Buying a property in India can be challenging in itself, but when the seller is a non-resident Indian (NRI), the process becomes even more complex. While location, pricing, and negotiation remain critical, buyers must also navigate a web of tax compliance and documentation requirements. A single error in the transaction can result in steep penalties, especially when it comes to Tax Deducted at Source (TDS) under Section 195 of the Income Tax Act.

Unlike typical real estate deals between Indian residents where a 1% TDS is applicable on transactions exceeding ₹50 lakh, a property purchase from an NRI seller comes with significantly more stringent requirements. In such cases, the buyer is responsible for deducting TDS at a much higher rate — often 20% or more — and depositing it with the Indian income tax department.

TDS is not just a procedural formality. It serves as an advance tax payment on behalf of the NRI seller and plays a critical role in compliance. Any delay or error in deduction can result in penalties, interest charges, or even tax notices from the authorities.
 

Understanding TDS and Documentation

TDS under Section 195 is mandatory in every property transaction involving an NRI seller. The amount deducted is not the final capital gains tax but an advance payment that is later adjusted when the NRI files their tax return in India. After depositing the TDS, the buyer must provide Form 16A to the seller. This form, available on the income tax department's website, acts as proof of deduction and payment.

To deposit TDS, the buyer must first obtain a TAN (Tax Deduction and Collection Account Number) through the TRACES portal. The TDS amount is then determined based on the length of time the seller held the property. If the property was held for more than 24 months, it is treated as a long-term asset and the TDS rate is 12.5%. For properties held for 24 months or less, the short-term capital gain attracts a 30% TDS.

These base rates are then increased with surcharge and cess depending on the transaction value:

• Property value under ₹50 lakh: Effective TDS rate is 13.00%

• ₹50 lakh to ₹1 crore: 14.30%

• ₹1 crore to ₹2 crore: 14.95%

• ₹2 crore to ₹5 crore: 16.25%

• ₹5 crore or more: 17.81%

After the Union Budget 2024, NRIs lost the benefit of indexation. This means that unless the purchase price and cost of improvements are backed by solid documentation, TDS will be calculated on the full sale value rather than just the capital gains portion.
 

Legal Risks and Compliance Musts

One of the most commonly overlooked aspects in these transactions is the proper handling of PAN and Aadhaar linkage. The seller’s PAN must reflect their NRI status. Failure to mark the PAN as NRI could block TDS refunds and complicate the tax return filing process for the seller.

Buyers should also be aware of the Lower Deduction Certificate (LDC), which NRIs can obtain from the tax department to reduce the applicable TDS if their actual capital gain is lower. However, obtaining an LDC is not straightforward. The seller must file a request backed by accurate documentation of the property’s purchase price, improvement costs, and related details. Depending on the efficiency of the seller’s Chartered Accountant (CA) and document quality, the process can take two months or more. If the LDC is not provided at the time of sale, the buyer must deduct TDS at the full applicable rate — failing which, the liability may shift to the buyer.

For property deals executed through a Power of Attorney (PoA), extra caution is needed. As per the Supreme Court's 2022 ruling, only a Specific PoA registered in India is considered valid. This means:

• The PoA must relate only to the property being sold

• It must be officially registered in India

• The PoA holder may sign documents for registration, but cannot receive sale proceeds

• Payments must be transferred directly to the NRI seller’s NRO account

A General Power of Attorney (GPA) is not acceptable and renders the transaction legally invalid.

Another key point: funds must always be deposited in the seller’s Non-Resident Ordinary (NRO) account. The NRE (Non-Resident External) account, which is often exempt from Indian taxation on certain types of income, cannot be used for property sale proceeds. Every installment of payment must be accounted for individually. TDS should be deducted for each payment and deposited by the 7th of the following month. Delays trigger interest charges and penalties — and the seller is not responsible for compensating the buyer for any resulting losses.

Buying property from an NRI may seem like a lucrative investment opportunity, but it comes with its own set of legal and financial pitfalls. Understanding the tax obligations, documentation requirements, and regulatory procedures is essential for buyers. Without proper diligence, what appears to be a smart investment could quickly become a regulatory nightmare. If you’re planning to purchase property from an NRI, consulting a tax expert and legal advisor familiar with NRI transactions is not optional — it’s a must.