TDS on Property Purchase by NRI: What Buyers Must Deduct and Deposit

One of the requirements that you must adhere to when purchasing property as an NRI in India is the Tax Deducted at Source. In a sale or purchase of property, the buyer will have to deduct the TDS before the amount is paid to the seller.

A popular misconception regarding TDS is that the TDS is based on the residence status of the buyer. Actually, this is not true, since the residential status of the seller will determine the amount of tax and which section of the act is applied.

It is advisable to be aware of all the above requirements prior to the transaction.

What Is TDS in Property Transactions?

TDS (Tax Deducted at Source) in property transactions refers to the taxes which are charged by the government when the payment is being made. Rather than making the total payment of property value to the seller, the buyer will calculate TDS and deposit the same directly to the income tax department.

Example:

NRI has bought a property for ₹80 lakhs from the resident seller.

Property value: ₹80 lakh

TDS @ 1%: ₹80,000

Payment to seller: ₹79.20 lakhs

Who Is Responsible for Deducting and Depositing TDS?

 the responsibility of TDS lies with the buyer always.

The buyer needs to:Verify the residential status of the seller.

• Apply the correct rate of TDS.
• Deduct the amount prior to making payment.
• Deposit the tax by the due date prescribed.
• Submit the relevant TDS returns.

Failure to comply with the above conditions could lead to interest and penalties imposed by the Income Tax Department.

TDS applies when an NRI acquires a property in India, but the rule that applies totally depends on whether the seller is a resident or non-resident individual. A purchase from a resident individual falls under one rule, whereas from an NRI falls under another rule.

Buying Property From a Resident Seller (Section 194-IA)

In the case where the seller is a resident Indian, in most instances, the application of Section 194-IA is mandatory.

The following are some characteristics of this section:

• Applies if the value of the property exceeds ₹50 lakh.
• Deduction will be done at 1% of the total sale consideration.
• There is no requirement for a TAN number.
• TDS will be deducted using Form 26QB.

Example:

If an NRI buys a flat in Hyderabad whose value is ₹90 lakh, the amount of tax will be ₹90,000.

Buying Property From an NRI Seller (Section 195)

If the seller is an NRI, the tax deducted will be as per Section 195 of the Income Tax Act.

Section 195 is different from 194-IA in the following ways:

• There is no exemption limit of ₹50 lakh.
• TDS will be applicable regardless of the property price.
• The rate of deduction will be calculated based on the capital gain tax applicable to the seller, as well as surcharge and cess if applicable.
• It becomes mandatory for the buyer to have a TAN.

It is imperative for buyers to check the residential status of the seller and also check if a Lower Deduction Certificate is issued as per Section 197.

In case the NRI buys a property from another NRI, then Section 195 of the Income Tax Act, 1961, will be applicable. The buyer has to pay tax deducted at source prior to making any payment to the seller.

Section 195 is different from Section 194-IA as that section covers payments made to resident sellers while Section 195 deals with non-resident sellers. Since the seller will have tax liability for his/her capital gain, the buyer has the responsibility of deducting the tax.

The actual TDS will be decided based on various considerations such as:

• Whether the gain is a long-term or short-term gain.
• Income tax rate of the seller.
• Any surcharge or Health & Education cess.
• Whether a Lower Deduction Certificate has been issued by the Income Tax Department.

Why Section 195 Applies Instead of Section 194-IA

Many purchasers incorrectly believe that 1% TDS according to Section 194-IA is mandatory for all property purchases. The applicability of this Section depends solely on whether the seller is a resident Indian.

In case the seller falls into the category of NRI according to the Income Tax Act, Section 195 comes into play irrespective of the property value. It implies that the purchaser cannot pick the Section according to his convenience.

Comparison:

• Resident Seller -> Section 194-IA
• NRI Seller -> Section 195

Determining applicability depends on residential status of the seller, but not the buyer.

One of the most crucial tasks is verification of the residential status of the seller before making any payments.

Does the Buyer Need TAN Registration?

The need for a Tax Deduction and Collection Account Number (TAN) is also contingent on the relevant TDS provision.

