March 31, 2025

TDS on Property Purchase from an NRI: Avoid Penalties and Ensure Compliance

When buying property in India, many buyers overlook the crucial aspect of Tax Deducted at Source (TDS), leading to severe penalties and being deemed tax defaulters. This is particularly important when purchasing property from a Non-Resident Indian (NRI). Understanding the applicable TDS provisions ensures compliance and prevents legal and financial complications.

TDS on Property Purchase from a Resident Seller – Section 194-IA

Under Section 194-IA of the Income Tax Act, TDS applies to purchases from resident sellers:

Who must deduct TDS? The buyer of the property.
Threshold: TDS is applicable if the purchase price exceeds ₹50 lakh.
TDS Rate: 1% of the sale consideration or stamp duty value, whichever is higher.
TDS Payment & Filing: Payment must be made within 30 days using Form 26QB, and a TDS certificate (Form 16B) must be issued to the seller.
Penalty for Non-Deduction: Failure to deduct or deposit TDS attracts interest, penalties, and prosecution risks under Section 271C.

TDS on Property Purchase from an NRI – Section 195

If the seller is an NRI, TDS is deducted under Section 195, which has different rules than Section 194-IA:

Key Differences for TDS on Property Purchased from an NRI

TDS Rate: A resident buyer purchasing a property from an NRI must withhold taxes at 12.5% plus applicable surcharge and cess.
Requirement of TAN: Buyers must obtain a Tax Deduction Account Number (TAN) before deducting TDS. Form 26QB cannot be used; instead, Form 27Q must be filed.
TDS on Total Sale Consideration: TDS is deducted on the full sale price, not just on capital gains.
Installment-Based Deduction: If the property is paid for in installments, TDS must be deducted on each payment.
NRO Account Requirement: The balance sale consideration can be directly remitted to the NRI’s NRO account.

How an NRI Seller Can Reduce TDS Deduction

NRIs facing higher TDS deductions can apply for a Lower TDS Certificate (Section 197) to deduct TDS only on capital gains. The seller must submit:

Sale agreement details
Cost of acquisition documents
Capital gains computation
Proof of reinvestment (if claiming exemptions under Sections 54, 54EC, etc.)

The process takes around 4-6 weeks, so it’s advisable to apply early.

Consequences of Non-Compliance with TDS Rules

Failure to comply with TDS regulations can result in:

Interest Charges: 1% per month for non-deduction and 1.5% per month for non-deposit.
Late Filing Fees: ₹200 per day for delayed Form 27Q filing (up to the TDS amount).
Penalty under Section 271C: Equivalent to the TDS amount not deducted.
Income Tax Scrutiny: Non-compliance often triggers IT department scrutiny and legal complications.

Best Practices for Buyers of NRI Property

Verify the Seller’s Residential Status – Confirm whether the seller is a resident or an NRI before applying the correct TDS rate.
Obtain a TAN – This is mandatory for TDS deductions under Section 195.
Deduct TDS on Full Consideration – Unlike resident transactions, where TDS is deducted only on capital gains, TDS on sale of property by NRI is deducted on the entire sale price.
Use Form 27Q & Issue Form 16A – File Form 27Q and provide Form 16A to the seller as proof of TDS deduction.
Assist the NRI Seller in Getting a Lower TDS Certificate – This helps in reducing TDS liability and avoiding excessive tax deductions.
Ensure Timely TDS Payment & Filing – TDS must be deposited within 30 days of deduction to avoid penalties.

Conclusion

Buying property from an NRI requires strict TDS compliance under Section 195 to avoid penalties. Buyers should be aware of the TDS rate, obtain a TAN, and comply with all TDS filing requirements.

For NRIs, obtaining a Lower TDS Deduction Certificate can optimize tax payments and prevent excessive withholding, ensuring compliance with NRI taxation regulations.

Need Expert Assistance?

For professional guidance on TDS on NRI property transactions, Sale of property by nri, tax planning, or real estate investments, consult with Dinesh Aarjav & Associates. Our experts specialize in NRI tax compliance and property-related financial planning.