NRI Property Sale TDS Section 195: Why 1% TDS for Residents vs 12.5% LTCG / 30% STCG for NRIs

The single most expensive surprise in any cross-border property transaction in India is the gap between resident TDS and non-resident TDS. A resident seller hands over a 1% TDS certificate under Section 194-IA on any property above Rs 50 lakh. An NRI seller, sitting in New York or Dubai, watches the buyer deduct 12.5% (LTCG) or 30% (STCG) of the entire sale consideration under Section 195 - sometimes locking up Rs 30-40 lakh on a Rs 1 crore flat. The Finance (No.2) Act 2024, notified on 16 August 2024, removed indexation for property and reset the LTCG rate to 12.5% from 23 July 2024 onward, which means the old 20% indexed regime no longer applies to new transfers (incometax.gov.in, Finance Act 2024, Section 50). For NRIs holding ancestral flats in Bandra, Bengaluru, or Gurugram, this article walks through how Section 195 is operated, how to compress it via Section 197, and what happens when the proceeds need to leave India.

FEMA / DTAA Position

Under Section 6 of the Foreign Exchange Management Act, 1999 (FEMA), an NRI may hold immovable property in India only in the categories permitted by the Reserve Bank of India - residential and commercial property other than agricultural land, plantation land, or farmhouses (rbi.org.in, Master Direction on Acquisition and Transfer of Immovable Property, 28 January 2016). The Master Direction further allows an NRI to transfer such property to a resident, another NRI, or an Overseas Citizen of India (OCI) holder. Sale to a foreign national who is not an NRI or OCI is barred without specific RBI approval. For a primer on the underlying statute see our FEMA glossary entry.

Income-tax treatment of the resulting capital gain is laid down by Section 9(1)(i) of the Income-tax Act, 1961 - income arising 'through the transfer of a capital asset situated in India' is deemed to accrue in India regardless of where the seller resides (indiacode.nic.in, IT Act 1961). India therefore retains primary taxing rights, and most Double Taxation Avoidance Agreements (DTAAs) follow Article 13 of the OECD Model: gains from immovable property are taxable in the State where the property is situated. India's bilateral treaty with the United States (effective 12 September 1991) and with the United Kingdom (effective 26 October 1993) confirm this - capital gains on Indian-situs immovable property fall under Article 13 and are taxable in India at 12.5% LTCG; the resident State grants a foreign tax credit under Article 25 (USA) or Article 24 (UK).

The takeaway: no DTAA exempts the NRI from Indian capital-gains tax on property. The only treaty benefit available is a foreign tax credit on the home-country side, never an exemption on the India side.

Tax Treatment in India

Section 194-IA vs Section 195

For a resident seller, the buyer's obligation under Section 194-IA is to deduct 1% of the consideration if the value crosses Rs 50 lakh. The deduction is a flat 1% of the gross figure - no slabs, surcharge, or cess - and the certificate is in Form 16B. For an NRI seller, the buyer steps into Section 195. The provision instructs the payer to withhold tax 'at the rates in force' on any sum chargeable to tax in India. As the Central Board of Direct Taxes (CBDT) clarified in Circular 728 dated 30 October 1995, the deduction must be made on the chargeable income, but where the buyer cannot determine that figure the default is to withhold on the full consideration. Most buyers default to gross-amount withholding to avoid downstream litigation under Section 201 - which is exactly why NRI sellers face such a heavy upfront block. A primer on the broader withholding mechanism sits in our TDS glossary entry.

The applicable rates from 23 July 2024 onward are codified in Section 112 read with the residual provisions of the Finance (No.2) Act 2024:

Surcharge under the new tax regime - the default for FY 2025-26 - is capped at 25% on income above Rs 5 crore; the older 37% top-slab was removed by the Finance Act 2023 with effect from 1 April 2023 (incometax.gov.in, Finance Act 2023). For most NRIs selling a single property worth Rs 1-3 crore, the effective TDS works out to roughly 13.0% (LTCG) or 33.5% (STCG) after surcharge and cess.