In case the purchase comes under Section 194-IA, the purchaser will have no obligation to get a TAN. The TDS can be paid without getting a TAN using Form 26QB.

But when a purchase falls under Section 195, then obtaining a TAN will become essential before paying any TDS. Not only will the purchaser have to file the appropriate TDS return but also provide the seller with the TDS certificate.

Prior to buying any property from the non-resident Indian seller, purchasers should see to it that they:

• Get TAN if needed.
• Make the TDS deduction before paying the amount.
• Make the TDS deposit before the due date.
• File the proper TDS return.
• Issue the TDS certificate to the seller.

This will help the purchaser to save himself/herself from interest, penalty, and notices from the Income Tax Department.

The TDS that the buyer has to make deductions from depends upon whether the seller is an NRI or a resident seller and what type of capital gain has arisen from such transactions.

Buyers need to be aware of the following facts:

• Resident Seller: The TDS is 1% of the sale consideration (subject to the prescribed threshold of section 194-IA).
• NRI Seller (for Long Term Capital Gain): The TDS shall be charged at the applicable long term capital gains tax rate with surcharge and Health and Education Cess, if any.
• NRI Seller (for Short Term Capital Gain): The TDS shall be charged at the applicable income tax slab rate with surcharge and cess, if any.
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As the final TDS may depend upon the tax situation of the seller, one cannot assume that the TDS will be charged at the same rate for all the NRIs.

Example 1: Resident Seller

• An NRI purchases a flat for ₹75 lakh from a resident seller.
• Sale Value: ₹75 lakh
• Applicable Section: 194-IA
• TDS: 1% (₹75,000)

Thus, the buyer makes a payment of ₹74.25 lakh to the seller and ₹75,000 as TDS.

Example 2: NRI Seller

An NRI buys a property worth ₹1.50 crore from an NRI.

The following steps need to be taken by the buyer prior to payment:

1. Find out whether the profit of the seller is a short-term profit or long-term profit.
2. See if the seller has a Lower Deduction Certificate under Section 197.
3. Calculate the TDS at the prescribed rate.

As this calculation might involve capital gains, surcharge, and cess, many buyers get help from professionals.

TIP: Do not calculate the TDS amount only based on the sale agreement.

Always check the residential status of the seller and tax rules applicable in order to make any payment, because failure to deduct the required TDS will lead to interest and penalties on your part.

Correct deduction and deposit of TDS is one of the key duties of the buyer while dealing with an NRI property transaction. Compliance with the right procedure would help in complying with the Income Tax Act, and hence avoiding penalties and legal hassles.

Step 1: Verify the Seller's Residential Status

It is essential to ascertain whether the seller is a resident Indian or NRI before initiating the process of making payment. The determination of the correct section will depend on whether Section 194-IA or Section 195 will apply.

The following documents can be used for ascertaining the status of the seller:

• Passport
• PAN card
• Foreign address proof
• Residential status declaration

Step 2: Calculate the Applicable TDS

Once the residential status of the seller is determined, the TDS needs to be calculated accordingly.

In the case of transactions where the seller is resident, TDS normally ranges at 1% as per Section 194-IA, whereas when it comes to the purchase of property from NRI sellers, TDS has to be computed as per Section 195.

In case the seller has received a Lower Deduction Certificate under Section 197, then the buyer has to deduct TDS according to it.

Step 3: Deduct TDS Before Making the Payment

TDS needs to be deducted before making any payment to the seller.

It will include:

• Advance Payment
• Partial Payment
• Final Amount Payment

E.g.: If the buyer is supposed to make an advance payment of ₹40 lakh, then TDS needs to be deducted from that amount before paying the remaining amount to the seller.

Step 4: Deposit TDS With the Government

After deducting the tax, the buyer must deposit it with the Income Tax Department within the prescribed timeline.

Delaying the deposit may result in:

• Interest on the unpaid amount.
• Late payment charges.
• Additional compliance issues.

Keeping payment receipts and challans safely is recommended, as they may be required during future verification.

Step 5: File the TDS Return and Issue the Certificate

The final step is completing the required tax compliance.

