Buying a property from a Non-Resident Indian (NRI) comes with its own set of legal and financial obligations in India. One of the most important among them is TDS on purchase of property. Many buyers aren’t aware that they need to deduct tax at source (TDS) when purchasing a property from an NRI, and failure to comply can result in hefty penalties.
If you’re in the process of buying a property from an NRI or planning to do so, this guide will help you understand the entire TDS on purchase of property process in a simple and humanized manner.
Why TDS Is Applicable When Buying Property from NRI
The Income Tax Act, under Section 195, mandates that when a resident buys property from an NRI, they must deduct TDS on purchase of property. This is done to ensure that the government receives taxes on the capital gains earned by the NRI.
Unlike resident-to-resident property transactions (where 1% TDS is deducted if the property value exceeds ₹50 lakhs), transactions involving NRIs are taxed at a much higher rate—up to 20% or more, depending on various factors like capital gains and surcharges.
So yes, this step is legally mandatory—and you, the buyer, are responsible for ensuring compliance.
Step-by-Step Process to Pay TDS on Purchase of Property from NRI
Step 1: Verify NRI Status and Understand Tax Liability
Before you start any paperwork, verify that the seller is indeed an NRI as per Indian tax laws. The tax implications vary greatly depending on the seller’s residential status.
You must also:
- Understand whether the sale results in short-term or long-term capital gains.
- Consult a Chartered Accountant if needed to determine applicable tax rates.
Step 2: Obtain TAN (Tax Deduction and Collection Account Number)
To pay TDS on purchase of property, the buyer needs to apply for a TAN using Form 49B on the NSDL website. Without a TAN, you cannot deposit TDS with the government.
TAN is different from PAN and is mandatory when deducting TDS under Section 195.
Step 3: Deduct TDS Before Making Payment to Seller
Once TAN is obtained and the TDS amount is calculated based on the sale value and applicable rate, you must deduct the TDS before transferring money to the NRI seller.
Let’s say the property is valued at ₹1 crore and the applicable TDS is 20%. Then ₹20 lakhs must be deducted and deposited with the government, and the remaining ₹80 lakhs can be paid to the seller.
Step 4: Deposit TDS with the Government
The deducted TDS must be deposited to the Income Tax Department using Challan No./ITNS 281. You can pay it online via the TIN NSDL website.
Make sure:
- You enter correct PAN and TAN numbers.
- Payment is made within 7 days of the end of the month in which TDS was deducted.
Step 5: File TDS Return (Form 27Q)
After depositing the TDS, you need to file Form 27Q—a quarterly TDS return for payments made to NRIs. This should be filed online through TIN-NSDL or the TRACES website.
This step is essential to record the deduction officially and to enable the seller to get credit for the tax deducted.
Step 6: Issue TDS Certificate to the Seller (Form 16A)
Once the TDS return is filed, you must issue a Form 16A to the NRI seller. This is proof that tax has been deducted and deposited on their behalf.
The seller will need this form to claim tax credit in their ITR.
Points to Remember
- If the NRI has applied for a Lower TDS Certificate from the Income Tax Department under Section 197, you can deduct TDS at the reduced rate specified.
- Always check whether GST, stamp duty, and registration charges are applicable and whether they affect the total value for TDS deduction.
- The buyer, not the seller, is liable for TDS compliance in such transactions. Ignoring this may lead to penalties and interest.
Common Mistakes to Avoid
- Skipping TAN application: Without TAN, TDS payment cannot be processed legally.
- Incorrect calculation of capital gains: This can result in underpayment or overpayment.
- Late TDS payment or filing: This attracts penalties.
- Not issuing Form 16A: The seller won’t be able to claim the TDS credit without this.
Consult a tax advisor or legal expert when unsure. While the process may sound daunting, professional help can ensure smooth and lawful execution.
TDS Rates for Sale of Property by NRI (Indicative)
| Type of Capital Gain | TDS Rate | Surcharge & Cess |
| Short-Term (Held <2 years) | As per income slab (30% usually) | Yes |
| Long-Term (Held >2 years) | 20% | Plus surcharge & 4% cess |
Conclusion
Paying TDS on purchase of property from an NRI is not just a legal formality—it’s a crucial step in ensuring your real estate transaction is valid and clean. While the process might appear bureaucratic, following these steps carefully will save you from future tax troubles.
Buying property is a significant milestone. And by being well-informed and compliant, you make sure your investment remains safe and hassle-free.