Worked example: Rs 1.6 crore flat in Pune

Assume an NRI bought a Pune apartment in 2010 for Rs 38 lakh and sells in May 2026 for Rs 1.6 crore. Holding period exceeds 24 months, so the gain is long-term.

• Capital gain (no indexation, post-Finance Act 2024) = Rs 1.6 crore minus Rs 38 lakh = Rs 1.22 crore
• Tax under Section 112 at 12.5% = Rs 15.25 lakh
• Surcharge at 15% (income above Rs 1 crore) = Rs 2.29 lakh
• Cess at 4% = Rs 70,160
• Total tax payable = approximately Rs 18.24 lakh

The buyer's TDS under Section 195, however, computed on the gross Rs 1.6 crore at 12.5% plus 15% surcharge plus 4% cess, is Rs 23.92 lakh - Rs 5.68 lakh more than the actual tax. That excess sits with the Income-tax Department until the NRI files an ITR-2 and claims a refund, You can run your own numbers through the NRI tax calculator and the rental income calculator.

Lower deduction certificate under Section 197

The escape hatch is Section 197 - a Lower Deduction Certificate (LDC). The NRI seller files Form 13 with the Jurisdictional Assessing Officer (International Taxation circle) before the sale is registered. The AO computes the actual likely tax liability - taking cost, the grandfathered 1 April 2001 fair-market-value base for pre-2001 acquisitions, and Section 54 / 54EC reinvestment intent - and issues a certificate authorising the buyer to deduct at the lower rate, often as low as 1.5-3% of the consideration. The CBDT prescribed an online TRACES workflow under Notification 8/2018 and revised it via Notification 2/2024 dated 27 March 2024, mandating digital submission and disposal within 30 days where the application is complete.

A Form 13 application typically demands:

Without a PAN, Section 206AA forces a default 20% withholding even if the DTAA rate is lower - the only relief is Rule 37BC, which exempts non-residents from Section 206AA where they furnish name, address, country of residence, TRC, and a foreign Tax Identification Number.

Tax Treatment Abroad

The home-country position varies sharply depending on whether the foreign jurisdiction taxes worldwide income.

United States. A US person is taxed on worldwide capital gains. The Indian property gain enters Schedule D - long-term gains taxed at 0%, 15%, or 20% depending on the federal bracket, plus 3.8% Net Investment Income Tax (NIIT) for high earners. The Indian tax at 12.5% (plus surcharge and cess) is creditable under Form 1116 (general category) up to the US tax on the same income; excess foreign tax carries forward 10 years (Internal Revenue Code Section 904(c)). Because the Indian rate is now 12.5% rather than the old 20% indexed rate, more US-resident NRIs will find their US tax exceeds the Indian credit, meaning some additional US tax may be due even after the foreign tax credit - a position that was uncommon under the pre-2024 regime.

United Kingdom. A UK-resident NRI is taxed on worldwide capital gains under the Taxation of Chargeable Gains Act 1992. Residential-property gains are taxed at 18% (basic-rate band) or 24% (higher-rate band) following the Finance (No.2) Act 2024, with a unilateral foreign tax credit equal to the lower of the Indian tax or the UK tax on the same income (HMRC Helpsheet HS263). The UK has not allowed indexation for individuals since 2008.

United Arab Emirates. Individuals in the UAE are not taxed on personal capital gains from foreign property - the 9% UAE Corporate Tax introduced from 1 June 2023 applies to business income, not to individual capital gains on Indian-situs assets. There is therefore no UAE tax liability on the Indian sale and no foreign-tax-credit claim - but also no relief for the Indian TDS overhang. UAE-resident NRIs typically use the LDC route under Section 197 to compress the cash-flow lock-up, since they cannot recover anything via a foreign credit.

For a parallel read on cross-border treatment of Indian-source rental flows, our companion piece on NRI rental income tax in FY 2025-26 walks through the let-out property rules.

Repatriation Mechanics

Once the sale is closed, TDS deposited, and the seller's tax position settled, the next question is how the funds leave India. The two compliance forms - Form 15CA and Form 15CB - sit at the heart of the process; see our Form 15CA / 15CB glossary entry.

