NRI Selling Property in India? Beware: TDS Rules Have Changed Under the New Income Tax Act, 2025
The sale of immovable property by Non-Resident Indians (NRIs) has always been a compliance-sensitive area. While most taxpayers are familiar with the old Section 195 of the Income-tax Act, 1961, the introduction of the Income-tax Act, 2025 has left many buyers, sellers, brokers, and even professionals wondering whether the TDS provisions have changed.
The answer is both yes and no.
The section number has changed, but the underlying obligation of the purchaser remains substantially the same. Failure to comply can result in substantial tax demands, interest, penalties, and even prosecution in certain cases.
Why NRI Property Transactions Are Different
When a resident Indian sells property, the buyer generally deducts tax at a concessional rate prescribed for such transactions. However, when the seller is a non-resident, the law treats the transaction differently because the seller may leave India after receiving the sale proceeds, making tax recovery difficult.
To protect revenue interests, the responsibility of tax collection is shifted to the purchaser through TDS provisions.
From Section 195 to Section 393(2)
Under the Income-tax Act, 1961, TDS on payments to non-residents was governed by Section 195.
The new Income-tax Act, 2025 has renumbered and reorganized various provisions. The corresponding provision is now contained in Section 393(2).
Therefore, while professionals may continue referring to “Section 195 TDS” out of habit, transactions undertaken after the commencement of the new Act should technically refer to Section 393(2).
Does the 1% Property TDS Apply to NRI Sellers?
One of the most common misconceptions is that the purchaser can deduct tax at 1% or at the rate applicable to transactions involving resident sellers.
The answer is an emphatic “No”.
The concessional TDS provisions applicable to purchases from resident sellers do not apply where the seller is a non-resident.
The moment the seller qualifies as an NRI for tax purposes, the purchaser must examine the provisions applicable to payments made to non-residents.
What TDS Rate Should the Buyer Deduct?
The rate depends upon the nature of capital gains arising to the NRI.
Where the Property Results in Long-Term Capital Gain
For long-term capital assets, the basic tax rate is generally 12.5%.
However, the actual TDS rate may be higher because surcharge and health & education cess are also applicable.
Accordingly, the effective deduction can range from approximately 13% to a higher percentage depending upon the seller’s total income and applicable surcharge.
Where the Property Results in Short-Term Capital Gain
If the property is sold before qualifying as a long-term capital asset, the gain may be taxed at normal rates applicable to the NRI, resulting in a substantially higher TDS obligation.
Is TDS Calculated on Capital Gain or Sale Consideration?
This is where most practical difficulties arise.
Many taxpayers assume that TDS should be deducted only on the actual capital gain earned by the NRI.
Unfortunately, the law does not always operate that way.
In the absence of a lower deduction certificate, purchasers often deduct tax on the gross sale consideration because they may not possess sufficient information regarding the seller’s cost of acquisition, indexation, exemptions, reinvestments, or other deductions.
As a result, a seller earning a capital gain of only ₹10 lakh on a property sold for ₹1 crore may still face TDS on the entire sale consideration.
The excess tax can subsequently be claimed as a refund while filing the income tax return.
No ₹50 Lakh Threshold for NRI Transactions
Another misconception carried over from resident property transactions is that TDS becomes applicable only if the sale value exceeds ₹50 lakh.
This threshold does not apply to NRI property transactions.
Even if the property value is significantly lower, TDS obligations may still arise under the provisions governing payments to non-residents.
The Best Solution: Obtain a Lower Deduction Certificate
To avoid excessive TDS and blockage of funds, NRIs should consider obtaining a lower deduction certificate before executing the sale deed.
Such a certificate allows the tax authorities to determine a more appropriate deduction based on the estimated capital gain rather than the gross consideration.
This often results in substantial cash-flow savings and avoids lengthy refund procedures.
Common Mistakes Made by Purchasers
The following mistakes are frequently noticed:
• Deducting tax at the rate applicable to resident sellers.
• Assuming that no TDS is required if the property value is below ₹50 lakh.
• Ignoring the seller’s residential status.
• Deducting tax without considering surcharge and cess implications.
• Making payment before ensuring TDS compliance.
• Failing to obtain professional advice in cross-border transactions.
What Happens If the Buyer Fails to Deduct TDS?
The consequences can be severe.
The purchaser may be treated as an assessee in default and may become liable for:
• Tax not deducted.
• Interest on delayed deduction or deposit.
• Penalty proceedings.
• Other consequential compliance issues.
In many cases, the tax department first approaches the purchaser because the law specifically casts the TDS responsibility on the buyer.
Conclusion
The Income-tax Act, 2025 has changed the numbering of the law, replacing the old Section 195 with Section 393(2). However, the fundamental principle remains unchanged: whenever an NRI sells property in India, the purchaser must carefully evaluate the TDS implications before making payment.
The seller’s residential status, nature of capital gain, surcharge applicability, and availability of a lower deduction certificate can significantly influence the amount required to be deducted.
In NRI property transactions, the costliest mistake is often not underestimating the tax liability—but assuming that the rules applicable to resident sellers also apply to non-residents.
Before signing the sale deed, both parties should ensure that the TDS provisions are correctly applied. A little planning can save substantial tax disputes later.
