The TDS mistake in NRI property sales
An NRI client sells an apartment in Chennai. The buyer, trying to be helpful, deducts TDS at 1% — because that's what a quick Google search or the sub-registrar's office assumes applies. The sale closes, the deed is registered, everyone moves on.
Then the seller files their tax return and gets a notice. The 1% deduction under Section 194-IA never applied to them in the first place — because the seller is an NRI, not a resident. That single wrong assumption is a root cause of TDS problems in NRI property sales, and it cuts two very different ways depending on which mistake gets made.
Two sections, two very different outcomes
The section numbers in this post are those of the Income-tax Act 1961, which governs income up to FY 2025-26; for tax year 2026-27 the Income-tax Act 2025 applies with renumbered provisions (Section 195 corresponds to Section 393(2), Section 197 to Section 395, and Section 194-IA to Section 393(1)), so confirm the equivalents and forms for the year of your sale.
Section 194-IA — the 1% TDS on property sale — is written for transactions between residents. The moment the seller is a non-resident, the governing provision is Section 195, not 194-IA. Section 195 requires the buyer to deduct TDS on payments to an NRI seller, and unlike the flat 1% rate, this TDS is meant to apply on the full sale consideration, at the applicable capital gains rate (12.5% plus surcharge and cess for long-term gains on property, with different rates for short-term gains; confirm for your case) — which, absent any relief, is materially higher than 1%.
So the "mistake" shows up in one of two ways:
- Under-deduction: Buyer and seller both assume 194-IA applies, deduct 1%, and file accordingly. Months later, the seller's actual tax liability under Section 195 turns out to be much higher, triggering interest, notices, and — because the buyer was the one legally obligated to deduct — potential exposure for the buyer too.
- Over-deduction with no advance planning: The buyer correctly applies Section 195 at the higher default rate on the full consideration, but the NRI seller never bothered to apply in advance for relief. The result is TDS deducted on the gross sale price rather than the actual gain, locking up far more cash than the seller's real tax liability requires — recoverable only by filing a return and waiting for a refund.
The fix nobody applies for in time: Section 197
This is the part that actually matters for cash flow. Under Section 197, an NRI seller can apply to the Assessing Officer before the sale completes for a certificate directing a lower — or nil — TDS rate, based on the actual computed capital gain rather than the gross sale value. Get this certificate in hand before the sale deed is signed, and the buyer deducts TDS on a realistic number. Skip it, and the buyer has little choice but to withhold at the higher default rate on the full consideration.
NRI sellers may have to wait for their refund simply because nobody applied for the Section 197 certificate before the transaction closed. Excess TDS is not something you can adjust at the time of sale — it can only be recovered later, by filing an income tax return and claiming the refund through the normal assessment cycle. If your capital gain is genuinely small relative to the sale price (common with older properties held a long time, or purchase-cost-heavy transactions), a certificate obtained before closing can avoid having cash locked up until the refund is processed; the time a certificate takes depends on the officer and the case, so apply early.
The capital gains rate itself has also changed
Budget 2024 removed the indexation benefit for long-term capital gains on property and introduced a flat rate — commonly cited at 12.5% — for property sold on or after 23 July 2024. The transitional option for property acquired before that date (tax at the old rate of about 20% with indexation, if that produced a lower liability) is available only to resident individuals and HUFs, so an NRI seller should expect the 12.5% rate without indexation. Treat the exact figures as a starting point for discussion with your CA rather than a substitute for a computation on your actual purchase and sale numbers — this is precisely the kind of detail where getting the base computation wrong feeds straight into an incorrect TDS certificate application.
Don't forget: tax compliance is only step one of repatriation
Even after TDS is correctly handled and your return is filed, moving sale proceeds out of India is a separate FEMA exercise. Proceeds typically route through an NRO account, with repatriation capped at USD 1 million per financial year (net of applicable taxes), and the bank will require CA certification — the Form 15CA/15CB pair (which the Income-tax Rules 2026 renumber as Forms 145 and 146 from 1 April 2026) — before releasing funds abroad. Tax compliance and repatriation compliance are two different gates; clearing one doesn't automatically clear the other.
What this means for you
If you're an NRI planning to sell Indian property: talk to a CA about a Section 197 lower/nil TDS certificate before you sign the sale agreement, not after. Confirm with your buyer, well in advance, that Section 195 — not 194-IA — governs the deduction. And line up your Form 15CA/15CB and NRO account structure early, so tax compliance and repatriation don't become two separate rounds of waiting.
Get the paperwork right at the start, and you collect closer to your real proceeds at closing instead of financing an interest-free loan to the tax department while your refund works its way through the system.