TDS on Property Purchase from an NRI — Section 195 Guide

Buying property from a non-resident Indian (NRI) is a common transaction in India's real estate market, but it carries a tax compliance obligation that many buyers are unaware of. When you purchase property from an NRI, you — as the buyer — are required to deduct tax at source before making the payment. This obligation falls under Section 195 of the Income Tax Act, not under the rent-related sections 194-I or 194-IB. The rules are fundamentally different: you need a TAN, the rates depend on the nature of the gains, and the filing requirements involve quarterly returns in Form 27Q. This guide explains the entire process.

Why Section 195 and not 194-I or 194-IB?

Sections 194-I and 194-IB apply exclusively to resident landlords. When the payee (the person receiving the payment) is a non-resident — whether an NRI, a person of Indian origin living abroad, or a foreign national — the transaction falls under Section 195. This section governs all payments to non-residents, whether they are for rent, property purchase, services, or any other purpose.

The critical distinction is the residency status of the payee, not the nature of the payment. If you are buying property from an NRI, Section 195 applies. If you are renting from an NRI, Section 195 applies. The rent calculator on our homepage handles Section 194-I and 194-IB for resident landlords only.

The buyer's obligation — you deduct, not the seller

Under Section 195, the buyer (transferee) is responsible for deducting TDS before making payment to the NRI seller. This is a critical point: the obligation is on you, the purchaser. You cannot assume the NRI will handle their own tax. If you fail to deduct TDS, you are treated as an "assessee in default" under Section 201, and you face interest, penalties, and possible disallowance of the expenditure.

The TDS is deducted on the sale consideration — the total amount you pay to the NRI for the property. This includes all components of the payment: the basic sale price, any premium, club charges, car parking, or other amounts specified in the sale agreement.

TAN is mandatory

Unlike Section 194-IB, where your PAN is sufficient, Section 194 requires a Tax Deduction and Collection Account Number (TAN). You must apply for a TAN using Form 49B before you deduct TDS. The TAN appears on the challan, the TDS return, and the certificate issued to the NRI. If you do not have a TAN, apply for one immediately — you cannot comply with Section 195 without it.

Applicable rates — capital gains vs. other income

The TDS rate under Section 195 depends on the nature of the income being paid to the NRI. For property purchases, the primary consideration is capital gains:

• Long-term capital gains (LTCG): If the NRI held the property for more than 24 months (the holding period for immovable property as of FY 2025-26), the gains are long-term. The TDS rate is 20% plus applicable surcharge and 4% health and education cess. In practice, this works out to approximately 20.8% to 22.8% depending on the surcharge applicable to the NRI's income level.
• Short-term capital gains (STCG): If the property was held for 24 months or less, the gains are short-term and taxed at the NRI's applicable slab rate. The buyer must deduct TDS at the applicable slab rate, which can be up to 30% plus surcharge and cess. In practice, buyers often deduct at 30% plus applicable surcharge and cess (approximately 31.2% to 37.2%) to be safe.

The NRI can apply for a lower or nil deduction certificate under Section 197 if their actual tax liability is lower than the standard rate. For example, if the NRI has losses that offset the capital gains, they can apply to the Assessing Officer for a certificate allowing the buyer to deduct at a reduced rate.

The sale consideration and stamp duty value

TDS is deducted on the sale consideration, which is the amount payable by the buyer to the seller as per the agreement. However, if the stamp duty value (circle rate) of the property exceeds the sale consideration by more than 10%, the stamp duty value is treated as the deemed sale consideration under Section 50C. The buyer must deduct TDS on the higher of the two amounts.

For example, if the agreement states a sale price of Rs 80,00,000 but the stamp duty value is Rs 95,00,000, the deemed consideration is Rs 95,00,000. TDS is calculated on Rs 95,00,000, not Rs 80,00,000.

Step-by-step compliance process

Here is the complete process for a buyer purchasing property from an NRI:

• Step 1: Obtain the NRI's PAN and verify it against the Income Tax Department's online verification tool.
• Step 2: Apply for a TAN if you do not already have one (Form 49B at tin-nsdl.com).
• Step 3: Determine whether the NRI has applied for a lower-deduction certificate under Section 197. If they have, deduct at the certificate rate. Otherwise, deduct at the standard rate.
• Step 4: Deduct TDS from the sale consideration before making payment to the NRI. The deduction must happen at the time of payment or credit, whichever is earlier.
• Step 5: Deposit the TDS using a challan (Form 281) within 7 days from the end of the month in which the deduction was made.
• Step 6: File a quarterly TDS return in Form 27Q for the quarter in which the deduction was made. Due dates: Q1 — 31 July, Q2 — 31 October, Q3 — 31 January, Q4 — 31 May.
• Step 7: Issue Form 16A to the NRI within 15 days from the due date of filing the quarterly return.

