TDS on Property Sale by NRI — Why You Lose 20% (and How to Fix It)

An NRI in London sells a Mumbai flat. The buyer's CA, taking the cautious route, deducts 20% TDS on the full sale value of ₹2.4 crore — that is ₹48 lakh held back at source. The actual long-term capital gains tax due on the transaction may be ₹6-8 lakh after indexation and Section 54 reinvestment. The NRI seller has just lost the use of ₹40 lakh of their own money for the next 12-15 months until the refund processes. This is the most expensive avoidable mistake in NRI taxation, and it happens every week. This guide explains why it happens, how to prevent it before sale, and what to do if it has already happened.

The 20%-on-everything trap

When a resident sells property in India, the buyer deducts 1% TDS on sale value above ₹50 lakh under Section 194-IA — a fixed 1% on the gross consideration. This is what most buyers and their lawyers / CAs are familiar with. When the seller is an NRI, an entirely different section applies — Section 195 — under which TDS is on capital gains, not on sale value. The rate is 20% (plus surcharge and cess) on long-term capital gains, or 30% on short-term.

In practice, the buyer's CA almost always plays it safe by deducting on the full sale value rather than on computed capital gains. The reasoning is defensive — if the capital gains are under-estimated and tax under-deducted, the buyer becomes liable for the shortfall under Section 201. Deducting on the higher figure shifts the cash-flow burden entirely to the NRI seller.

What the law actually says

The Section 197 fix — lower-TDS certificate

Section 197 of the Income Tax Act allows the seller to apply to the Assessing Officer for a certificate authorising the buyer to deduct TDS at a lower rate (or nil rate) based on the seller's estimated tax liability on the actual capital gains.

• The application is made by the SELLER (NRI), not the buyer. It must be filed BEFORE the sale is registered.
• Filed through Form 13 on the income tax e-filing portal (TRACES section).
• The Assessing Officer reviews the computation — actual cost, indexation, period of holding, exemptions claimed under Section 54 / 54EC / 54F — and issues a certificate fixing the TDS rate at a specific lower percentage, often 1-5% of sale value instead of 20%+.
• The buyer then deducts TDS at this lower rate, citing the certificate. The cash flow that would otherwise be tied up in a refund battle stays with the seller.
• Realistic processing time: 4-6 weeks from a complete application. Plan accordingly — start the Section 197 application before signing the agreement to sell.

A Section 197 certificate is THE highest-leverage step an NRI seller can take. Without it, you finance the Indian government with your own money for 12-15 months. With it, the right amount is deducted at source.

Capital gains computation

Capital gains on Indian property held by an NRI are computed identically to a resident's:

• Long-term (held > 24 months): Sale consideration minus indexed cost of acquisition minus indexed cost of improvement minus sale expenses (brokerage, legal fees). Tax at 20% with indexation (CII base year 2001 if acquired before 1 April 2001).
• Short-term (held ≤ 24 months): Sale consideration minus cost of acquisition minus cost of improvement minus sale expenses. Taxed at slab rate for residents, 30% flat for NRIs.
• For property acquired by inheritance or gift, the date of acquisition by the original owner and the original cost are taken (Section 49(1)). The holding period in the inheritor's hands plus the period in the previous owner's hands together determine LTCG eligibility.
• Special rule (NRI-specific) — for shares and debentures of an Indian company, NRIs can claim Section 115AC / 115E benefit. Property does not have this concession.

Worked example: NRI sells a flat in 2026 for ₹2.4 crore that was purchased in 2010 for ₹70 lakh. Indexed cost (CII 2010-11 = 167, CII 2025-26 ≈ 363) = 70 × (363/167) = ₹152 lakh. Capital gain = 240 − 152 = ₹88 lakh. Tax at 20% = ₹17.6 lakh plus 4% cess = ~₹18.3 lakh. Compare to buyer-deducted TDS at 20% on full ₹2.4 crore = ₹48 lakh + cess = ~₹50 lakh. Section 197 certificate saves the NRI ~₹31.7 lakh of cash flow.

