Buying From an NRI Seller: The Section 195 TDS Trap Mumbai Buyers Miss

A buyer in Powai told us how a smooth resale purchase turned into a tax headache. He had bought a flat, deducted one percent as tax at source the way every guide describes, and moved in happily. Months later an income tax notice arrived. His seller was a non resident Indian, the transaction fell under a completely different rule, and far more tax should have been deducted at the source. Because he had deducted too little, the shortfall, with interest, landed on him, the buyer. The flat was fine. The paperwork was not.

The short answer. If your seller is an NRI, property tax at source is not the familiar one percent under Section 194-IA. You deduct under Section 195, and for a long term holding the base rate is twelve and a half percent plus surcharge and cess on the gains, while a short term sale is taxed at the seller's slab rates, and a seller without a PAN can attract twenty percent. You also need a TAN and you file Form 27Q, not Form 26QB. The deduction applies to the full sale value unless the seller obtains a lower deduction certificate. The trade off is more paperwork and more cash withheld upfront, but getting it wrong makes you, the buyer, liable for the shortfall with interest and penalty.

Why the seller's residential status changes everything

The entire tax treatment of your purchase turns on one fact: whether the seller is a resident or a non resident for tax purposes. When you buy from a resident, you deduct a flat one percent under Section 194-IA on any property priced at fifty lakh or more, and the process is simple. When you buy from an NRI, that section does not apply at all. Instead Section 195 governs, the rate is far higher, and the compliance is heavier. Same flat, same price, entirely different rulebook.

This is why the very first question in a resale purchase should be the seller's tax residency, confirmed in writing, not assumed from where they happen to live now. An Indian passport does not make someone a resident, and a seller settled abroad is an NRI even if the flat was bought years ago while they lived in India. Getting this fact wrong at the start is what sets the whole problem in motion.

What rate do you actually deduct?

For an NRI seller the rate depends on how long they held the property. If the holding is long term, meaning held for more than twenty four months, the base rate of tax at source on the capital gains is twelve and a half percent, to which surcharge and health and education cess are added, so the effective rate is higher and rises with the value of the sale. If the holding is short term, the income is taxed at the NRI's applicable slab rates. And if the seller has not furnished a PAN, the deduction can jump to twenty percent or more. Rates and surcharge slabs change, so confirm the current figures on the income tax portal or with a chartered accountant before you deduct.

There is a further trap in the base amount. Unless the seller has a valid lower deduction certificate, the safe default is that tax at source applies on the entire sale consideration, not merely on the gain, because the buyer usually cannot compute the seller's exact capital gain. That makes the cash withheld substantial, which is precisely why sellers pursue the certificate described below.

TAN, Form 27Q and the compliance steps

Buying from an NRI turns you into a tax deductor with real obligations. First, you must obtain a TAN, the tax deduction account number, because unlike the simple resident process you cannot use only your PAN. Then you deduct the correct amount at the time of payment, deposit it with the government by the due date, and file Form 27Q, the return for tax deducted on payments to non residents. Finally you issue the seller a TDS certificate in Form 16A so they can claim credit.

Each of these steps has a deadline, and each carries interest for late deduction or late deposit and a fee for a late return. From October 2026 the payment mechanism is expected to move toward a PAN based challan process, so confirm the exact procedure on the income tax portal close to your transaction date rather than relying on an older guide.

The lower deduction certificate: how a seller can cut it

Because deducting on the full sale value ties up a large sum, a genuine NRI seller will often apply for a lower or nil deduction certificate. The seller files Form 13 with the income tax department under Section 197, and if satisfied, the department issues a certificate specifying a reduced rate that reflects the seller's actual expected tax on the gain rather than the full value default. As the buyer, you then deduct at the certified rate for the amount stated in that certificate.

The key discipline for a buyer is simple. Deduct at the lower rate only when you are holding the actual certificate in hand, with the seller's name, the property and the rate on it. A promise that the certificate is coming is not a certificate. If you release money at a reduced rate on a promise and the certificate never arrives, the shortfall is again your liability, not the seller's.

There is a cash flow angle worth planning for as a buyer. Because so much may be withheld upfront when there is no certificate, the timing of your payment and any home loan disbursement needs to account for the tax you must set aside and deposit. Discuss this openly with the seller and your lender early, so the deduction does not derail the payment schedule on the day of registration and leave everyone scrambling at the sub registrar office at the last minute.

Section 194-IA versus Section 195: the buyer's two worlds

The cleanest way to keep this straight is to see the two regimes side by side. The table below contrasts what you do when the seller is a resident against what you must do when the seller is an NRI, so you can tell at a glance which world your transaction lives in.

What goes wrong, and why the buyer pays

The most common failure is treating an NRI sale like a resident sale and deducting only one percent. When the department later finds the seller was a non resident, it treats the buyer as an assessee in default for the tax that should have been deducted, adds interest for the delay, and can levy a penalty. The buyer is left chasing an overseas seller for money that has already left the country, which is difficult, slow and, in most real cases we hear about, ultimately fruitless.

A second failure is skipping the TAN or filing the wrong form, which stalls the seller's ability to claim credit and invites notices. The way these compare to a straightforward resident purchase is stark, and if you want to see the simpler side, our guide on TDS on a property purchase under Section 194-IA walks through the one percent process. For the wider set of Mumbai resale checks, the guide on the society share certificate and NOC covers the documents that sit alongside the tax question.

Your NRI seller TDS checklist

Run these seven steps whenever there is any chance your seller is a non resident.

1. Confirm the seller's tax residency in writing before you agree on anything.
2. If the seller is an NRI, treat the sale under Section 195, not Section 194-IA.
3. Apply for a TAN early, because you cannot deduct correctly without one.
4. Ask whether the seller holds a lower deduction certificate, and see the original.
5. Deduct at the full rate unless a valid certificate lets you deduct less.
6. Deposit the tax on time and file Form 27Q, then issue Form 16A to the seller.
7. Use a chartered accountant to confirm the current rate, surcharge and procedure.

Frequently asked questions

Do I really deduct more than one percent when buying from an NRI?

Yes. The one percent rate under Section 194-IA applies only when the seller is a resident. When the seller is an NRI, Section 195 applies, and a long term holding attracts twelve and a half percent plus surcharge and cess. Short term sales are taxed at slab rates, and a seller without a PAN can face twenty percent.

Why do I need a TAN to buy property from an NRI?

Because buying from an NRI makes you a tax deductor under Section 195, and that requires a TAN, the tax deduction account number, rather than just your PAN. You use the TAN to deposit the tax and to file Form 27Q, the return for payments to non residents. Apply early, since you cannot deduct and file correctly without it.

What is a lower deduction certificate and who gets it?

A lower deduction certificate is issued by the income tax department to the seller, who applies using Form 13 under Section 197. It lets tax be deducted at a reduced rate reflecting the seller's actual expected tax, instead of on the full sale value. As a buyer, deduct at the reduced rate only if you hold the actual certificate.

What happens if I deduct too little TDS on an NRI sale?

The liability falls on you, the buyer. If you deduct only one percent on an NRI sale, the department can treat you as in default for the shortfall, charge interest, and levy a penalty. Recovering that money from a seller who has moved funds abroad is hard, so confirm residency and deduct correctly before you pay.

Last updated 2026-09-28. PropNewz Team.