TDS on Property Purchase by NRI 2026: Rates, Compliance and Refund Process

When you buy property from an NRI seller in India, TDS rules differ fundamentally from a resident-to-resident transaction. Section 194-IA (flat 1% TDS for resident sellers) does not apply. Section 195 of the Income Tax Act governs NRI transactions, and it requires TDS at the rate applicable to the sellers capital gains, not a flat 1%. For long-term capital gains (property held over 24 months), TDS is 12.5% of the full sale consideration (or 20% for pre-July 2024 properties, if the seller chooses the indexed route). For short-term gains, TDS is 30%. Plus, surcharge and 4% health and education cess. The buyer must obtain a TAN, deduct TDS before payment, deposit it with the Income Tax Department, and file Form 27Q.

Section 195 vs Section 194-IA: The Mistake That Costs Lakhs

The most common error in NRI property transactions is applying Section 194-IA (the 1% TDS rule for resident sellers) instead of Section 195. If the buyer deducts only 1% instead of 12.5% to 30%, the Income Tax Department can issue notices to both the buyer and the seller. The buyer faces a Section 271C penalty for under-deduction, and the NRI seller faces reassessment and recovery proceedings. This mistake happens frequently because brokers and sub-registrars do not always verify the sellers residential status before registration.

The fix is straightforward: before making any payment, confirm the sellers NRI status through passport and visa documentation. If the seller is an NRI, apply Section 195, not Section 194-IA. Use Form 27Q (not Form 26QB) for the TDS return.

TDS Rates for NRI Property Transactions in 2026

• LTCG (property held over 24 months, purchased after July 23, 2024): TDS at 12.5% on the full sale consideration. No indexation. Plus, applicable surcharge and 4% health and education cess.
• LTCG (property held over 24 months, purchased before July 23, 2024): TDS at 20% with indexation OR 12.5% without indexation, whichever results in lower tax for the seller. The seller chooses the method. The buyer deducts at the applicable rate.
• STCG (property held 24 months or less): TDS at 30% on the full sale consideration. Plus, surcharge and cess. This is the highest TDS rate and can result in a very large sum being withheld.

Important: TDS under Section 195 is calculated on the full sale consideration, not on the capital gain. The NRI sellers actual tax liability may be much lower (after deducting the purchase cost, improvement costs, and exemptions). The seller can claim a refund of the excess TDS when filing their income tax return.

Lower Deduction Certificate: How to Reduce TDS Legally

A Lower Deduction Certificate (LDC) under Section 197 allows the buyer to deduct TDS at the NRI sellers actual tax rate instead of the default 12.5 to 30%. For example, if the NRI sellers actual LTCG tax after indexation and exemptions is 5%, the LDC authorizes the buyer to deduct only 5% instead of 12.5 or 20%. This prevents the sellers capital from being locked in the refund cycle for 12 to 18 months.

The process: the NRI seller (or their authorized representative) files Form 13 with the Assessing Officer, providing the capital gains computation, applicable exemptions (Section 54, 54F, 54EC), and the requested lower rate. The AO issues the certificate, which the buyer presents to justify the reduced deduction. The LDC must be obtained before payment.

Buyers Compliance Checklist

1. Step 1: Verify the sellers residential status (NRI or resident) using passport and visa documentation.
2. Step 2: Obtain a TAN (Tax Deduction Account Number) by filing Form 49B. You cannot deposit TDS under Section 195 without a TAN.
3. Step 3: Calculate TDS at the applicable rate (12.5% / 20% / 30%) on the full sale consideration, plus surcharge and cess.
4. Step 4: Check if the NRI seller has a Lower Deduction Certificate (Form 13). If yes, deduct at the rate specified in the certificate.
5. Step 5: Deposit TDS with the Income Tax Department within 7 days of the end of the month in which the deduction was made.
6. Step 6: File Form 27Q (quarterly TDS return for NRI payments) by the due date.
7. Step 7: Issue TDS certificate (Form 16A) to the NRI seller.

Conclusion

1. Section 195 governs NRI property TDS, not Section 194-IA. The default TDS is 12.5% (LTCG) or 30% (STCG) on the full sale consideration, not a flat 1%.
2. A Lower Deduction Certificate (Form 13) can reduce TDS to the sellers actual tax rate, preventing capital from being locked in refund cycles.
3. Buyers must obtain TAN, deduct TDS before payment, deposit within 7 days, file Form 27Q quarterly and issue Form 16A to the seller.
4. Verify the sellers NRI status before any payment. This single check prevents the most expensive compliance mistake in the process.

For NRI property transaction guidance, contact the DLFInfo advisory desk and your CA.

Frequently Asked Questions

Q: What is the TDS rate when buying property from an NRI in 2026?

A: Under Section 195, TDS is 12.5% on the full sale consideration for LTCG (property purchased after July 23, 2024). For property purchased before that date, TDS is 12.5% or 20% (with indexation), whichever is lower. STCG (property held for under 24 months) attracts 30% TDS. All rates are plus surcharge and 4% cess.

Q: Can TDS on NRI property purchase be reduced?

A: Yes. The NRI seller can apply for a Lower Deduction Certificate under Section 197 by filing Form 13 with the Assessing Officer. The certificate specifies the reduced TDS rate based on the sellers actual tax liability after exemptions. The buyer must obtain it before making payment.

Q: Do I need a TAN to buy property from an NRI?

A: Yes. Buyers must obtain a TAN (Tax Deduction Account Number) to deposit TDS under Section 195. The form is Form 49B. Note: From October 2026, individual buyers may be able to use PAN instead of TAN for NRI property TDS, but until clarification, obtain TAN to avoid compliance risk.

Q: What happens if I deduct only 1% TDS on an NRI property purchase?

A: Deducting 1% under Section 194-IA (the resident seller rule) instead of the correct rate under Section 195 is a compliance failure. The buyer faces a penalty under Section 271C for short deduction, plus interest under Section 201(1A). The NRI seller faces reassessment. Both parties receive notices from the Income Tax Department.