Buying property from an NRI? Such deals trigger higher TDS. Here’s how buyers can avoid tax pitfalls

Buying a property in India isn’t just about finding the right location or negotiating a good deal. It's a financial maze, especially when the seller is a non-resident Indian (NRI). From deducting the right TDS to managing registration and dealing with ever-evolving tax rules, one misstep can land the buyer in trouble. For anyone purchasing from an NRI, the stakes are even higher — falling foul of Section 195 of the Income Tax Act could mean penalties, interest, or worse, a full-blown tax notice.

When an Indian resident buys a property from an NRI, TDS rules under Section 195 kick in — no exceptions. Unlike local transactions where 1% TDS applies beyond ₹50 lakh, here the deduction is significantly higher. The buyer must deduct TDS, often 20% or more, and deposit it with the income tax department. The remaining amount is paid to the NRI seller’s NRO account; the NRE account plays no role in this transaction.

Once the tax is deposited, the buyer provides Form 16A (downloaded from the income tax website) to the seller. It’s important to understand that this TDS isn't capital gains tax — it’s an advance, later adjusted when the seller files their return in India.

Miss the TDS deposit deadline or deduct at the wrong rate, and the income tax department will come knocking. TDS must be deducted for each instalment and paid by the 7th of the following month. Failure to comply brings interest charges — and no, the seller won’t refund your losses.

To make TDS payments, the buyer must first apply for a TAN on the TRACES website.

The actual TDS rate depends on the length of time the seller held the property:

• Held for over 24 months (long-term): TDS at 12.5%
• Held for 24 months or less (short-term): TDS at 30%

Add surcharge and cess, and the effective rate rises steeply:

• Less than ₹50 lakh: 13.00%
• ₹50 lakh-1 crore: 14.30%
• ₹1-2 crore: 14.95%
• ₹2-5 crore: 16.25%
• ₹5 crore or more: 17.81%

After Union Budget 2024, NRIs can no longer claim indexation benefits. If the original purchase price is known and supported by documents, TDS is calculated on capital gains. Otherwise, it’s levied on the full sale value.

Another wrinkle: The seller’s PAN must be marked as NRI to avoid Aadhaar-PAN linkage issues. Otherwise, TDS refunds won’t be processed even after return filing.

For some NRI sellers, there's a workaround — applying for a Lower Deduction Certificate (LDC) from the tax department. But that’s easier said than done. Processing can take two months or more depending on how competent the seller’s CA is and how strong the supporting documents are. Unless the buyer has the LDC in hand, they must deduct TDS at the full applicable rate.

If a Power of Attorney (PoA) is involved, caution is key. As per a 2022 Supreme Court ruling:

• The PoA must be registered in India.
• It must be a Specific PoA, tied only to the property being sold.
• The PoA holder can sign registration documents but cannot receive sale proceeds.
• Funds must go directly to the seller’s NRO account.

A General Power of Attorney (GPA) is a legal red flag and renders the sale invalid.