When an NRI sells property in India, the profit earned is taxed as capital gains based on the period of holding. TDS on sale of property by an NRI is mandatory, and the buyer must deduct it before releasing the payment. The applicable TDS rates are 12.5 percent for long term capital gains and 30 percent for short term capital gains, and this deducted amount is deposited with the Income Tax Department as part of the NRI’s tax compliance.
For NRIs, including those who may also have a loan against property, understanding how TDS affects their financial and legal responsibilities is important. Any lapse in compliance can lead to penalties or delays in repatriating funds.
Being aware of the applicable TDS rates, calculation rules, available exemptions, and the procedural steps involved helps ensure a seamless property sale. The sections ahead offer a clear and comprehensive guide on TDS on sale of property by NRI, making the entire process easier to navigate.
What is TDS and its applicability to NRIs selling property in India?
Tax Deducted at Source (TDS) is a system where the buyer of a property must deduct a percentage of the sale value and deposit it with the Income Tax Department. This ensures tax is collected upfront on income earned through property transactions. For NRIs, TDS becomes applicable whenever they sell property in India.
As per the Income Tax Act, 1961, the buyer must deduct TDS at the applicable rate before making payment to an NRI seller. This mechanism ensures that capital gains earned by NRIs are taxed just like those of resident sellers. The amount deducted is treated as an advance tax payment and is later adjusted against the NRI’s final tax liability.
TDS rates for NRIs: Long-term vs. Short-term capital gains
The TDS rates applicable to NRIs selling property depend on the nature of the capital gains—short-term or long-term. These rates are different for individuals, Hindu Undivided Families (HUFs), and companies.
Capital gains type |
TDS rate for NRI |
Conditions |
Short-Term Capital Gains (STCG) |
30% |
For properties held for less than 2 years. |
Long-Term Capital Gains (LTCG) |
20% with indexation |
For properties held for more than 2 years. |
Additional Surcharge |
10% |
In cases where the sale amount exceeds INR 50 lakh. |
How are gains from the Sale of Property in India Taxed to NRI?
NRIs selling residential property in India are liable to pay capital gains tax. The nature and amount of tax depend on whether the profit qualifies as Short-Term Capital Gain (STCG) or Long-Term Capital Gain (LTCG).
LTCG
If an NRI sells a property after holding it for more than two years, the profit is treated as long term capital gain. LTCG is taxed at prescribed rates, along with surcharge and cess wherever applicable.
STCG
If the property is sold within two years of purchase, the gain is treated as short term capital gain. STCG is taxed as per the applicable income tax slab rates.
Inherited Property
When an inherited property is sold, the tax classification is based on the original owner's date of purchase. The cost of acquisition for tax purposes is also the amount paid by the original owner, not the inheritor.
Particulars |
LTCG |
STCG |
Holding period |
More than 2 years |
Up to 2 years |
Tax rate |
20 percent plus surcharge and cess |
As per income tax slab rates |
Cost of acquisition |
Based on original owner's purchase price (for inherited property) |
Based on original owner's purchase price (for inherited property) |
Indexation benefit |
Available |
Not available |
TDS by buyer |
12.5 percent on capital gains portion (effective rate varies with surcharge and cess) |
30 percent as per slab applicability |
Tax rates for NRIs on property sale
The tax rates on capital gains for NRIs selling property depend on how long the property was held:
STCG (Short-term capital gains): If the property is sold within two years of purchase, the gain is treated as short-term and taxed as per the applicable income tax slab rates.
LTCG (Long-term capital gains): If the property is sold after two years, the gain is treated as long-term and taxed as follows:
Please note: For property purchased before 23 July 2024: Taxed at 20 percent with indexation. For property purchased on or after 23 July 2024: Taxed at 12.5 percent without indexation.
TDS on sale of property by NRI
When an NRI sells property in India, the buyer must deduct TDS before releasing the payment to the seller.
If the property is sold within two years (STCG): TDS is deducted at 30 percent on the sale value.
If the property is sold after two years (LTCG): TDS is deducted at 20 percent, plus applicable surcharge and cess.
Unlike resident sellers who face only 1 percent TDS under Section 194IA, NRIs are subject to higher TDS because the deduction is linked to their capital gains tax liability, not merely the transaction value.
Calculation of TDS on property sale by NRI
To calculate TDS on the sale of property by an NRI, the process usually involves the following steps:
Identify the sale value: TDS is calculated on the total sale consideration, not on the profit. The entire amount paid by the buyer becomes the basis for TDS deduction.
Check the nature of capital gain: The holding period determines whether the gain is short term or long term, which then decides the applicable TDS rate.
Apply the correct TDS rate: The buyer must deduct TDS at 30 percent for STCG or 20 percent for LTCG (plus surcharge and cess, where applicable) and deposit it with the Income Tax Department.
For instance, if an NRI sells a property for INR 70 lakh, and the capital gain qualifies as long-term (held for over two years), the TDS will be calculated at 20% on the sale price.
Particulars |
Resident seller |
NRI seller |
TDS rate |
1% of Sale Value (if > Rs. 50L) |
20%+ Surcharge + Cess on Capital Gains |
On what amount? |
Full Sale Consideration |
Capital Gains, not total sale value (with valid certificate) |
Section |
194-IA |
195 |
Steps for NRIs to obtain lower TDS deduction certificate
NRIs can apply for a lower TDS deduction certificate if they believe the TDS deducted by the buyer is higher than their actual tax liability. To do so, they must:
Apply to the income tax department: File an application to the Income Tax Department to obtain a lower or NIL TDS certificate under Section 197 of the Income Tax Act.