Depending on the applicable provision, buyers should:

• File the prescribed TDS return.
• Generate the applicable TDS certificate.
• Provide the certificate to the seller for claiming tax credit.

Completing these formalities on time ensures that both the buyer and seller maintain proper tax records and helps avoid future disputes with the Income Tax Department.

It is as important to complete the right documents as making deductions of TDS. This depends on whether the vendor of the property is a resident Indian or an NRI. An incorrect document and failure to file can affect compliance and also result in penalty.

Commonly Used Forms during an NRI Property Transaction

• Form 26QB – When the purchaser buys property from a resident vendor through Section 194-IA.
• Form 27Q – The quarterly TDS return filed when the purchaser buys a property from an NRI vendor through Section 195.
• Form 16A – The TDS certificate issued to the NRI vendor once the purchaser makes the deduction of tax.
• Form 13 (Vendor’s Responsibility) – It is used by the NRI vendor to make application for a Lower Deduction Certificate under Section 197.

Prior to filing the above forms, the purchaser needs to be assured that the information about the seller's PAN, property details, payment amount, and TDS calculation are correct.

It is very important to follow the timeline to avoid paying interest and penalty.

The general timeline can be described as follows:

• Prior to making the payment: Confirm the status of residence of the seller and determine the rate of TDS.
• At the time of making the payment: Make the deduction of TDS prior to the transfer of sale consideration or installment.
• Within the prescribed due date: Pay the deducted TDS to the Income Tax Department.
• After paying the TDS: File the TDS return and issue the TDS certificate to the seller.

It would be wise to maintain the copies of challans, receipt of acknowledgment, and filed returns since these may be required for future assessments or queries related to tax.

Non-payment or non-deposit of TDS is non-compliance with the Income Tax Act. Despite the transaction being made in its entirety, the purchaser could be liable for the default committed.

Some of the repercussions are as follows:

1. Interest on unpaid or delayed TDS.
2. Penalties for non-compliance with the TDS provisions.
3. Fees for delayed filing of TDS return.
4. Notices from the Income Tax Department.
5. Financial burden until such time the default is settled.

For instance, in a case where a buyer buys property from an NRI seller and makes the total sale value without deducting TDS, the Income Tax Department shall be entitled to collect the outstanding tax amount, including the interest and penalty, from the buyer.

The easiest means of ensuring that there are no problems is by confirming the residential status of the seller before making the payment and completing all other formalities relating to TDS.

One of the most frequent errors committed by buyers is to assume that Section 194-IA and Section 195 are one and the same.

It is easy to differentiate between these two sections since the residential status of the seller determines which section will be applicable.

Section 194-IA

Section 194-IA is relevant when the seller of the property is a resident Indian.

Important points regarding Section 194-IA include:

• Will be applicable only when the value of the transaction for sale of the property is above the prescribed threshold limit.
• TDS should be paid at 1% of the sale consideration amount.
• There is no requirement for buyers to have TAN.
• TDS needs to be deposited using Form 26QB.

Section 195

Section 195 becomes relevant when the seller of the property is NRI or any other non-resident.

As opposed to Section 194-IA:

• There is no value floor of property below which deduction need not be made.
• Deduction will be made in accordance with capital gains provisions of the tax.
• Buyers will have to acquire a TAN in order to deposit the TDS.
• Quarterly TDS returns along with the appropriate TDS certificate are needed after making the deduction.

As the amount of the tax will depend upon a number of factors, buyers are advised to calculate it accurately prior to any payment.

While TDS compliance might seem simple, many buyers commit avoidable errors as a result of their ignorance. Making a simple mistake may cost you more money in terms of extra tax liabilities.

1. Applying Resident Seller Rules to NRI Transactions

A common mistake is assuming that 1% TDS applies to every property purchase.

Before deducting TDS, always verify whether the seller is a resident or an NRI. Applying Section 194-IA to a transaction that falls under Section 195 can result in short deduction of tax.

2. Deducting Incorrect TDS

Some purchasers make deduction of TDS depending upon the sales value alone without verifying whether:

• The profit made is either short term or long term.
• The surcharge and cess apply.
• The seller holds any Lower Deduction Certificate.

