Section 195 vs 194-IA: TDS on NRI property sale and Section 197 lower-deduction certificate

The trip-up arrives three weeks before completion. An NRI seller hands over the agreement to sell, the buyer's chartered accountant glances at the Rs 2.8 crore consideration, and asks the question that derails every second NRI property transaction: why are we deducting only one per cent? The buyer should not be deducting one per cent at all. Section 194-IA of the Income-tax Act, 1961, which mandates the 1% TDS resident sellers know so well, is excluded the moment the seller's residential status flips to non-resident. From there, Section 195 takes over, and the deduction is no longer on the gain but on the entire sale consideration.

The numbers escalate quickly. On a property selling for Rs 3 crore where the long-term capital gain is Rs 80 lakh, the resident TDS regime under Section 194-IA would cost the seller Rs 3 lakh in withholding. Under Section 195, the buyer must deduct at 12.5% (the post-Budget 2024 LTCG rate without indexation), plus surcharge of up to 15% on the LTCG portion, plus 4% health and education cess, on the entire Rs 3 crore. That works out to roughly Rs 43.05 lakh withheld against an actual liability of about Rs 11.50 lakh. The seller can claim the excess back as a refund, but the cash sits with the Central Board of Direct Taxes (CBDT) for 18 to 24 months.

Section 197 of the same Act, which lets the Assessing Officer issue a certificate for nil or lower deduction, is therefore the most important compliance document an NRI seller can possess. Filed through Form 13 on the TRACES portal at tdscpc.gov.in, it converts a 12.5% deduction on Rs 3 crore into a 12.5% deduction on the Rs 80 lakh gain, and the buyer remits the difference to the seller on completion.

FEMA / DTAA Position

Sale of immovable property by an NRI is governed jointly by the Foreign Exchange Management Act, 1999 (FEMA), the Income-tax Act, 1961, and the DTAA between India and the seller's country of residence. Regulation 4 of the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018 allows an NRI to sell residential or commercial property to a resident, another NRI, or an OCI without prior Reserve Bank of India approval. Agricultural land, plantation property, and farmhouses can only be sold to a resident Indian.

DTAA does not exempt these gains. India retains the primary right to tax capital gains on immovable property situated in India under Article 13 of every Indian DTAA, including the India-USA treaty (effective from 12 September 1991), the India-UK treaty (effective from 26 October 1993), and the India-UAE treaty. For an NRI tax-resident in the United States, the gain is taxed at 12.5% in India under Section 112 of the IT Act, and the same gain is reported on the US return at the relevant federal long-term capital gains rate of 0%, 15%, or 20%, with foreign tax credit available under Article 24 of the India-USA DTAA.

For NRIs in the United Arab Emirates, where there is no personal income tax, the entire Indian liability is absorbed in India. The DTAA does not exempt the gain in India just because the country of residence does not tax it. That common misreading produces the most expensive notice an NRI seller can receive: a Section 156 demand for the full TDS shortfall, plus Section 234B interest at 1% per month.

Tax Treatment in India

Three statutes intersect at sale. Section 9(1)(i) deems the gain to accrue in India because the property is situated in India; Section 45 charges it in the year of transfer; Section 48 prescribes computation by deducting cost of acquisition and improvement from full value of consideration. The long-term holding period for immovable property is 24 months under Section 2(42A); anything sold within 24 months is short-term and taxed at the seller's slab rate.

Budget 2024 (Finance (No. 2) Act 2024) made a structural change that hit NRI sellers harder than residents. The long-term capital gain rate under Section 112 was reduced from 20% with indexation to 12.5% without indexation, effective for transfers on or after 23 July 2024. Resident individuals and HUFs received a grandfathering option for properties acquired before 23 July 2024, allowing them to pick the lower of 12.5% without indexation and 20% with indexation. That option is not available to NRIs. An NRI selling a flat bought in 2008 for Rs 30 lakh that is now realising Rs 2.5 crore is taxed at 12.5% on the full Rs 2.2 crore gain, without the indexation cushion that took the indexed cost into the Rs 1 crore zone under the pre-July 2024 regime.

