Buying Property from an NRI Seller: TDS Under Section 195, Form 27Q and the Lower Deduction Certificate (AY 2026-27)

Most Indian property buyers know the 1% rule. Deduct 1% TDS on any property costing ₹50 lakh or more, pay it with Form 26QB, hand the seller a certificate, done.

That rule is Section 194-IA, and it applies only when the seller is a resident. The moment the seller is a Non-Resident Indian, a completely different section takes over, the rate multiplies by more than ten, you need a TAN, and Form 26QB is the wrong form entirely.

Buyers discover this at the worst possible time: after registration, when a notice arrives holding them personally liable for tax they never deducted. This guide sets out what actually applies for AY 2026-27 (FY 2025-26), and how to avoid blocking ₹10 lakh or more of the seller's money unnecessarily.

Why Section 194-IA Does Not Apply

Section 194-IA is written for payments to a resident transferor. Payments to a non-resident fall under Section 195, which covers any sum chargeable to tax in India paid to a non-resident.

The differences are not cosmetic:

A buyer who files Form 26QB for an NRI seller has not complied. The money reaches the government, but the correct return was never filed, the seller cannot claim the credit cleanly, and the buyer remains an assessee-in-default.

Step One: Establish the Seller's Residential Status

The obligation sits on you, the buyer. If you deduct 1% because the seller told you they are Indian, and the department later finds they were a non-resident, the recovery comes from you.

Do not rely on a passport colour or an Indian address in the sale deed. Two points decide it:

• Residential status is determined for the financial year of the sale, under Section 6. Someone who moved abroad three years ago and spent 40 days in India this year is a non-resident even if they hold an Indian passport, an Aadhaar and a Mumbai voter ID.
• RNOR counts as resident. A Resident but Not Ordinarily Resident seller is a resident for TDS purposes, so Section 194-IA and the 1% rate apply to them. Our guide to residential status explains where the line falls.

Collect a written declaration of residential status, passport pages showing travel in the relevant year, and the seller's PAN. The declaration does not transfer your liability, but it establishes that you asked, and it is the first thing an assessing officer will look for.

Step Two: Apply for a TAN Before Registration

You cannot deposit TDS under Section 195 against your PAN. You need a Tax Deduction and Collection Account Number (TAN), applied for in Form 49B on the NSDL/Protean portal, costing roughly ₹65 and taking about a week to be allotted.

Apply as soon as the deal is agreed, not on the day of registration. If the property is being bought jointly by two buyers, each buyer needs their own TAN and each deducts on their share of the payment.

Step Three: Understand What the TDS Is Calculated On

Here is the part that costs sellers the most money.

Section 194-IA deducts 1% of the sale price, which is a small number by design. Section 195 deducts at the capital gains tax rate, and in the absence of a certificate from the department, it is applied to the entire sale consideration, not to the gain.

The Supreme Court has held that Section 195 applies only to sums chargeable to tax, so in principle only the capital gain should be taxed. But a buyer is not permitted to work out the chargeable portion themselves. That determination has to come from the Income Tax Department, which is what the Section 197 certificate below is for. Without it, the safe and standard practice is to deduct on the gross consideration.

The Rates for FY 2025-26

For immovable property held more than 24 months, the gain is long term and taxed at 12.5% without indexation under Section 112. Non-residents do not have the option of 20% with indexation that residents have for property acquired before 23 July 2024.

Held for 24 months or less, the gain is short term and taxed at the seller's slab rate, which for TDS purposes is applied at the maximum rate of 30%.

Surcharge is added based on the amount paid, and health and education cess of 4% on top. For capital gains, surcharge is capped at 15%.

Short-term sales run at 30% plus the same surcharge and cess, so 31.20% to 35.88%.

If the seller has no PAN, Section 206AA forces a minimum of 20% plus surcharge and cess. The relaxation in Rule 37BC for non-residents without PAN covers interest, royalty, dividend and fees for technical services. It does not cover capital gains.

What That Looks Like in Practice

Ms Iyer, a US-based NRI, is selling her Pune flat for ₹1.6 crore. She bought it in 2015 for ₹70 lakh, so her actual long-term capital gain is ₹90 lakh.

• Her real tax liability: ₹90 lakh at 12.5%, plus 10% surcharge and 4% cess, is about ₹12.87 lakh.
• TDS the buyer must deduct without a certificate: 14.95% of the full ₹1.6 crore, which is ₹23.92 lakh.

