Why TDS on an NRI’s property sale works differently
When a resident Indian sells property, the buyer usually doesn’t withhold any tax at the time of payment — the seller reports the gain and pays tax later, when filing the return. For a Non-Resident Indian seller, the law works the other way around: the buyer is required to deduct tax at source at the time of the transaction itself, under Section 393(2) of the Income Tax Act, 2025 (Section 195 of the Income-tax Act, 1961).
The practical issue this creates is simple but easy to miss: unless a lower or nil deduction certificate is in place, the buyer’s TDS obligation applies to the full sale consideration, not just the profit on the sale. For an NRI who has held the property for years and has a relatively modest actual gain, that can mean a large amount of tax withheld upfront — refundable only after filing a return and waiting out the assessment process.
How the capital gain itself is taxed
Property held for the long term is taxed as a long-term capital gain. Following Budget 2024’s removal of indexation benefits, long-term capital gains are currently taxed at 12.5% (plus applicable surcharge and cess). This is the rate the actual tax liability is calculated at — it’s distinct from, and usually lower than, the amount a buyer might withhold by default on the full sale value in the absence of a certificate.
The Lower or Nil Deduction Certificate
This is the mechanism that bridges the two numbers above. An NRI seller can apply for a Lower (or Nil) Deduction Certificate under Section 395 of the Income Tax Act, 2025 (Section 197 of the Income-tax Act, 1961), before the sale closes. The application is made to the jurisdictional Assessing Officer (or processed through the TRACES portal), along with supporting documents — the original purchase deed, details of the cost of acquisition and improvement, and a computation of the expected capital gain.
Once the certificate is issued, it specifies the rate (or nil rate) at which the buyer should deduct TDS, based on the actual estimated gain rather than the full sale value. This is the step that most directly prevents cash from being locked up with the tax department for a year or more while a refund is processed.
What happens if this isn’t arranged in advance
Without a certificate, the buyer has little choice but to deduct TDS conservatively on the full consideration, since the law places the compliance responsibility — and the penalty exposure for under-deduction — on the buyer, not the seller. For an NRI, this usually means:
- A significantly larger amount withheld at the time of sale than the actual tax eventually payable.
- The difference recoverable only by filing an Indian income tax return for that year and claiming a refund.
- A wait of several months to over a year for that refund to be processed, during which the funds are not available for repatriation or reinvestment.
None of this is a penalty or a compliance failure — it’s simply what the default withholding mechanics produce when no certificate has been obtained. The certificate route exists precisely so this outcome is avoidable with advance planning.
Repatriating the proceeds
Once tax has been accounted for, moving the net sale proceeds out of India involves its own layer of compliance under FEMA, typically including a certification from a Chartered Accountant (commonly referenced as Form 15CA/15CB) confirming that applicable taxes have been paid or provided for. This is a separate step from the TDS and capital gains calculation above, and is worth planning for at the same time rather than after the sale closes.
A practical sequence for NRI sellers
- Work out the likely long-term capital gain before listing the property or finalising a buyer, using actual cost of acquisition and improvement records.
- Apply for the Lower/Nil Deduction Certificate under Section 395 (2025) / Section 197 (1961) early — this takes time to process and should not be started after a sale agreement is already signed.
- Share the certificate with the buyer so the correct, lower TDS rate is applied at the time of payment.
- File the Indian income tax return for the relevant year to formally report the transaction, even where TDS has already been deducted correctly.
- Plan the FEMA repatriation documentation (including the CA certification) alongside the sale, not as an afterthought.
Every NRI property sale has its own facts — acquisition date, cost records, residency history, and whether the property was inherited or purchased — that affect this calculation. This article explains how the mechanism works in general; it isn’t a substitute for a review of your specific transaction.
Read more on NRI taxation and advisory services, or get in touch to discuss a specific property sale.