Navigating tax complexities: What resident Indians must know when buying property from NRIs

When a resident Indian buys property from an NRI, they must deduct 20% TDS on the total sale value and deposit it with the Income Tax Department

Vikram Patel, a Mumbai resident, was thrilled to find a luxurious apartment listed by Neha Kapoor, an NRI in Singapore, for ₹1.8 crore. The property was perfect, but Patel soon learned that buying from an NRI involved complex tax rules under the Income Tax Act, 1961 (IT Act). If he sold his own property to an NRI, the tax implications would differ.

When an Indian resident buys a property from an NRI, the resident buyer should deduct 20% as TDS from the total sale value, say experts. (Representational Image)(Unsplash)

TDS obligations when buying from an NRI

As a resident Indian buying from an NRI, Vikram faced strict Tax Deducted at Source (TDS) rules under Section 195 of the IT Act. Says Kunal Savani, Partner, Cyril Amarchand Mangaldas, a law firm, “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.

Says Suresh Surana, a Mumbai-based chartered accountant, “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.

“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,” said Deepak Kumar Jain, founder of TaxManager.in, a tax advisory and e-filing portal platform.

This higher rate and compliance burden was daunting. “The paperwork is overwhelming,” Vikram admitted.

Selling property to an NRI: Tax implications

If Vikram sold his property to an NRI, the scenario would shift. Says Ritika Nayyar, Partner at Singhania & Co., a law firm, “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.

Reducing tax liabilities

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.

Tax rules for resident Indians buying property from NRIs(HT Graphic)

Verifying NRI status

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).

A smooth transaction

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.

Anagh Pal is a personal finance expert who writes on real estate, tax, insurance, mutual funds and other topics