Section 195 TDS On NRI Property Sale: Why Buyer Must Withhold At Capital Gains Rate Plus Surcharge

Most property buyers in India have trained themselves to deduct 1% TDS, file a quick Form 26QB, and move on. That muscle memory is correct, but only when the seller is a resident. The instant the person selling you the flat is a Non-Resident Indian, the entire withholding machinery changes. You move out of Section 194-IA and into Section 195 of the Income-tax Act 1961, where there is no Rs 50 lakh threshold, no flat 1% rate, and no PAN-only shortcut. You become responsible for withholding tax at the full capital-gains rate, and if you get it wrong, the Department comes after you, the buyer, not the NRI who has already flown home.

This is the single most expensive mistake in NRI property transactions. A buyer who deducts 1% on a Rs 2 crore purchase from an NRI under-collects by tens of lakhs and inherits the liability under Section 201. This guide sets out exactly what Section 195 demands, the rate plus surcharge plus cess you must apply, and the Form 13 route that lets a genuine seller bring the deduction down to the real tax due.

FEMA / DTAA Position

The right to sell Indian immovable property and take the money out sits inside the Foreign Exchange Management Act 1999. Under the capital-account framework of Section 6 of FEMA 1999, transactions affecting assets outside India by a resident, and assets in India by a non-resident, require general or specific Reserve Bank of India permission unless they are expressly permitted. The good news for sellers is that the RBI has long granted general permission to NRIs and OCI cardholders to sell residential and commercial property to a resident, another NRI, or an OCI. The sale itself is permitted; the constraint that bites is on taking the proceeds abroad, which is governed by the Remittance of Assets framework discussed in the repatriation section below.

The tax side is governed by the relevant Double Taxation Avoidance Agreement read together with the Income-tax Act. Section 195 itself directs the deductor to withhold at the rates in force under the Act or the rates under the applicable DTAA, whichever is lower. The crucial point that catches sellers out is that capital gains on immovable property are never "exempt" under a DTAA. India, as the source state where the property is situated, retains the first right to tax. Under the India-United States treaty (in force from 12 September 1991), for example, the long-term capital gains rate India applies is 12.5%, and Article 24 then directs the United States, as the residence state, to grant a foreign tax credit. The treaty reduces double taxation; it does not eliminate the Indian charge. Anyone who reads "DTAA benefit" as "no Indian tax" on a property sale is reading it wrong, and our DTAA benefit calculator and the DTAA glossary entry walk through how the lower-of-two test actually resolves.

Tax Treatment in India

Section 195(1) is deliberately broad: any person responsible for paying to a non-resident any sum chargeable to tax under the Act must deduct income tax at the time of credit or payment, whichever is earlier. Sale consideration paid to an NRI for property carries an embedded capital gain, and that gain is the sum chargeable. Because the buyer cannot, on his own, split the consideration neatly into capital and gain, the default position is that withholding is computed on the full consideration unless the seller produces a certificate fixing a lower figure.

The rate depends on the holding period. If the NRI held the property for more than 24 months, the gain is long-term. Following Budget 2024, the long-term capital gains rate on immovable property is 12.5% without indexation for assets acquired on or after 23 July 2024. For property acquired before 23 July 2024, the seller may choose the grandfathered route of 20% with indexation, whichever produces the lower tax. If the property was held for 24 months or less, the gain is short-term and taxed at the slab rate, which for a substantial gain reaches the top slab of 30%.

On top of the base rate sit two further charges that buyers routinely forget: surcharge, which steps up with the consideration, and a health and education cess of 4% on tax plus surcharge. The surcharge slabs applied are set out below, and the surcharge glossary entry explains why a large transaction is taxed harder.

For a short-term sale, replace the 12.5% base with the 30% top slab rate before adding surcharge and cess, so a sub-Rs 50 lakh short-term deal withholds at 31.20%. The mechanics of computing the actual liability against this gross withholding are exactly what our NRI tax calculator is built for, and rental sellers should separately model recurring income on the rental income tax calculator.

Two compliance obligations attach to the buyer and are non-negotiable. First, the buyer must obtain a Tax Deduction and Collection Account Number (TAN); the PAN-only Form 26QB route used for resident sellers is not available under Section 195. Second, the buyer must report the deduction in Form 27Q, the quarterly TDS return for payments to non-residents, and issue Form 16A to the seller. The TDS glossary entry covers the deposit timeline, and the consequences of getting it wrong are severe: under Section 201, a buyer who under-deducts becomes an assessee-in-default liable for the shortfall plus interest at 1% per month for under-deduction and 1.5% per month for late deposit.

Tax Treatment Abroad

The Indian TDS is not the end of the story for the seller; it is the start of a credit claim in the country of residence. Most of India's treaties follow the same architecture: the source state taxes the property gain first, and the residence state then relieves double taxation through a foreign tax credit. Under Article 24 of the India-United States DTAA, the United States allows its residents a credit for Indian income tax paid on the same gain, capped at the US tax otherwise payable on that income. A seller in the United States who has suffered 12.5% plus surcharge and cess in India does not pay that tax a second time in full; the credit offsets the US liability up to the treaty ceiling.

