When a Non-Resident Indian sells a property in India, one of the most debated issues is the TDS that becomes applicable on the sale transaction. Unlike resident sellers who face a low 1% TDS, NRIs often find themselves dealing with much higher tax deductions, complex documentation and questions around exemptions. Property transactions often involve large amounts of money, so even a small error made could result in higher taxes deducted than necessary and delays in processing refunds or other legal issues related to property transactions.
This article explains in a clear and simple manner how TDS works for NRIs selling residential or commercial property in India, the applicable rates, exemptions, and how to avoid unnecessary deductions.
Introduction
The Indian real estate market has always attracted Non Resident Indians (NRIs), as many of them will have purchased a property within their hometowns and as long-term investments. When an NRI decides to sell such property, the transaction is regulated by the Income Tax Act, FEMA guidelines, and strict TDS provisions.
One of the most common misconceptions is that NRIs are taxed heavily on property sales. While the TDS amount deducted upfront may seem high, the actual tax payable depends on factors like period of holding, type of capital gain and available deductions.
To avoid confusion, it is essential to understand how TDS works, especially since buyers (whether resident or non-resident) must deduct tax before making payment to the NRI seller.
Why Does TDS Apply Differently for NRIs?
The Income Tax Act treats NRIs differently because their income is earned in India, but they reside outside the country. Property sale income is considered capital gains arising in India, which makes it taxable here.
To ensure tax collection, the law makes it mandatory for the buyer to deduct TDS, as collecting tax later from an NRI is more difficult due to non-residency.
How is TDS Calculated for NRIs Selling Property?
The TDS rate depends on whether the gain is Short Term Capital Gain (STCG) or Long Term Capital Gain (LTCG).
Long Term Capital Gains (held for more than 24 months)
TDS rate – 20% on the capital gain, plus applicable surcharge and cess.
After including surcharge and cess, the effective deduction often goes above 20% and may range between 20.8% to 23%, depending on the transaction value.
Short Term Capital Gains (held for less than 24 months)
STCG is added to the NRI’s total income and taxed as per the normal income tax slab rates.
In such cases, TDS is deducted at the maximum applicable tax rate, which can be around 30% plus surcharge and cess.
Important Point
TDS for NRIs is not deducted on the profit alone, but is often deducted on the entire sale value, unless the NRI has a certificate for lower deduction. This is why many NRIs prefer applying for a Lower TDS Certificate (LDC) before completing the sale.
TDS on Sale Value vs. Actual Tax Liability
Most NRIs get confused because the TDS deducted upfront is often higher than the actual tax payable.
For example, if an NRI sells a property for ₹80 lakhs with a long-term capital gain of only ₹8 lakhs, TDS may be deducted on the entire ₹80 lakhs. This results in an unnecessarily high deduction, even though the tax liability is much lower.
To avoid this, NRIs can apply for a Lower Deduction Certificate under Section 197 from the Income Tax Department. Once approved, the buyer deducts TDS only at the rate mentioned in the certificate, saving the seller from excess deductions and refund delays.
Who Has to Deduct the TDS?
The buyer, whether resident or non-resident, must deduct TDS before paying the NRI seller. Unlike transactions between residents (where TDS is only 1%), any payment made to an NRI for property purchase automatically triggers higher TDS compliance.
The buyer must also deposit the TDS with the Income Tax Department and issue a TDS certificate (Form 16A) to the NRI.
Documents Required for NRI Property Sale TDS Compliance
Although not exhaustive, these are essential:
- PAN card of the buyer and seller
- NRI’s passport and OCI/PIO card, if applicable
- Tax residency documents
- Sale agreement or draft agreement
- Bank details for tax remittance
- Capital gain computation
If applying for a Lower Deduction Certificate, the NRI will need to provide additional financial documents.
Exemptions Available to Reduce Tax Burden
The Income Tax Act allows NRIs to reduce or eliminate capital gains tax by reinvesting in specified assets.
Section 54 – Reinvestment in Residential Property
If the capital gain is reinvested in another residential property in India within the specified timeline, an exemption can be claimed.
Section 54EC – Capital Gain Bonds
NRIs can invest in 54EC bonds issued by NHAI, REC, PFC, etc., within six months of sale.
Both deductions can significantly reduce the tax liability, and if applied properly, the TDS rate can also be reduced through the Lower Deduction Certificate.
Repatriation of Sale Proceeds
After paying taxes and completing compliance, NRIs can usually repatriate up to USD 1 million per financial year.
Repatriation requires:
- proof of tax payment
- Form 15CA/CB by a Chartered Accountant
- bank documentation
This ensures the money can be legally transferred abroad.
Common Mistakes NRIs Make
Several errors cause unnecessary tax complications:
- Assuming TDS is only 1% like resident sellers
- Not applying for a Lower TDS Certificate
- Ignoring capital gains exemptions
- Using a resident bank account instead of an NRO or NRE account
- Not obtaining a CA certificate (Form 15CB) for repatriation
Avoiding these mistakes ensures a smooth transaction and minimizes tax impact.
Practical Example to Understand TDS for NRIs
Consider this situation:
An NRI sells a flat for ₹1 crore and the long-term gain is only ₹10 lakhs.
If no lower TDS certificate is taken, the buyer must deduct around 20%+ on the entire ₹1 crore, which means around ₹20–23 lakhs TDS.
But the actual tax payable on ₹10 lakhs gain may be around ₹2 lakhs.
This results in a large refund claim and delays.
However, if the NRI applies for an LDC, the tax department may reduce the TDS to 2–5% or even lower, based on actual calculations.
Conclusion
The sale of property by an NRI and the tax liability under TDS is one of the most misunderstood areas of India’s taxation laws. While the TDS amounts may appear high, the actual tax payable is often far lower. Under Indian taxation law, because your income may be generated in India, TDS must be deducted by the buyer, so the Income Tax Department can ensure proper collection of income taxes.
For NRIs planning to sell property, the smoothest approach is to understand whether the gain is long-term or short-term, explore exemptions under sections 54 and 54EC, and, most importantly, apply for a Lower Deduction Certificate to avoid heavy deductions. When handled correctly, the process becomes far less stressful, ensuring legal compliance and proper tax planning.
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