Submit relevant documents: Provide necessary documents such as proof of income, property documents, and tax payment history.
Wait for approval: If the application is approved, the NRI will receive a certificate specifying the lower TDS rate, which the buyer must apply to future payments.
Responsibilities of the buyer in deducting TDS from NRI seller
The buyer plays a crucial role in ensuring TDS compliance. Key responsibilities include:
Deducting TDS: At the correct rate based on whether the NRI is selling a property with short-term or long-term capital gains.
Filing TDS returns: The buyer must file TDS returns with the Income Tax Department and issue a TDS certificate (Form 16B) to the NRI seller.
Pay TDS online: The buyer is responsible for paying TDS online with the government through the designated TDS payment portal.
Tax exemptions and reliefs available for NRIs on property sale
NRIs selling property in India may be eligible for certain exemptions and reliefs under the Income Tax Act, such as:
Exemption under Section 54: If the NRI reinvests the capital gains from the sale of a residential property into another residential property, they may be eligible for an exemption from long-term capital gains tax.
Indexation benefit: For long-term capital gains, NRIs can avail of the indexation benefit, which allows adjusting the cost of acquisition for inflation, thus reducing the taxable capital gain.
How to save on TDS on Sale of Property by NRI?
Non-Resident Indians (NRIs) selling property in India can reduce or save on TDS liability through legal provisions. The standard TDS rate on property sales by NRIs is 20% (plus surcharge and cess) on long-term capital gains. However, this can be reduced if the actual capital gain is lower than the sale value.
To save on TDS on sale of property by NRI, the seller can apply for a lower or nil TDS certificate under Section 197 of the Income Tax Act by submitting Form 13 to the Assessing Officer. Upon approval, the Income Tax Department issues a certificate directing the buyer to deduct TDS at a reduced rate.
Additionally, reinvesting capital gains in specified assets under Section 54 or 54EC can offer exemptions and reduce tax liability. Proper documentation, advance planning, and consulting a tax expert can help NRIs stay compliant while optimizing their tax outgo on property sales.
Recent amendments impacting TDS rates for NRIs
Recent amendments to the Income Tax Act have introduced provisions to reduce the burden on NRIs selling property. For example, the TDS rates for NRIs selling property may be lowered for those claiming benefits under Double Taxation Avoidance Agreements (DTAA) between India and their country of residence.
Common mistakes to avoid when dealing with TDS on property sales by NRIs
Incorrect TDS rate: Ensure the correct TDS rate is applied based on whether the capital gain is long-term or short-term.
Failure to obtain a lower TDS certificate: If applicable, failing to apply for a lower TDS certificate may result in excess TDS deduction.
Non-compliance with TDS filing: The buyer must ensure the timely filing of TDS returns and issuance of Form 16B to the NRI.
Documentation required for TDS compliance in property transactions involving NRIs
The following documents are required for TDS compliance in property sales:
Sale deed: Proof of property transfer.
PAN of buyer and seller: Mandatory for TDS deduction.
TDS challan: Proof of TDS payment made to the Income Tax Department.
Form 16B: TDS certificate issued to the seller by the buyer.
How to claim refund on excess TDS deducted for NRIs?
If excess TDS has been deducted, an NRI can claim a refund through the following steps:
File the Income Tax Return (ITR): Submit the ITR for the relevant assessment year, reporting the income and the higher TDS deducted.
Receive the refund: Once the Income Tax Department processes the return, the excess TDS amount is refunded directly to the NRI’s bank account.
Impact of Double Taxation Avoidance Agreements (DTAA) on TDS for NRIs
The Double Taxation Avoidance Agreement (DTAA)between India and the NRI’s country of residence may provide relief by reducing the TDS rates. NRIs can benefit from reduced TDS rates on capital gains if the DTAA agreement allows for preferential treatment.
Role of PAN and TAN in TDS deductions for NRI property transactions
The Permanent Account Number (PAN)of both the buyer and seller is mandatory for TDS deductions. Similarly, the Tax Deduction and Collection Account Number (TAN) of the buyer is required to file TDS returns. Without these numbers, the TDS deduction may not be valid.
Timeline and process for depositing TDS with the Income Tax Department
TDS deducted by the buyer must be deposited with the Income Tax Department within 7 days from the end of the month in which the deduction is made. This can be done through the online TDS payment portal.
Penalties for non-compliance with TDS provisions in NRI property sales
Failure to comply with TDS provisions can result in penalties, including:
Interest charges: For delay in TDS payment or filing returns.
Penalties: For failure to deduct TDS or for incorrect TDS deduction.
Conclusion
TDS on property sales by NRIs is a critical aspect of tax compliance. NRIs must understand the TDS rates, calculate the deductions accurately, and ensure timely payment and filing of returns. By obtaining a lower TDS certificate when applicable, claiming available exemptions, and avoiding common mistakes, NRIs can manage their property sales smoothly. Furthermore, understanding the role of pay TDS online ensures that the transaction complies with tax laws and avoids penalties. By following these steps, NRIs can avoid complications and ensure that their tax liabilities are correctly managed.