Surcharge on long-term capital gains under Section 112 is capped at 15%, as clarified by the proviso to Section 2 of the Finance Act 2022, even where total income would otherwise attract the 25% surcharge band in the new tax regime. Health and education cess at 4% applies on the aggregate of tax and surcharge. The NRI tax calculator at oquilia.com/calculators/nri/nri-tax computes the gross-up across LTCG slab, surcharge, and cess for any sale-consideration figure.

The TDS mechanic is set out in Section 195 read with Rule 30 of the Income-tax Rules, 1962. The buyer must deduct at the time of credit or payment, whichever is earlier, deposit it within seven days of the end of the month using challan ITNS-281, and issue Form 16A to the seller within 15 days of filing the quarterly Form 27Q return. Form 27Q replaces Form 26QB; the latter is structurally limited to resident sellers under Section 194-IA and the TRACES portal will not accept it against an NRI's PAN.

The single biggest operational difference from the resident regime is that the buyer must hold a Tax Deduction and Collection Account Number (TAN) under Section 203A. A buyer who deducts under Section 194-IA on an NRI's sale instead of Section 195 is treated as an assessee-in-default under Section 201, exposed to interest at 1% per month for non-deduction (Section 201(1A)(i)) and 1.5% per month for non-deposit (Section 201(1A)(ii)), plus a penalty equal to the tax not deducted under Section 271C.

Section 197 lower-deduction certificate in practice

Section 197(1) empowers the Assessing Officer to grant a certificate authorising lower or nil deduction where the actual liability justifies it. The seller files Form 13 on TRACES, and the AO computes the estimated capital gain after accepting documentary evidence of cost of acquisition, improvement, registration charges, stamp duty, and brokerage. The certificate is issued with the specific buyer's TAN endorsed on it and is valid only for that transaction.

Processing time is officially 30 days under the Citizen's Charter, but field experience across FY 2024-25 puts the median at 35 to 50 working days, with Mumbai, Delhi, and Bengaluru running closer to 45 days. Form 13 must be filed soon after the agreement to sell is executed, ideally before any advance is received. Without a certificate, the only post-deduction relief is a refund claim through the annual return under Section 139, crystallising the cash blockage for 18 to 24 months.

Tax Treatment Abroad

For an NRI tax-resident in the United States, the Indian capital gain enters Schedule D of Form 1040. The federal rate is 0%, 15%, or 20% depending on the seller's bracket, with the 20% rate applying above USD 583,750 of adjusted gross income for single filers in tax year 2025. The 3.8% Net Investment Income Tax under Section 1411 of the Internal Revenue Code applies above USD 200,000 of modified AGI for single filers. Foreign tax credit is claimed on Form 1116 for the Indian tax paid; because India's 12.5% rate is generally lower than the US 15% or 20% rate, the credit fully offsets the Indian tax and the seller still owes a residual to the US Treasury.

For UK-resident NRIs, capital gains tax applies at 18% (basic band) or 24% (higher and additional bands) on residential property gains for disposals on or after 30 October 2024. The India-UK DTAA under Article 14 gives India the primary right to tax, with FTC under Article 24. The 2025 UK Budget's abolition of the remittance basis from 6 April 2025 means the gain is taxable in the UK on an arising basis regardless of whether proceeds are remitted. For UAE residents, there is no personal income tax, so the Indian Section 112 tax is the final liability.

A common but expensive mistake is treating the India-Singapore DTAA's territorial wording as exempting the gain in India. India's right to tax under Article 13 is independent of Singapore's territorial regime; the gain is fully taxable in India at 12.5% and only the Singapore residue depends on remittance.

