Why Is TDS Different When You Buy Property From an NRI?
When the seller is an NRI, the buyer generally has to deduct TDS under Section 195, provided the payment is chargeable to tax in India. The Income Tax Department specifically states that Section 195 applies when a non-resident sells immovable property in India.
This is different from buying property from a resident seller.
Seller | Applicable TDS provision |
|---|---|
Resident seller | Section 194-IA |
NRI seller | Section 195 |
The Income Tax Department's current guidance confirms that Section 194-IA applies only when the seller is resident in India. If the seller is a non-resident, TDS is deducted under Section 195.
This means a buyer should not simply use the commonly known 1% property TDS rule for an NRI seller. The 1% provision under Section 194-IA is for qualifying purchases from resident sellers.
The buyer should establish the seller's residential status before making the payment. The seller's PAN and details needed for determining the tax treatment should also be collected in advance.
Another important point is that TDS under Section 195 is linked to the amount that is chargeable to tax. Therefore, the buyer should not assume that one flat percentage can always be applied to the entire property price without checking the applicable tax treatment.
How Much TDS Is Deducted on Property Purchased From an NRI?
The applicable rate depends on whether the gain is long-term or short-term and on the status of the NRI seller. The Income Tax Department states that an immovable property held for more than 24 months is treated as a long-term capital asset. For transfers taking place on or after 23 July 2024, the specified long-term capital gains rate is 12.5%.
If the property has been held for 24 months or less, the gain is treated as short-term. For an NRI individual or firm, the Income Tax Department currently lists a 30% rate for such short-term capital gains. For a foreign company, the listed rate is 35%.
The basic rates stated by the Income Tax Department are:
Type of gain | Rate stated by Income Tax Department |
|---|---|
Long-term capital gain, transfer before 23 July 2024 | 20% |
Long-term capital gain, transfer on or after 23 July 2024 | 12.5% |
Short-term capital gain, NRI individual/firm | 30% |
Short-term capital gain, foreign company | 35% |
The Income Tax Department also states that applicable surcharge and Health and Education Cess need to be considered. It further states that the applicable rate for a non-resident should be determined after analysing the relevant DTAA provisions.
So, if you are buying property from an NRI, do not calculate TDS simply by taking 1% of the property value. That approach belongs to the resident-seller provision under Section 194-IA and does not apply to an NRI seller.
For the applicable government guidance on NRI property TDS, refer to the Income Tax Department's NRI property TDS guidance.
What Is the TDS Process When Buying Property From an NRI?
The TDS process should be addressed before the buyer makes payments to the NRI seller. The main steps are to establish the seller's status, determine the applicable tax treatment, deduct TDS at the correct stage and complete the required reporting.
Step 1: Confirm the Seller's Residential Status
First, establish that the seller is a non-resident for income-tax purposes.
This matters because the TDS provision changes according to the seller's residential status. Section 194-IA applies to a resident seller, while Section 195 applies to a non-resident seller.
The buyer should also obtain the seller's PAN and relevant property transaction details.
Step 2: Check the Property Holding Period
The holding period affects whether the gain is treated as long-term or short-term.
For immovable property, the Income Tax Department states that a holding period of more than 24 months results in long-term capital gains, while a holding period of 24 months or less results in short-term capital gains.
The buyer should therefore obtain the relevant acquisition and ownership information before determining the TDS treatment.
Step 3: Determine the Applicable TDS
The buyer should determine the rate applicable under Section 195 after considering the nature of the gain, seller status, applicable surcharge and cess, and relevant DTAA provisions.
The Income Tax Department currently lists 12.5% for specified long-term capital gains from transfers on or after 23 July 2024 and 30% for short-term capital gains where the NRI is an individual or firm.
Where the exact amount chargeable to tax needs determination, the buyer should not make an unsupported calculation.
Step 4: Deduct the Tax at the Correct Time
Under Section 195, TDS is linked to the payment or credit of the amount to the non-resident, whichever occurs earlier, where the amount is chargeable to tax.
This means the TDS requirement should be considered when the payment schedule is prepared. It should not be treated as a task that can automatically be completed only after the property registration.
Step 5: Report the Deduction Correctly
The Income Tax Department's current e-Pay Tax FAQ states that Form 26QB is for resident deductees, while Form 27Q applies when the seller or deductee is a non-resident.
This is one of the key differences between resident and NRI property transactions.
The buyer should therefore check the reporting requirements applicable to the transaction instead of using the resident-property TDS process by default.
Step 6: Keep the TDS Records
Keep copies of the seller's PAN, payment details, TDS calculation, tax payment records, acknowledgements and property transaction documents.
These records can help establish how the deduction was calculated and reported if a tax-related query arises later.
For current tax-payment guidance, buyers can use the Income Tax Department e-Pay Tax portal.
What Should You Check Before Paying an NRI Seller?
Before transferring money to an NRI seller, check the seller's residential status, PAN, property holding period and the tax treatment applicable to the transaction.
The 24-month holding period is particularly important because it determines whether the property gain falls under the long-term or short-term category for the purpose described by the Income Tax Department.
You should also check whether the seller or transaction requires any tax order or certificate that changes the amount to be deducted. Section 195 provides mechanisms for certain cases where the amount chargeable to tax needs to be determined by the tax authorities.
If the purchase consideration is being remitted outside India, the buyer should also check whether Form 15CA is applicable. The Income Tax Department states that Form 15CA is used for furnishing information about payments to non-residents and is filed before the remittance in applicable cases.
Form 15CA has different parts depending on the amount and taxability of the remittance. For example, the Income Tax Department states that Part A applies where the taxable remittance does not exceed ₹5 lakh during the financial year. Part B, Part C and Part D apply in other specified circumstances.
Form 15CB is not required for every NRI property transaction. The Income Tax Department states that Form 15CB is used for taxable payments to a non-resident or foreign company exceeding ₹5 lakh in the financial year, where the specified conditions for the form are met.
The buyer should therefore check the applicable reporting requirement based on the actual transaction instead of assuming that every NRI property purchase requires the same forms.
How Vault Helps with TDS on Property Purchase from NRI
TDS compliance can become difficult when the buyer has to determine the seller's status, applicable rate, reporting form and payment requirements at the same time.
Vault Proptech provides Property TDS Filing support for property TDS compliance, payment and related documentation. The service is listed among Vault Proptech's property legal services.
For a property purchase from an NRI, the buyer can get the transaction details reviewed and understand the documentation and compliance steps required for the TDS process.
The key is to address the TDS requirement before the payment schedule is completed. This gives the buyer a clearer view of the amount to be paid to the seller and the tax that needs to be deducted and reported.