About ₹11 lakh of her money is locked with the department until she files her return and the refund is processed, which realistically means 12 to 18 months. On a sale funding a purchase abroad, that gap is the whole problem.

Step Four: The Fix Is a Lower Deduction Certificate

The solution is Section 197, applied for in Form 13 on the TRACES portal. The seller applies, and asks the Assessing Officer to certify that TDS should be deducted at a lower rate, or on the gain rather than the consideration.

Practical points buyers and sellers both need to know:

• The buyer's TAN must be quoted in the application. This is why the TAN has to exist before the certificate process starts, and why the certificate is issued for a specific buyer, seller and property combination. Change the buyer and the certificate is void.
• Allow four to eight weeks. The officer typically asks for the purchase deed, the draft sale agreement, a capital gains computation and proof of the cost of improvement.
• Deduct exactly what the certificate says. If it specifies 3.5% of consideration, deduct 3.5%, not the seller's own calculation.
• A buyer can also apply, under Section 195(2), for a determination of the appropriate proportion chargeable to tax. In practice the seller-led Form 13 route is far more common.

Build the certificate timeline into the sale agreement. The single most common reason NRI property deals get stuck is that the parties reach registration day with no certificate and no agreement on who absorbs the cash-flow hit.

Step Five: Deposit, File and Certify

Once deducted, the compliance calendar is fixed:

• Deposit by the 7th of the following month using challan ITNS 281 through the e-Pay Tax service, quoting your TAN. TDS deducted in March is due by 30 April.
• File Form 27Q for the quarter: by 31 July, 31 October, 31 January, and 31 May for the January to March quarter. Form 27Q needs the seller's PAN, country of residence, and address abroad.
• Issue Form 16A to the seller within 15 days of the Form 27Q due date, downloaded from TRACES.

Deduct on every payment, not just the final one. If you pay a ₹20 lakh advance in February and the balance in May, TDS applies to each tranche on the date of payment, and each falls in a different quarter's Form 27Q. Where a bank disburses a home loan directly to the seller, the deduction obligation is still yours, so tell the bank to release the net amount.

What Happens If You Get It Wrong

The consequences fall on the buyer, not the seller:

• Interest under Section 201(1A): 1% per month for failing to deduct, and 1.5% per month from deduction until deposit.
• Penalty under Section 271C: up to the entire amount of tax not deducted.
• Late filing fee under Section 234E: ₹200 per day of delay in filing Form 27Q.
• Penalty under Section 271H: ₹10,000 to ₹1,00,000 for not filing or filing incorrectly.
• Prosecution under Section 276B where tax was deducted and not deposited.

Deducting 1% instead of 14.95% on a ₹1.6 crore deal leaves the buyer exposed to roughly ₹22 lakh of tax plus interest and penalty. This is not a theoretical risk; it is one of the more commonly issued demands against individual buyers.

Repatriation: Form 15CA and 15CB

If the seller wants the proceeds moved out of India from their NRO account, the bank will require Form 15CA from the seller and Form 15CB, a certificate from a chartered accountant confirming the tax position. Sale proceeds of immovable property are repatriable up to USD 1 million per financial year from an NRO account under FEMA, subject to the property having been acquired in accordance with FEMA rules.

TDS under Section 195 applies regardless of where the money goes. Crediting an Indian NRO account instead of remitting abroad changes nothing, because the section keys off the payee's residential status, not the destination of the funds.

For the NRI Seller: Getting the Money Back

If TDS was over-deducted, the only route to recovery is filing a return.

File ITR-2 for the year of sale, report the capital gain in Schedule CG, claim the full TDS credit from Form 26AS, and claim any exemption you are entitled to under Sections 54, 54EC or 54F. Note that 54EC bonds must be bought within six months of the sale and are capped at ₹50 lakh, so that decision cannot wait for the refund. Our capital gains on property sale guide covers the reinvestment options in detail.

49Tax can pull the Form 27Q credit straight from your Form 26AS and match it against the sale reported in your AIS, which is where mismatches between the buyer's filing and your own computation usually surface.

The Takeaway

Sort out three things before you sign anything: confirm the seller's residential status for the current financial year in writing, apply for your TAN the week the deal is agreed, and put the Section 197 certificate on the deal timeline rather than treating it as paperwork to chase later. Everything expensive about buying from an NRI seller comes from discovering the rules on registration day. Discovered eight weeks earlier, this is a slightly longer checklist and nothing more. For the ordinary resident-seller case, our Section 194-IA and Form 26QB guide covers what changes.