Exemptions under Section 54 / 54F / 54EC

Long-term capital gains on residential house property can be fully or partly sheltered from tax through three statutory exemptions — all available to NRIs:

Combining Section 54 (reinvest in another house) with Section 54EC (₹50 lakh in bonds) can often bring long-term capital gains tax to NIL for typical NRI property transactions. The Section 197 application must show these claimed exemptions to bring the certified TDS rate down.

Timeline from sale to certificate

1. Sign agreement to sell (token + sale agreement) — NOT the registered conveyance yet.
2. Engage a CA. Compute actual capital gains, list exemptions you plan to claim, prepare the Section 197 application (Form 13).
3. File Form 13 online with supporting documents — purchase deed, indexation calculation, sale agreement, PAN, passport/OCI card, planned reinvestment proof or intent.
4. Assessing Officer review — 4-6 weeks typically. May raise queries; respond within stipulated time.
5. Certificate issued by AO — specifies the TDS rate applicable for the specific sale to the specific buyer.
6. Buyer deducts TDS at the certified lower rate. Both parties sign and register the sale deed.
7. Buyer files Form 27Q quarterly and issues Form 16A to seller within 15 days of return due date.
8. NRI seller files ITR-2 for the relevant AY claiming the TDS credit. If actual tax is less than TDS deducted (e.g., further exemptions applied or capital loss carried forward), refund processes through CPC within ~6 months of filing.

If TDS has already been deducted at 20%+

If the sale has happened and the buyer has already deducted 20% on the full sale value, the corrective path is via the income tax return:

• File ITR-2 for the AY in which the sale occurred — disclose actual capital gains, claim exemptions under Section 54 / 54EC / 54F, and claim TDS credit.
• The refund is the excess of TDS over actual tax payable. Typical processing: 6-12 months from filing of ITR.
• Where DTAA may apply (the home country also taxes capital gains on the same transaction), file Form 67 to claim foreign tax credit if your country of residence will tax the gain. India usually has primary taxing right on Indian-situated immovable property — the home country gives credit, not the other way round.
• Track refund status on the income tax portal. Pre-validate your foreign bank account in the e-filing portal — refunds can now be credited to a foreign account directly.

What buyers also get wrong

• Quoting Section 194-IA for an NRI sale — wrong section; the rate, base and reporting form are all different.
• Issuing Form 16B instead of Form 16A — Form 16A is for non-resident TDS under Section 195.
• Reporting the TDS in Form 26QB (resident purchase form) instead of Form 27Q (non-resident TDS return).
• Forgetting that NRI sales have NO threshold — Section 195 applies to every rupee.
• Believing they can defer TDS until possession — TDS is due at credit OR payment, whichever is earlier. Token money attracts TDS proportionately.

NRI seller's checklist

1. Identify NRI status under FEMA at the time of sale. If you have already become RNOR or resident, the section and rate change.
2. Compute capital gains realistically before listing — knowing the number drives every subsequent step.
3. Plan exemptions BEFORE the sale: identify reinvestment property (Section 54) or earmark the ₹50 lakh for Section 54EC bonds.
4. Apply for Section 197 lower-TDS certificate at least 6 weeks before registered sale.
5. Inform buyer at the agreement-to-sell stage that they will deduct TDS under Section 195 and provide them with the certificate when issued.
6. Ensure buyer files Form 27Q quarterly and provides Form 16A to you on time — without it, you cannot claim the TDS credit cleanly in your ITR.
7. File ITR-2 in India for the AY of sale. Disclose under Schedule CG (Capital Gains), claim exemptions, claim TDS credit.
8. If your country of residence also taxes the gain (US, UK, etc.), co-ordinate with a local tax advisor for Foreign Tax Credit on your home return.