TDS on Property Purchased From an NRI: Section 195 Rules for AY 2026-27
TL;DR
- Section 195 (not 194-IA) governs TDS when the seller is an NRI; rates are much higher.
- Long-term capital gains attract 12.5% plus surcharge and cess; short-term gains are taxed at the NRI's slab rate.
- TDS is deducted on the entire sale consideration unless the seller obtains a Lower Deduction Certificate under Section 197.
- A TAN is mandatory; the buyer files Form 27Q quarterly instead of Form 26QB.
- Form 15CA and Form 15CB filings are needed when funds are remitted to the NRI's overseas account.
What this means in plain terms
Most Indian property buyers know about the 1% TDS rule under Section 194-IA. What very few realise is that this rule does not apply when the seller is a Non-Resident Indian. Instead, Section 195 kicks in, and the TDS rate jumps to 12.5% or even 30% depending on the holding period.
This rule is buyer-protective. The government collects tax upfront because chasing an NRI seller for tax dues after they exit India is impractical. But the compliance burden on the Indian buyer is heavy: a TAN registration, monthly TDS deposit, quarterly Form 27Q filing, and Form 15CA/CB for the foreign remittance leg. Missing any step can hold up the property registration or the seller's overseas remittance.
Why Section 195 applies instead of Section 194-IA
Residential status of the seller
Section 194-IA explicitly excludes payments to non-residents. The residential status of the seller is determined as per Section 6 of the Income Tax Act. If the seller has been outside India for the prescribed days, they qualify as NRI and Section 195 applies regardless of the property value.
The Rs. 50 lakh threshold does not apply
Section 195 has no monetary threshold. Even if the NRI is selling a Rs. 30 lakh property, TDS must be deducted. The Rs. 50 lakh trigger that exists in Section 194-IA does not carry over.
TAN requirement
The buyer must obtain a Tax Deduction Account Number (TAN) before deducting TDS. PAN is not enough for Section 195. TAN registration takes 5-7 working days through Form 49B on the protean portal.
TDS rates and computation
Long-term capital gains rate
If the NRI seller has held the property for more than 24 months, the gains are long-term and taxed at 12.5% plus surcharge and cess as per Budget 2024 (effective FY 2024-25 onwards). Effective rate is around 13% for most NRIs.
Short-term capital gains rate
If holding is 24 months or less, gains are short-term and taxed at the NRI's slab rate plus surcharge and cess, which can be as high as 30%+.
TDS on full sale value, not just gains
By default, TDS under Section 195 is deducted on the entire sale consideration, not just the gains. To deduct on gains only, the NRI must obtain a Lower Deduction Certificate under Section 197.
Lower Deduction Certificate under Section 197
Why it matters
Without a Section 197 certificate, the buyer deducts TDS on the full sale price. So for a Rs. 1 crore property sale where the seller's actual capital gain is Rs. 30 lakh, TDS at 12.5% on Rs. 1 crore is Rs. 12.5 lakh, even though the actual tax liability may be Rs. 3.9 lakh.
How the seller applies
The NRI seller files Form 13 on the TRACES portal, attaching computation of expected capital gains, cost of acquisition documents, and indexation calculations. The Assessing Officer reviews and issues a certificate within 30-60 days, allowing TDS at a lower rate on gains only.
Timing considerations
The certificate must be in hand before the sale is registered, because TDS must be deducted at the time of payment. Late certificates do not allow retrospective rate adjustment.
Filing Form 27Q and Form 15CA/CB
Form 27Q
Form 27Q is the quarterly TDS return for payments to non-residents. The buyer files it on TRACES by 31 July (Q1), 31 October (Q2), 31 January (Q3), and 31 May (Q4).
Form 15CA
Form 15CA is a declaration filed by the remitter (buyer) at incometax.gov.in before sending funds to the NRI's overseas account. It captures details of the remittance and the TDS deducted.
Form 15CB
Form 15CB is a CA certification of the remittance and is needed when the remittance exceeds Rs. 5 lakh in a financial year. The CA validates that TDS has been correctly deducted.
A real example
Meera, 41, Rs. 36L CTC, Bengaluru buys a Rs. 1.2 crore villa in Hebbal from Rahul, who has been working in Dubai for 6 years and is an NRI. Rahul bought the villa in 2018 for Rs. 70 lakh.
Here is the TDS workflow:
- Long-term gains = Rs. 1.2 crore minus indexed cost of Rs. 90 lakh = Rs. 30 lakh.
- Without Section 197 certificate, Meera must deduct TDS on full Rs. 1.2 crore at 12.5% plus 4% cess = approximately Rs. 15,60,000.
- With Section 197 certificate (Rahul applies via Form 13), TDS is on Rs. 30 lakh of gains only = approximately Rs. 3,90,000.
- Meera registers for TAN, deducts the TDS at the time of payment, deposits via ITNS-281 monthly.
- Files Form 27Q quarterly and Form 15CA before remitting balance to Rahul's Dubai account; CA furnishes Form 15CB.
Rahul gets Form 16A from TRACES and uses it to claim TDS credit while filing his ITR-2 in India.
What to do this week
- Check the seller's residential status formally before signing any agreement; ask for passport stamps if needed.
- Apply for TAN immediately if you have not already; it takes 5-7 working days.
- Encourage the NRI seller to apply for a Lower Deduction Certificate under Section 197 if their actual tax liability is much lower than the default TDS.
- Engage a CA early for Form 15CB if the remittance to NRI exceeds Rs. 5 lakh.
- Run the 6-step assessment at https://myfinancial.in to see your old-vs-new regime delta, unused deductions, and insurance gap in under 10 minutes.
FAQ
What if the NRI seller holds an Indian PAN?
The Indian PAN does not change the residential status. Section 195 still applies because the determining factor is residential status, not citizenship or PAN.
Can I use Form 26QB by mistake?
If you filed Form 26QB for an NRI seller, the TDS rate is wrong (1% instead of 12.5%/30%). The CPC-TDS will issue a default notice, and you must file a correction and pay the differential along with interest.
Is the buyer liable if the seller misclassifies as resident?
Yes. The buyer is the deductor and bears the liability. If the seller's residential status was NRI but they filed wrong status, the buyer faces TDS default. Always verify residential status with documentary proof.
What is the surcharge and cess on Section 195 TDS?
For long-term gains, surcharge ranges from 10% to 25% based on income; cess is 4% on tax plus surcharge. Effective rate for most NRIs is around 13% to 14%.
Do repatriation rules under FEMA also apply?
Yes. The NRI seller can repatriate up to USD 1 million per financial year from NRO account, subject to TDS compliance and Form 15CA/CB. Sale of inherited property has separate FEMA rules.
Can the NRI claim TDS refund?
Yes. If actual tax liability is lower than TDS deducted, the NRI files ITR-2 in India and claims the refund. Processing typically takes 3-6 months.
What about properties held jointly by an NRI and a resident?
TDS is split. On the NRI's share, Section 195 applies. On the resident's share, Section 194-IA applies. Each buyer-seller pair files their respective form (Form 27Q for NRI portion, Form 26QB for resident portion).
Sources
This is general information, not personalised advice. For your situation, consult a Certified Financial Planner.