Repatriation Mechanics

Sale proceeds fall under the Reserve Bank of India's Master Direction on Remittance of Assets (RBI/FED/2015-16/9, updated to date). The proceeds must first be credited to the seller's NRO account; direct credit to NRE or FCNR(B) is not permitted, irrespective of how the property was acquired. From the NRO account, repatriation is allowed up to USD 1 million per financial year per individual under Regulation 4(2) of the Foreign Exchange Management (Remittance of Assets) Regulations, 2016, subject to Form 15CA (Part C) and Form 15CB (CA certificate), both filed electronically on the Income Tax e-filing portal under Section 195(6) read with Rule 37BB.

Where the property was acquired by inheritance, the USD 1 million annual cap still applies, but the NRI must also declare that the inheritance was from a person who was a resident of India at the time of acquisition, or hold the succession certificate or probated will. The repatriation calculator at oquilia.com/calculators/nri/repatriation walks through the per-year cap arithmetic when sale value exceeds the USD 1 million threshold.

Where no Section 197 certificate has been obtained, the 12.5% TDS is reflected in Form 26AS within 7 to 15 days of the buyer filing Form 27Q. The seller can claim it back through the annual return, but the funds available for immediate repatriation are correspondingly reduced. A Section 197 certificate therefore directly affects how much can move out of India within the FY of sale.

Rental income before sale follows a parallel Section 195 regime read with its second proviso, at 30% on gross rent for an NRI landlord, unless the rental income calculator at oquilia.com/calculators/nri/rental-income-tax shows a lower effective rate after the 30% standard deduction under Section 24(a). A separate Form 13 application can reduce the tenant's withholding to the rate on net rent.

FAQ

Can the buyer deduct 1% under Section 194-IA if the NRI seller has lived abroad for less than a year?

No. Section 194-IA applies only where the transferor is a resident under Section 6 of the IT Act. Residential status is determined for the financial year of the transfer using the 182-day, 60-day, and 120-day Rs 15 lakh tests. If the seller fails the resident test for the FY in which the sale deed is registered, Section 195 governs irrespective of how recently the seller migrated.

Does the buyer need a TAN to deduct under Section 195?

Yes. Section 203A makes a TAN mandatory for any person required to deduct tax under Chapter XVII-B. The buyer must apply on Form 49B with Protean (formerly NSDL) before the deduction event. A buyer who attempts to deduct using a PAN alone receives a system rejection while filing Form 27Q on TRACES.

What is the effective TDS rate on the full consideration without a Section 197 certificate?

Under Section 112 (post 23 July 2024), 12.5% LTCG plus surcharge up to 15% (capped under the proviso to the Finance Act 2022) plus 4% cess gives an aggregate effective rate of about 14.95% on the full sale value for LTCG transactions. For STCG (holding under 24 months), slab rates plus surcharge plus cess apply, often touching 39%.

How long does Section 197 certificate processing actually take?

The Citizen's Charter mentions 30 days, but Form 13 filings tracked through FY 2024-25 show a median of 35 to 50 working days, longer in metro jurisdictions. Escalate via e-Nivaran on incometax.gov.in if the certificate has not arrived within 45 days.

Can two co-owner NRIs file a single Form 13?

No. Section 197 certificates are PAN-specific. Each co-owner files an independent Form 13 and the buyer receives two separate certificates with corresponding line entries in Form 27Q.

Does the Section 195 deduction apply on the stamp duty value or the consideration?

Section 195 deducts on actual consideration. However, Section 50C deems the stamp duty value to be the full value of consideration where it exceeds the actual consideration by more than 10%, and the Section 197 AO factors this in upfront to avoid a downstream reassessment under Section 147.

Can sale proceeds be credited directly to an NRE account to avoid the NRO route?

No. Schedule 1 of the Foreign Exchange Management (Deposit) Regulations, 2016 restricts NRE credits to inward remittance and current-income inflows. Property sale proceeds must first land in NRO and then move out under the USD 1 million annual repatriation window with Forms 15CA and 15CB.