NRO route (the default)

Sale proceeds of immovable property held by an NRI must, by default, be credited to a Non-Resident Ordinary (NRO) account. Repatriation is governed by the RBI's Master Direction on Remittance of Assets, 1 January 2016 (rbi.org.in). The cap is USD 1 million per financial year, aggregated across all sources (sale of property, inheritance, rental, dividends). The seller computes the post-tax balance, files Form 15CA online on incometax.gov.in plus a Form 15CB chartered-accountant certificate, and the bank executes the SWIFT transfer in the home-country currency.

NRE / FCNR route (limited)

If the property was originally bought using funds remitted from abroad through banking channels, and the original inward remittance is documented, the principal is freely repatriable up to two residential properties per individual without the USD 1 million cap. This is set out in Regulation 6(b) of FEMA Notification 21(R)/2018-RB (rbi.org.in). The capital-gain element, however, is still routed through NRO and counted against the USD 1 million ceiling.

Practitioners commonly miss the fact that loan-funded property sale proceeds are treated as NRO-route, even when the loan was an NRE-housing loan partially serviced from foreign earnings. You can model the repatriation flow using our NRI repatriation calculator, which flags the documentation list per route.

Section 54 / 54EC reinvestment

Where the NRI does not need the cash abroad immediately, two reinvestment exemptions are open:

• Section 54 - exemption from LTCG if the gain is reinvested in another residential house in India (one new house if gain is up to Rs 2 crore; a one-time-in-lifetime two-house benefit applies if gain is up to Rs 2 crore). Purchase window: 1 year before or 2 years after sale; construction window: 3 years after sale.
• Section 54EC - exemption up to Rs 50 lakh of LTCG by investing in 5-year capital-gains bonds of NHAI, REC, or PFC within 6 months of sale.

Both routes are available to NRIs on the same footing as residents. The 54EC bond lock-in was raised from 3 years to 5 years by the Finance Act 2018 with effect from 1 April 2018, so they are best used for the gain portion the NRI does not intend to repatriate.

FAQ

Why is TDS 12.5% on the entire sale value and not on the gain?

Section 195 requires the buyer to deduct on 'any sum chargeable' - but as CBDT Circular 728 (30 October 1995) records, where the buyer cannot apportion gain from cost the safe-harbour is to withhold on the gross consideration. An LDC under Section 197 is the only practical way to compress the deduction to actual tax. Without it, the seller's working capital is locked until ITR-2 refund issues,

Does the new 12.5% LTCG rate apply if I bought before 23 July 2024?

The Finance (No.2) Act 2024 grandfathering option (12.5% without indexation or 20% with indexation, whichever is lower) applies only to resident individuals and HUFs under the proviso to Section 112. For NRIs the statute applies 12.5% without indexation, with no 20% fallback. Confirm against the latest CBDT FAQ on incometax.gov.in before relying on this in a specific transaction.

Can I avoid Indian tax altogether by claiming UAE or Singapore residence?

No. Section 9(1)(i) deems the gain to accrue in India because the asset is situated in India, and Article 13 of every Indian DTAA assigns immovable-property gains to the source State. Treaty residence in the UAE or Singapore does not displace India's taxing right at 12.5% LTCG.

What happens if I sell to another NRI?

The buyer NRI is still required to deduct TDS under Section 195 - there is no exemption for NRI-to-NRI transactions. The buyer must obtain a TAN, file Form 27Q quarterly, and issue Form 16A to the seller. A Form 13 LDC remains available to the seller.

Is the 1% TDS under Section 194-IA ever applicable to an NRI seller?

No. Section 194-IA explicitly applies only where the seller is a resident. The moment the seller is an NRI the buyer's obligation flips to Section 195. Buyers who incorrectly deduct 1% can be held in default under Section 201(1) and face interest under Section 201(1A) at 1% per month for short-deduction.

How do I handle a co-owned property where one owner is resident and the other NRI?

Treat the consideration as split per the title share. The portion attributable to the resident attracts Section 194-IA at 1%; the portion attributable to the NRI attracts Section 195 at the LTCG or STCG rate. The buyer must execute two separate TDS challans referencing each seller's PAN.