The practical friction is one of timing and proof. The credit in the foreign jurisdiction is claimed in that country's tax year, which rarely lines up with India's April-to-March year, and the credit requires documentary evidence of the Indian tax paid, which is precisely what Form 16A and the Form 27Q acknowledgement provide. Other treaty rates illustrate how source taxing rights vary by income type: under the India-United States treaty, portfolio dividends are taxed at 15% and interest at 15% at source, with the residence state again granting credit. The foreign tax credit calculator helps a seller estimate how much of the Indian withholding will actually be recoverable abroad rather than becoming a sunk cost.

A recurring error is to assume the foreign tax credit makes the Indian TDS economically free. It does not. Where the foreign tax on the gain is lower than the Indian tax, or where foreign-tax-credit limitation rules cap the usable credit, part of the Indian withholding is a real, unrecoverable cost. That is why managing the Indian rate down to the true liability, rather than over-withholding and chasing a refund across two jurisdictions, matters so much.

Repatriation Mechanics

Once the sale completes and TDS is deducted, the net proceeds land in the seller's NRO account, because rupee proceeds of an Indian asset sale are credited there by default. The repatriation route then depends on the account type, and the distinctions matter.

Sale proceeds in the NRO account are repatriable, but only within the ceiling the Reserve Bank permits under its Remittance of Assets framework for non-residents, and only after the seller routes the remittance through the prescribed documentation. The seller must file Form 15CA online and obtain a chartered accountant's certificate in Form 15CB confirming that the applicable taxes, including the Section 195 TDS, have been paid before the bank releases the funds abroad. The repatriation calculator and the NRO account glossary entry set out the documentation chain. For sellers who first move money into an NRE account, the FCNR deposit calculator shows how freely repatriable balances can be parked without exchange risk while the remittance is arranged.

For balance, residents on the other side of these transactions operate under the Liberalised Remittance Scheme, which permits remittances of up to USD 250,000 per financial year under FEMA, a limit our coverage of the LRS and its TCS rules explains in detail.

The Form 13 Escape Route, Step By Step

The single most valuable tool for an NRI seller is the lower-deduction certificate. Withholding on the gross consideration can lock up a sum many times larger than the real tax, because the gain is usually a fraction of the sale price. The seller does not have to accept this. Under the certificate mechanism, the seller applies to the Assessing Officer in Form 13 before the sale, submitting the purchase cost, indexation or acquisition date, improvement costs, and the computed gain. The officer issues a certificate authorising the buyer to deduct at the actual computed rate on the gain, rather than the headline rate on the whole price.

The buyer then deducts strictly as the certificate directs, references the certificate number in Form 27Q, and the cash-flow drag on the seller collapses. A seller who does not obtain the certificate is not without remedy, but the remedy is slow: deduct on the gross, then file an Indian income-tax return after the financial year and claim a refund of the excess over the true liability, waiting out the Department's processing cycle. For a large transaction, the difference between the Form 13 route and the refund route can be lakhs of rupees of trapped capital for the better part of a year.

A practical checklist for the buyer protects both sides. Confirm the seller's residential status in writing before signing. Obtain a TAN well before the first payment, including any advance or token. Ask the seller whether a Form 13 certificate exists and collect a copy if it does. Deduct on the correct base, deposit by the seventh of the following month, and file Form 27Q by the quarterly due date. Issue Form 16A promptly so the seller can claim the credit abroad. Skipping any of these steps shifts risk onto the buyer under Section 201, and that risk is entirely avoidable.

FAQ

Does the Rs 50 lakh TDS threshold under Section 194-IA apply when I buy from an NRI?

No. Section 194-IA and its 1% rate apply only when the seller is a resident. The moment your seller is a non-resident, the transaction shifts to Section 195, which has no minimum threshold. Even a Rs 10 lakh sale to an NRI attracts full capital-gains-rate TDS.

Do I need a TAN to deduct TDS under Section 195?

Yes. Unlike Section 194-IA, which lets a buyer use only a PAN, Section 195 requires the buyer to obtain a Tax Deduction and Collection Account Number, deduct the tax, deposit it, and file Form 27Q every quarter. There is no PAN-only shortcut.

TDS was deducted on the full sale price, not just my gain. Can I recover the excess?

Yes, by two routes. Before the sale, apply for a lower-deduction certificate under Form 13 so the buyer withholds only on the computed gain. After the sale, file an Indian income-tax return and claim a refund of the excess over the actual computed liability.

Can the NRI claim relief abroad for the TDS paid in India?

Yes. Under Article 24 of the India-United States DTAA, in force from 12 September 1991, the country of residence grants a foreign tax credit for the Indian tax paid, subject to its own ceiling. India retains the first right to tax the property gain at 12.5%, so the credit reduces, but does not erase, the overall burden.

What happens to me as the buyer if I deduct too little TDS?

You become an assessee-in-default under Section 201. The Department can recover the shortfall, plus interest at 1% per month for under-deduction and 1.5% per month for late deposit, from you, the buyer, not from the NRI seller who has already received the money.

Can the NRI repatriate the sale proceeds abroad after TDS?

Yes, through the NRO account, within the RBI ceiling under the FEMA Remittance of Assets framework, and only after filing Form 15CA online together with a chartered accountant's Form 15CB certifying that the applicable taxes, including the Section 195 deduction, have been paid.