beneficial treaty rate and must fall back to the domestic rate -- a point we covered in detail in Claiming DTAA relief under Section 90. Section 195 read with Section 90(2) lets the buyer withhold at the DTAA rate or the Act rate, whichever is lower, but only once that paperwork is on file.

Tax Treatment in India

Start with the contrast that trips up most buyers. Section 194-IA imposes 1% TDS only where the seller is a resident and the consideration is Rs 50 lakh or more. It does not apply to a non-resident seller at all. Payments to non-residents are carved out and routed to Section 195, whose text on indiacode.nic.in requires deduction "at the rates in force" at the earlier of credit or payment. There is no Rs 50 lakh threshold under Section 195; even a Rs 30 lakh sale triggers the obligation.

The rate the buyer applies depends on the holding period. Where the seller held the property for more than 24 months the gain is long-term and taxed under Section 112 at 12.5% for transfers on or after 23 July 2024 without indexation; a seller who acquired before that date may instead elect the grandfathered 20% with indexation where it produces a lower liability. Where the holding period is 24 months or less the gain is short-term and taxed at the seller's slab rate, so buyers commonly withhold at the maximum 30% band plus surcharge and cess.

Because the buyer cannot compute the seller's actual gain, the default is to deduct TDS on the full sale consideration, not on the profit element, unless the seller produces a lower or nil deduction certificate under Section 197. On top of the 12.5% long-term rate sit the surcharge slabs -- 10% where consideration is Rs 50 lakh to Rs 1 crore, 15% from Rs 1 crore to Rs 2 crore -- and a 4% cess on tax plus surcharge. The enhanced higher surcharge bands do not touch capital gains: surcharge on gains under Section 112 is capped at 15% however large the consideration.

Two compliance mechanics are non-negotiable for the buyer. First, obtain a Tax Deduction Account Number (TAN) before the transaction, because Section 195 deductions are reported on the quarterly Form 27Q, not the PAN-based Form 26QB used for resident sales. Second, if the seller has no PAN, Section 206AA overrides the treaty and imposes a minimum 20% deduction -- a figure the NRI tax calculator will let you sanity-check against the surcharge-inclusive rate before you release the payment.

Tax Treatment Abroad

The Indian TDS is not a dead cost to the seller; it is a prepayment the home country will usually credit. Article 24 of the India-US treaty (and the equivalent relief article in every Indian DTAA) obliges the residence country to allow the India tax paid on the Indian-situated gain as a credit against its own tax on the same gain. An NRI resident in the United States reports the sale on Schedule D of Form 1040 and claims the Indian tax as a foreign tax credit on Form 1116, so double taxation is relieved rather than doubled.

The credit is a ceiling, not a top-up. The home country limits the foreign tax credit to its own tax on that slice of income, so the seller only benefits fully where the foreign rate is at least the Indian effective rate of roughly 14.95%. A UAE-resident seller illustrates the extreme: the United Arab Emirates levies no personal income tax on individuals, so there is no home-country liability against which to credit the Indian 12.5%, and the India tax is the entire tax cost -- the DTAA still does not make the gain exempt in India.

Timing mismatches are the practical trap. India's financial year ends 31 March while the US tax year ends 31 December, so the year in which India collects the TDS and the year in which the US grants the credit may differ, and the seller must track the India challan to claim relief in the correct US filing. Where the seller over-deducts because TDS ran on the full consideration rather than the gain, the excess is recovered only by filing an Indian return and claiming a refund -- another reason to secure the Section 197 certificate up front.

Repatriation Mechanics

Selling the property and moving the money abroad are two separate FEMA steps. Sale proceeds of immovable property owned by an NRI are first credited to a Non-Resident Ordinary (NRO) account, because that is the rupee account meant for India-source income such as a property sale, rent or dividends. From the NRO balance, RBI's FEMA framework (rbi.org.in) permits repatriation of up to USD 1 million per financial year, net of applicable taxes, covering both the sale proceeds and other current-year income.

The gate for that outward remittance is the Form 15CA and 15CB pair. Form 15CA is the remitter's online declaration; Form 15CB is the chartered accountant's certificate confirming that the correct tax has been deducted, and it is required once the taxable remittance in the year crosses Rs 5 lakh. Banks will not process the USD 1 million repatriation without the 15CA acknowledgement number, so the seller should budget for this certification before booking the transfer -- our repatriation calculator helps model the net figure after the Section 195 deduction.

Money already sitting in a Non-Resident External (NRE) account or an FCNR deposit is a different story: both the principal and the interest are fully and freely repatriable without any USD 1 million ceiling, because they were funded from foreign earnings in the first place. The catch is that property sale proceeds cannot be parked in an NRE account -- India-source capital receipts must route through the NRO channel and are therefore subject to the USD 1 million annual cap and the 15CA/15CB discipline.

For a seller who also earns Indian rent while the sale completes, that rental income shares the same NRO account and the same repatriation limit, so it pays to compute the combined tax first with the NRI rental income calculator. Planning the sequence -- deduct correctly under Section 195, file Form 27Q, obtain 15CB, then repatriate within the USD 1 million window -- keeps the whole transaction inside the four corners of FEMA and the Income-tax Act.

FAQ

Is the 1% TDS under Section 194-IA ever enough when buying from an NRI?

No. Section 194-IA applies only to resident sellers and to consideration of Rs 50 lakh or more. For a non-resident seller the transaction falls entirely under Section 195, where the buyer withholds at the gain rate of 12.5% for long-term gains (transfers on or after 23 July 2024) plus surcharge and 4% cess, or at slab rates for short-term gains. Deducting only 1% leaves the buyer exposed to interest under Section 201.

Does the buyer need a TAN, or is a PAN enough?

The buyer must obtain a Tax Deduction Account Number (TAN) before the deal closes. Section 195 deductions are reported on the quarterly Form 27Q, which requires a TAN. This differs from resident purchases, where the PAN-based Form 26QB is used and no TAN is needed. Deducting without a TAN and failing to file Form 27Q attracts penalties.

What happens if the NRI seller has no PAN?

Section 206AA overrides the treaty rate and imposes a minimum deduction of 20% where the seller has not furnished a PAN. Even if the applicable DTAA or domestic long-term rate is 12.5%, the absence of a PAN pushes the floor to 20%, so it is in the seller's interest to obtain and share a PAN before completion.

Can TDS be deducted on the gain instead of the full sale price?

Only if the seller obtains a lower or nil deduction certificate under Section 197 from the assessing officer. Without that certificate the buyer must deduct on the full sale consideration, because the buyer cannot independently verify the seller's cost of acquisition or holding period. Any excess deducted is recovered by the seller through an Indian tax return and refund claim.

How much of the sale proceeds can the NRI repatriate abroad?

Sale proceeds are credited to an NRO account, from which RBI's FEMA framework permits repatriation of up to USD 1 million per financial year, net of taxes, supported by Form 15CA and, where the remittance crosses Rs 5 lakh, a Form 15CB certificate from a chartered accountant. Funds in NRE or FCNR accounts are freely repatriable, but property proceeds must route through the NRO account.

Is the capital gain exempt in the NRI's home country because of the DTAA?

No. Under the treaty, India as the situs country retains the right to tax the gain on Indian immovable property at 12.5%. The home country does not exempt the gain; it grants a foreign tax credit (for example, Form 1116 in the United States) up to its own tax on that income. A UAE-resident seller pays no home-country tax simply because the UAE levies no personal income tax, not because the gain is exempt.