TDS When an NRI Sells Indian Property: Which Provision Applies, and Who Carries the Liability

There is one mistake in Indian residential resale that reliably costs the person who did not make it. A resident buyer, buying from a seller who lives abroad, applies the withholding rule they have heard of — the one every home-buying checklist mentions — deducts on that basis, registers the deed, and pays the balance across. Months later the shortfall surfaces, with interest, and it is recoverable from the buyer.

The rule they applied was the right rule for the wrong transaction. Here is the one that governs it.

The substitution: two provisions, one of which does not apply

Section 194-IA of the Income-tax Act, 1961 requires a transferee of immovable property other than agricultural land to deduct tax from the sum paid to a resident transferor. The residence of the seller is a condition of the section, not a detail inside it. Where the seller is a non-resident, section 194-IA is not the operative provision.

What operates instead is section 195 of the same Act, which governs deduction from a payment to a non-resident of a sum chargeable under the Act. Almost everything about the mechanism differs, and the differences run in the direction of more obligation on the buyer rather than less.

The buyer's side of the ordinary case — the one that does apply when the seller is resident — is set out in our post on section 194-IA.

Why the department pursues the buyer

Because withholding is the mechanism by which tax on a non-resident's Indian income is collected at all. Once the money has left the country, recovering an unpaid liability from a person who is no longer here is difficult; the law's answer is to make the payer responsible before the money moves.

So the consequences attach to the buyer. Sections 201 and 201(1A) of the Income-tax Act, 1961 treat a person who does not deduct or does not pay as an assessee in default, with interest running. Section 234E provides a fee for late delivery of the statement and section 271H a penalty for failure to deliver it or for furnishing incorrect information. Section 276B carries a prosecution provision for failure to pay tax deducted to the credit of the Central Government. None of that moves to the seller because the contract says the seller will handle their own taxes. A contractual indemnity is worth having, and it is worth exactly as much as the counterparty's willingness to honour it from another country.

Establish residence before you agree the payment schedule

Residence for this purpose is a question of fact determined under section 6 of the Income-tax Act, 1961, on days of presence in India across the relevant periods. It is not settled by a passport, an Overseas Citizen of India card, an Aadhaar, an Indian address on the sale deed, or the seller's own description of themselves.

Ask the question early and in writing, because it changes the shape of the transaction: it decides whether you need a tax deduction account number, which statement you file, what you can deduct on, and how long the process takes. A seller who is evasive about residence status at the term-sheet stage is telling you something useful.

What the deduction is applied to

This is the part that surprises both sides. Section 195 requires deduction from a sum chargeable under the Act, and the chargeable sum on a property sale is the capital gain — but the buyer is not in a position to compute somebody else's capital gain, and the department does not take the buyer's word for it. In practice, absent a determination or certificate, the deduction is applied to the whole consideration rather than to the gain.

For the seller that is a cash-flow event of real size: a large part of the sale price is withheld, and the excess over their actual liability comes back only when they file a return and claim the refund, months later. For the buyer it is a compliance question — deduct on the gross unless an officer has said otherwise, in writing.

The lower-deduction certificate, and when to start

Two routes exist and they are worth distinguishing, because the parties keep confusing whose application it is.

• Section 195(2) — the payer applies to the Assessing Officer for a determination of the appropriate proportion of the sum that is chargeable, and deducts on that proportion.
• Section 197 — the recipient applies for a certificate authorising deduction at a lower rate or no deduction, and hands it to the payer.

In a property sale by a non-resident it is usually the seller who applies under section 197, because it is the seller who has the computation: cost of acquisition, the improvement history, the period of holding, and whatever relief they intend to claim. What the buyer needs is the certificate itself, before the payment, naming the buyer as the deductor.

Start it early. The application is documentary — the purchase deed, the sale agreement, the computation, the return history — and it is processed on the department's own schedule rather than yours. A certificate applied for after the agreement is signed is a certificate that arrives after the money was due, and at that point the transaction either waits or the buyer deducts on the gross. Neither is the outcome anyone wanted.

Surcharge, cess, and the difference between deduction and liability

Two things routinely get conflated here, and separating them defuses most of the argument between buyer and seller.

Deduction is not the tax. It is a collection on account. The seller's actual liability is computed in their return, and the difference is a refund or a further payment. A seller who says "you have deducted more than I owe" may well be right and is nonetheless describing a refund, not an error.

The rate in force is not one number. Tax deductible under section 195 is applied at the rates in force for the year, increased by surcharge — which is itself banded — and by the health and education cess. This site prints none of them. They come from the Finance Act for the relevant year and they change annually, and the Central Board of Direct Taxes is the authority whose material a chartered accountant reads on the day the payment is made. A rate quoted in an article, however confidently, is a claim about the year the article was written in.

Where the seller is resident in a country with which India has a double taxation avoidance agreement, the treaty can affect the position, and the documentation required to rely on it is its own exercise. That is a conversation with a chartered accountant, not a paragraph on a website.

The buyer's sequence, in order

1. Establish the seller's residence status under section 6 of the Income-tax Act, 1961, in writing, before the agreement.
2. Obtain a tax deduction account number under section 203A if section 195 applies. This is the step that has no equivalent in an ordinary purchase, and it takes time.
3. Ask for the certificate. If the seller intends to apply under section 197, agree in the sale agreement that the certificate is produced before the relevant payment, and that deduction is on the gross if it is not.
4. Deduct at the time of credit or payment, whichever is earlier — on each instalment, not once at the end.
5. Deposit within the period the Income-tax Rules, 1962 allow, computed from the end of the month of deduction. Read rule 30 as it stands; the period has been amended and is not printed here.
6. File the quarterly statement in Form 27Q, and issue Form 16A to the seller. Section 203 of the Act requires the deductor to furnish a certificate of deduction to the person from whose income it was deducted.
7. Keep the challans, the statement and the certificate with the registered deed. The next buyer's advocate will ask.

What to insist on seeing before you release the balance

• Evidence of residence status — a declaration from the seller, and where the seller claims to be resident, something that supports it.
• The section 197 certificate, if a reduced deduction is being applied, naming you as the deductor and covering this transaction.
• The PAN of every seller. A missing or wrong PAN changes the position and orphans the credit.
• A clear allocation where there are joint sellers, one resident and one not. Two sellers with different residence status is two different provisions in one transaction, and it is the case most often got wrong.

The framework and the six questions that survive an amendment are on our page on property withholding tax. Where the rest of the cross-border questions on this corridor sit — funding routes, documents to preserve, attending in person — is set out in the NRI section.