Vikram Patel, a resident of Mumbai, was overjoyed to discover an opulent apartment advertised by Neha Kapoor, an NRI based in Singapore, priced at ₹1.8 crore. The property seemed perfect for him; however, he quickly realized that purchasing from an NRI involved navigating intricate tax regulations under the Income Tax Act, 1961 (IT Act). The tax implications would be distinct if he were to sell his own property to an NRI.
TDS Responsibilities when Purchasing from an NRI
As an Indian resident buying from an NRI, Vikram encountered stringent Tax Deducted at Source (TDS) regulations as stipulated under Section 195 of the IT Act. According to Kunal Savani, Partner at Cyril Amarchand Mangaldas, a legal firm, “When the seller is an NRI, the provisions of Section 195 of the IT Act apply, unlike the more straightforward section 194-IA.”
In contrast to resident-to-resident transactions, which incur a TDS of 1% for property sales exceeding ₹50 lakh under Section 194-IA, Vikram was required to deduct TDS at a rate of 12.5% (plus surcharge and cess) for Long-Term Capital Gains (LTCG) or 30% for Short-Term Capital Gains (STCG) on the total sale amount, without any value exemption.
Suresh Surana, a chartered accountant based in Mumbai, commented, “There’s no monetary limit on sale consideration for tax deduction in cases where the purchase occurs between a resident transferee and a non-resident transferor.”
For Neha’s apartment, classified as an LTCG transaction (held for over 24 months), Vikram computed the TDS at 12.5% of ₹1.8 crore, resulting in ₹22.5 lakh, plus cess. He was also required to acquire a Tax Deduction and Collection Account Number (TAN) and submit Form 27Q, in contrast to the simpler Form 26QB used for transactions between residents.
“When an Indian resident purchases property from an NRI, the resident buyer must withhold 20% as TDS from the entire sale price and remit this to the Income Tax Department while also filing Form 27Q as the TDS Return and issuing Form 16A. TDS certificate to the NRI,” noted Deepak Kumar Jain, founder of TaxManager.in, a tax advisory and e-filing service.
This elevated rate and compliance requirement felt overwhelming to Vikram. “The documentation is quite daunting,” he confessed.
Tax Consequences of Selling Property to an NRI
Should Vikram decide to sell his property to an NRI, the circumstances would change. Ritika Nayyar, Partner at Singhania & Co., explained, “According to Section 195 of the ITA, tax must be withheld at the source when an Indian resident sells property to an NRI.”
In transactions involving NRIs, the buyer would need to deduct TDS at a rate of 12.5% for LTCG or 30% for STCG as dictated by Section 195. For instance, if Vikram sold a property bought in 2015 for ₹60 lakh and then sold it in 2025 for ₹1.2 crore, the LTCG would amount to ₹60 lakh (without indexation following July 23, 2024). The NRI buyer would deduct ₹15 lakh (which is 12.5% of ₹1.2 crore) as TDS. While Vikram’s tax obligation would be 12.5% of the gain (₹7.5 lakh), the higher TDS rate could impact his liquidity unless he reinvested.
Mitigating Tax Liabilities
To alleviate these financial pressures, Vikram could explore available exemptions. When selling, he could diminish his LTCG tax under Sections 54, 54EC, or 54F. Jain confirms, “Both NRI and Resident Indian are eligible to claim tax exemptions or benefits under Section 54, 54EC, or 54F.”
Under Section 54, reinvesting LTCG from a residential property into a new one within two years can exempt up to ₹10 crore. For example, if Vikram reinvested his ₹60 lakh gain into another residential property, he could eliminate his tax burden. Section 54EC allows for a ₹50 lakh exemption by investing in bonds from REC or NHAI within six months.
As a buyer, Vikram could further diminish his TDS liability if Neha were to secure a lower TDS certificate under Section 197. Savani suggested, “An NRI seller may, if eligible, obtain certification for tax deduction at a lower or nil rate from the tax authorities, which the buyer can use as a reference when deducting TDS.” Neha applied for this using Form 13, explaining her gains and exemption plans (such as reinvestment under Section 54), potentially lowering Vikram’s TDS to match her actual tax obligations, possibly reducing it to ₹10 lakh.
Confirming NRI Status
To avoid any future tax complications, it was crucial for Vikram to verify Neha’s NRI status. Nayyar stressed, “Confirming the seller’s residential status is essential for ensuring accurate TDS deduction and avoiding future liabilities.”
He requested her passport, a tax residency certificate from Singapore, and Form 10F to guarantee compliance with Section 195(2).
Ensuring a Seamless Transaction
Vikram successfully completed the purchase using Neha’s lower TDS certificate, reducing his TDS to ₹10 lakh and submitted this through Form 27Q. When contemplating the sale of his own property, he intended to reinvest under Section 54 to avoid incurring taxes. “While it is complicated, exemptions and proper documentation make the process manageable,” Vikram observed.
Indian residents face the challenge of higher TDS and compliance when dealing with NRIs but can mitigate their tax burdens through reinvestment strategies and verified lower TDS certificates.