Penalties for non-compliance

Failing to deduct or deposit TDS under Section 195 carries severe consequences:

• Interest under Section 201: 1% per month for late deduction, 1.5% per month for late deposit, from the date of deduction to the date of actual deduction or deposit.
• Disallowance under Section 40(a)(ia): Up to 30% of the expenditure may be disallowed in your hands if TDS is not deducted or deposited. This increases your taxable income significantly.
• Late fee under Section 234E: Rs 200 per day for late filing of Form 27Q, capped at the TDS amount.
• Penalty under Section 271H: Equal to the TDS amount for failure to file the TDS return.
• Prosecution under Section 276B: Rigorous imprisonment from 3 months to 7 years for willful failure to deduct or deposit TDS.

DTAA benefits — reduced rates

India has Double Taxation Avoidance Agreements (DTAAs) with many countries. If the NRI is a resident of a country with which India has a DTAA, they may be eligible for a reduced TDS rate. For example, under the India-USA DTAA, the capital gains rate on property may be lower than the domestic rate.

To claim DTAA benefits, the NRI must provide a Tax Residency Certificate (TRC) from their country of residence, along with a declaration that they are the beneficial owner of the income. The buyer should retain these documents. The NRI can also apply for a lower-deduction certificate under Section 197 to get a nil or reduced rate.

Practical example — buying a flat from an NRI

Rahul is buying a flat from Mr. Patel, an NRI based in the USA. The sale consideration is Rs 1,00,00,000. Mr. Patel held the property for 30 months (long-term capital gains).

• Sale consideration: Rs 1,00,00,000
• Stamp duty value: Rs 1,05,00,000 (higher than sale price)
• Deemed consideration: Rs 1,05,00,000 (stamp duty value applies)
• Holding period: 30 months (long-term)
• TDS rate: 20% + surcharge + 4% cess ≈ 20.8%
• TDS amount: Rs 1,05,00,000 × 20.8% ≈ Rs 21,84,000
• Net payment to NRI: Rs 1,05,00,000 - Rs 21,84,000 = Rs 83,16,000

Rahul must have a TAN, deduct Rs 21,84,000 before paying Mr. Patel, deposit the TDS within 7 days using Form 281, file Form 27Q in the quarterly return, and issue Form 16A to Mr. Patel.

Lower-deduction certificate — Section 197

If the NRI's actual capital gains tax liability is lower than the standard TDS rate (for example, because they have capital losses or are eligible for exemptions under Sections 54, 54EC, or 54F), they can apply to the Assessing Officer for a lower or nil deduction certificate under Section 197. The application is made in Form 13, and the certificate specifies the rate at which the buyer should deduct TDS.

The buyer should obtain and verify this certificate before making the payment. If the NRI presents a valid Section 197 certificate, the buyer deducts at the certificate rate. Without the certificate, the buyer must deduct at the standard rate.

When the buyer is also an NRI

If the buyer is also an NRI, the TDS obligation still applies under Section 195. The residency status of the buyer does not exempt them from the deduction requirement. However, the buyer may be able to claim credit for the TDS in their own tax return, depending on their tax residency and applicable DTAA provisions.

Key differences from TDS on rent

• Section: 195 (property purchase) vs. 194-I/194-IB (rent to residents).
• Rate: 20%+ (capital gains) vs. 2%/10% (rent).
• TAN: Required for 195; PAN sufficient for 194-IB.
• Return: Quarterly Form 27Q for 195; Form 26Q (194-I) or Form 26QC (194-IB).
• Timing: At the time of payment for property purchase; monthly or year-end for rent.
• Cap: No statutory cap for 195; 194-IB has a cap at last month's rent.

Disclaimer: This article is for informational purposes only and does not constitute tax advice. Tax rules can change and individual situations vary. Please consult a qualified Chartered Accountant before deducting or depositing TDS on property purchases from NRIs.