Navigating Tax Obligations When Buying Property from an NRI
Vikram Patel, a Mumbai resident, discovered the complexities of buying a property from an NRI, Neha Kapoor, based in Singapore. Learn about the tax liabilities and TDS obligations involved in such transactions.
PropertyNriTdsTax LiabilityReal EstateReal Estate MumbaiJul 20, 2025
As a resident Indian buying from an NRI, Vikram faced strict Tax Deducted at Source (TDS) rules under Section 195 of the IT Act. Kunal Savani, Partner at Cyril Amarchand Mangaldas, a law firm, explains, “Where the seller is a Non-Resident Indian (NRI), the provisions of section 195 of the IT Act apply instead of section 194-IA.”
Unlike resident-to-resident deals, where TDS is 1% for properties over ₹50 lakh under Section 194-IA, Vikram had to deduct TDS at 12.5% (plus surcharge and cess) for Long-Term Capital Gains (LTCG) or 30% for Short-Term Capital Gains (STCG) on the entire sale amount, regardless of value. Suresh Surana, a Mumbai-based chartered accountant, adds, “There is no monetary cap on sale consideration for deduction of tax in case where a transaction of purchase takes place between a resident transferee and a non-resident transferor.”
For Neha’s apartment, an LTCG transaction (held over 24 months), Vikram calculated TDS at 12.5% of ₹1.8 crore, totaling ₹22.5 lakh, plus cess. He needed a Tax Deduction and Collection Account Number (TAN) and had to file Form 27Q, unlike the simpler Form 26QB for resident deals. Deepak Kumar Jain, founder of TaxManager.in, a tax advisory and e-filing portal platform, advises, “When an Indian resident buys a property from an NRI, the resident buyer should deduct 20% as TDS from the total sale value and deposit with the Department of Income Tax and File Form 27Q as TDS Return and share Form 16A. TDS certificate to NRI.”
This higher rate and compliance burden was daunting. “The paperwork is overwhelming,” Vikram admitted.
If Vikram sold his property to an NRI, the scenario would shift. Ritika Nayyar, Partner at Singhania & Co., a law firm, explains, “As per sec 195 of the ITA, tax is mandatorily to be withheld at source when an Indian resident buys property from an NRI.”
For sales to an NRI, the buyer would deduct TDS at 12.5% for LTCG or 30% for STCG under Section 195. For example, if Vikram sold a property bought in 2015 for ₹60 lakh and sold it in 2025 for ₹1.2 crore, the LTCG would be ₹60 lakh (without indexation post-July 23, 2024). The NRI buyer would deduct ₹15 lakh (12.5% of ₹1.2 crore) as TDS. Vikram’s tax liability would be 12.5% of the gain ( ₹7.5 lakh), but the higher TDS could strain cash flow unless reinvested.
To ease these burdens, Vikram can explore exemptions. When selling, he could reduce LTCG tax under Sections 54, 54EC, or 54F. Jain confirms, “Yes both NRI and Resident Indian can claim tax exemptions or benefits under Section 54, 54EC or 54F.”
Under Section 54, reinvesting LTCG from a residential property into another within two years could exempt up to ₹10 crore. For instance, reinvesting his ₹60 lakh gain into a new home could eliminate Vikram’s tax liability. Section 54EC offers a ₹50 lakh exemption by investing in REC or NHAI bonds within six months.
As a buyer, Vikram could reduce his TDS burden if Neha obtained a lower TDS certificate under Section 197. Savani advises, “The NRI seller may, if eligible, obtain a certificate for deduction of tax at a lower or nil rate from the tax authorities, which the buyer can rely upon while deducting TDS.” Neha applied using Form 13, detailing her gains and exemption plans (e.g., Section 54 reinvestment), reducing Vikram’s TDS to match her actual tax liability, potentially lowering it to ₹10 lakh.
To avoid future liabilities, Vikram needed to confirm Neha’s NRI status. Nayyar emphasizes, “The residential status of the seller is a must while carrying out any tax compliance in this regard which ensures correct TDS deduction to avoid future liabilities.”
He requested her passport, Singapore tax residency certificate, and Form 10F, ensuring compliance with Section 195(2).
Vikram completed the purchase with Neha’s lower TDS certificate, reducing his TDS to ₹10 lakh, deposited via Form 27Q. When considering selling his property, he planned to reinvest under Section 54 to avoid tax. “It’s complex, but exemptions and documentation make it manageable,” Vikram reflected.
Resident Indians face higher TDS and compliance with NRIs but can reduce taxes through reinvestments and verified lower TDS certificates.
Frequently Asked Questions
What is TDS in the context of buying property from an NRI?
TDS stands for Tax Deducted at Source. When a resident Indian buys a property from an NRI, they are required to deduct TDS at 12.5% for Long-Term Capital Gains (LTCG) or 30% for Short-Term Capital Gains (STCG) on the entire sale amount.
What forms are required when buying a property from an NRI?
The buyer needs a Tax Deduction and Collection Account Number (TAN) and must file Form 27Q as TDS Return. The buyer also needs to share Form 16A, the TDS certificate, with the NRI seller.
How can a buyer reduce their TDS burden when purchasing from an NRI?
The NRI seller can obtain a lower TDS certificate under Section 197 by applying with Form 13, which details their gains and exemption plans. This can reduce the TDS to match the actual tax liability.
What is the importance of verifying the NRI status of the seller?
Verifying the NRI status of the seller is crucial to ensure correct TDS deduction and avoid future liabilities. The buyer should request the seller’s passport, tax residency certificate, and Form 10F.
What tax exemptions are available for selling a property to an NRI?
The seller can claim tax exemptions under Sections 54, 54EC, or 54F. Section 54 allows reinvesting LTCG from a residential property into another within two years, while Section 54EC offers a ₹50 lakh exemption by investing in REC or NHAI bonds within six months.
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