Incorrect calculation may necessitate paying more later on.

3. Missing Filing Deadlines

Deduction of TDS is not enough. The buyers also need to pay their tax and file the necessary returns by the stipulated due dates.

Late submissions may lead to:

• Charges for delay in payment.
• Penalty charges.
• Failure to comply with the Income Tax Act.
• Filing of all the steps on time can help in avoiding any problems.

4. Ignoring Seller Tax Documents

Prior to finalizing the deal, buyers need to make sure that they verify the tax documents of the seller beforehand.

These can be: 

• PAN card.
• Declaration of residential status.
• Lower Deduction Certificate, if applicable.
• Documents of property.

It will help the buyer to deduct the proper TDS in the long run.

There can be instances where the TDS deducted as per Section 195 is more than the total tax payable by the seller. To prevent such excess deduction and enhance cash flows, there are certain legal provisions available in the Income Tax Act, which allows an NRI seller to reduce his/her TDS deduction.

Lower Deduction Certificate Under Section 197

In case of an NRI vendor whose actual tax liability will be less than the total TDS amount, he may obtain a Lower Deduction Certificate from the department under Section 197 of the Income Tax Act.

As soon as the certificate is issued by the department of Income Tax, the buyer reduces TDS in accordance with the rate specified in the certificate.

Example:

Consider a situation where the tax liability of the NRI seller is only ₹8 lakh, while the amount payable under regular TDS provisions is ₹18 lakh.

By presenting a Lower Deduction Certificate, the buyer makes the tax deduction on TDS at the prescribed rate, which decreases the tax deduction for the seller.

Tax Planning Before the Property Sale

Tax planning prior to the transfer of the property can also be useful in avoiding any unwarranted TDS deductions.

Prior to the completion of the sale process, NRIs need to take into account the following:

1. Check on capital gain tax issues of the property being sold.
2. Have all purchase and improvement costs documentation prepared.
3. Acquire the Lower Deduction Certificate if eligible.
4. Seek advice from tax experts for tax computation purposes.

Advance tax planning will ensure that the transfer is completed without hindrance while abiding by the relevant tax laws.

Prior to buying a property,

it is important to make sure that the below-given things are done:

□ Confirm the residence status of the seller.

□ Apply the right TDS rule (Section 194-IA/Section 195).

□ Get a TAN while buying from an NRI seller.

□ Make sure you have calculated the right TDS.

□ Deduct the TDS before paying the amount.

□ Deposit the tax after deduction at the appropriate time.

□ Submit the relevant TDS return.

□ Provide TDS certificate to the seller.

□ Retain copies of challan acknowledgment and other tax documents.

Following the above points will ensure that the buyer goes through the process smoothly.

Interest on the part of foreign buyers continues to be high in Indian cities like Hyderabad, Bengaluru, Pune, and Mumbai. The World Bank reported that India continued to receive the most remittance money in the world in 2024. NRIs will have more money at their disposal to buy real estate property in Indian cities due to remittances totaling over USD 135 billion.

On the other hand, digital tax compliance makes the process of property transfer easy. Some of the tasks that can now be done digitally include registration of TAN, making TDS payments, filing returns, and obtaining TDS certificates.

The city of Hyderabad is attractive for NRIs due to the growth of its IT sector, infrastructure development, and reasonable costs of property purchase. The increase in the number of property transfers across borders is expected to make buyers focus on the compliance with the requirements related to TDS.

Knowing the tax provisions relevant for one's situation in advance will protect buyers from penalties.

The TDS plays an important role in all transactions when the buyer is NRI, and knowing the relevant provisions will save you from any potential errors and costly consequences before paying anything. In order to know which of the provisions you need to apply depending on the residential status of the seller – you need to make sure the seller's status, deduct the right percentage of the TDS, and make all filings on time.

No matter whether you buy your first house or invest into the rapidly developing real estate market of Hyderabad, compliance with the TDS laws will make the process easier. If you want to find the verified property listings and get professional advice at all stages of your purchase, Homefleet will be able to assist you.