By Arosh John | Founder – John Real Estate (MahaRERA Reg. No. A51700001835) | Editor-in-Chief – Thane Real Estate News
In NRI property transactions, one of the most frequent—and costly—points of confusion arises at the TDS deduction stage. Buyers sometimes assume that if the NRI seller is likely to have a capital loss (or a lower capital gain), tax can be deducted at a reduced rate or surcharge and cess can be ignored.
This assumption is legally incorrect and can expose the buyer to serious compliance risk.
Section 195: The Governing Provision for NRI Property Sales
When a property is purchased from an NRI, TDS is governed strictly by Section 195 of the Income-tax Act. This section operates differently from Section 194-IA, which applies only to resident sellers.
Under Section 195, the buyer is required to deduct tax at the “rate in force” on the amount chargeable to tax, following the prescribed legal framework. The buyer’s obligation is to withhold tax correctly—not to determine the seller’s final tax outcome.
A Current Note on Rates: The 12.5% LTCG Framework (Post Finance Act 2024)
In many NRI property sales, the applicable capital gains treatment depends on whether the sale qualifies as long-term or short-term. Under the post–Finance Act 2024 framework, long-term capital gains on eligible property transfers are taxed at 12.5% (plus applicable surcharge and cess), subject to conditions such as holding period and computation rules.
However, even where 12.5% may ultimately apply, a buyer cannot reduce deduction on the basis of assumption or informal understanding. TDS reduction is allowed only through the formal mechanisms recognised under the Act, such as a Section 197 certificate.
Why Capital Loss Cannot Be Assumed at the TDS Stage
Capital gain or capital loss is determined only after:
- analysing the holding period,
- verifying the cost of acquisition and improvements,
- considering selling expenses, and
- computing gains as part of the income-tax return.
This computation is finalised by the seller and assessed through the return-filing process.
At the TDS stage, the buyer has no authority to estimate or assume whether the seller will ultimately report a gain or a loss. TDS is a statutory withholding obligation, not a provisional assessment.
When Is Lower TDS Legally Permitted?
A buyer can deduct TDS at a reduced rate only in clearly defined situations:
- Lower or Nil Deduction Certificate under Section 197 (Form 13)
Issued by the Income-tax Department and effective only from the date of issue. - Specific written direction or order from the Income-tax Department
Authorising deduction at a rate lower than the standard applicable rate.
In the absence of either, the buyer must deduct tax strictly as per Section 195.
Surcharge and Cess Are Part of the Applicable Rate
For NRI property transactions, the applicable tax rate may include:
- the base capital gains tax rate,
- surcharge where thresholds are crossed, and
- health & education cess.
Surcharge and cess are not discretionary. Where applicable, they form part of the “rate in force” and cannot be ignored based on assumptions about the seller’s tax position.
Over-Deduction vs Under-Deduction: The Compliance Reality
From a regulatory perspective:
- Over-deduction
The seller may claim a refund while filing the income-tax return, subject to assessment. - Under-deduction
The buyer may be treated as an assessee-in-default and face interest, penalties, and recovery proceedings under the Income-tax Act.
This is why conservative deduction is the safer and legally sound approach when no certificate is available.
Important Note on Token or Advance Payments
Any payment made before a lower or nil deduction certificate is issued triggers TDS at the prevailing applicable rate at that time. A Section 197 certificate operates prospectively and does not automatically apply to payments made earlier.
Advance planning is therefore critical in NRI transactions.
Key Takeaway for Buyers and Sellers
- Buyers cannot assume capital loss or reduced tax liability at the TDS stage.
- TDS reduction is permitted only with a valid Section 197 certificate or written departmental direction.
- Surcharge and cess cannot be ignored where applicable.
- Buyers must obtain a TAN to deposit TDS under Section 195; using PAN alone (as in resident transactions under Section 194-IA) is not sufficient.
- In case of doubt, following the Section 195 framework protects the buyer from compliance exposure.
Also READ: Documents You Need for a Lower or Nil TDS Certificate (Form 13) When Selling Property as an NRI
Also READ: TDS on Sale of Property — Resident vs NRI Sellers (Updated for 2025)
Need help structuring or executing an NRI property transaction in Thane or MMR with clean compliance? Connect with John Real Estate for advisory-led execution. Call 9819881455
About the Author
Arosh John is a Thane-based real estate consultant and Founder of John Real Estate (MahaRERA Reg. No. A51700001835). With over a decade of experience handling NRI property transactions, he specialises in compliance-heavy resale transactions and advisory-led execution. As Editor-in-Chief of Thane Real Estate News, he publishes research-driven insights on property law, taxation, and investment trends across the Mumbai Metropolitan Region.
Disclaimer
This article is intended for informational and educational purposes only and does not constitute legal, financial, or tax advice. Tax laws and their interpretation may change due to amendments, notifications, circulars, and judicial rulings. Readers are strongly advised to consult a qualified Chartered Accountant or tax professional for case-specific guidance. Neither the author nor Thane Real Estate News accepts liability for actions taken based on this content.
