Section 195: TDS on Payments to Non-Residents

Introduction: Why Section 195 Matters

If you are buying property from a Non-Resident Indian (NRI) in India, you are legally required to deduct tax at source before making the payment. This obligation arises under Section 195 of the Income Tax Act, 1961 — one of the most important and frequently misunderstood provisions for property transactions involving NRIs.

Unlike a resident seller, where TDS under Section 194IA is a flat 1% of the sale value, payments to NRIs attract significantly higher TDS rates. Failure to deduct the correct TDS can expose the buyer to serious penalties, interest, and even prosecution — even if the mistake was unintentional.

Whether you are a buyer purchasing property from an NRI, or an NRI planning to sell property in India, understanding Section 195 is essential for a legally compliant and financially sound transaction.

What Is Section 195 of the Income Tax Act?

Section 195 mandates that any person making a payment to a non-resident — whether in the form of interest, royalties, capital gains, or any other income chargeable to tax in India — must deduct TDS at the applicable rate before releasing the funds.

In the context of property sales, this means: if you are buying property from an NRI, you must deduct TDS from the sale consideration and deposit it with the government before paying the remaining amount to the seller.

Key Facts at a Glance

Applicable to: All payments made to non-residents that are chargeable to tax in India

Most common use case: Purchase of immovable property from an NRI

TDS Rate: Typically 20% on Long-Term Capital Gains + applicable surcharge + 4% cess

Short-Term Capital Gains: Taxed at applicable slab rates

Buyer's Responsibility: Deduct TDS and deposit using Form 26QB or challan

Key Forms: Form 15CA and Form 15CB are mandatory for remittance abroad

TDS Rates Under Section 195 for Property Sales

The TDS rate applicable under Section 195 depends on the nature of the capital gain earned by the NRI seller:

Note: The Finance Act 2024 introduced changes to LTCG taxation on property. For properties purchased before 23rd July 2024, sellers may have the option to choose between 12.5% without indexation or 20% with indexation. Buyers should verify the applicable rate with a CA or tax advisor before deducting TDS.

Step-by-Step Process: TDS Compliance for Buyers

As a buyer of property from an NRI, here is what you need to do to remain fully compliant:

• Obtain a Tax Deduction Account Number (TAN) — Buyers who do not already have a TAN must apply for one using Form 49B before deducting TDS.

• Calculate the TDS Amount — Determine whether the gain is long-term or short-term, and apply the correct rate including surcharge and cess.

• Deduct TDS at the Time of Payment — TDS must be deducted at the time of credit or payment, whichever is earlier.

• Deposit TDS with the Government — Use Challan ITNS 281 to deposit TDS. For NRI sellers, deposition must happen within 7 days from the end of the month of deduction.

• File TDS Return in Form 27Q — Unlike resident sellers (Form 26QB), for NRI sellers you must file quarterly TDS returns in Form 27Q.

• Issue TDS Certificate in Form 16A — After filing Form 27Q, issue Form 16A to the NRI seller within 15 days of the due date of TDS return.

Form 15CA and Form 15CB: Mandatory for Remittance Abroad

When remitting sale proceeds abroad to an NRI seller, the buyer's bank will require Form 15CA and Form 15CB to complete the wire transfer. These forms are also required for compliance under the Foreign Exchange Management Act (FEMA).

Form 15CB

This is a certificate issued by a Chartered Accountant (CA) confirming the nature of the payment, the applicable TDS rate, and whether double tax avoidance agreement (DTAA) benefits apply. The CA verifies that TDS has been correctly deducted.

Form 15CA

This is an online declaration filed by the remitter (buyer or their authorised person) on the Income Tax portal (incometax.gov.in). It is to be filed after obtaining Form 15CB and before submitting the remittance instruction to the bank.

Important: Form 15CA/15CB Process

Step 1: Get Form 15CB signed by a Chartered Accountant

Step 2: File Form 15CA online on the Income Tax e-filing portal

Step 3: Provide both forms to your bank along with the remittance request

Penalty for non-compliance: Up to Rs. 1,00,000 under Section 271-I

Can the NRI Seller Claim DTAA Benefits?

Yes — India has Double Tax Avoidance Agreements (DTAAs) with over 90 countries. If the NRI seller is a resident of a country with which India has a DTAA, they may be eligible for a lower TDS rate or even an exemption.

For example, an NRI residing in the United Arab Emirates may benefit from provisions in the India-UAE DTAA that reduce the overall tax liability. However, to claim DTAA benefits, the NRI seller must provide:

Tax Residency Certificate (TRC) issued by the foreign tax authority

Form 10F (self-declaration) filed on the Income Tax portal

PAN Card or a valid reason for not having one

If these documents are not provided, TDS must be deducted at the higher of the DTAA rate or the domestic rate. Consulting a tax expert at KarrTax.in before the transaction will help you navigate DTAA applicability correctly.

NRI Sellers: Applying for a Lower or Nil TDS Certificate

If the NRI seller believes their actual tax liability is lower than the TDS being deducted, they can apply for a Lower Deduction Certificate (LDC) under Section 197. This is particularly useful when:

The NRI has significant capital losses to set off against the gain

The property was used for re-investment in another property under Section 54 or 54EC

Indexation benefits substantially reduce the taxable capital gain

The application is made online to the jurisdictional Assessing Officer (AO), who may issue a certificate specifying a lower or nil rate of TDS. The buyer is then required to deduct TDS at the rate mentioned in the certificate.

This process can take several weeks, so NRI sellers should initiate it well before the expected transaction date.

Practical Example: TDS Calculation on NRI Property Sale

Let us walk through a simple illustration:

Illustrative Scenario

NRI Seller: Mr. Ramesh, residing in the UK

Property Sale Value: Rs. 90,00,000

Property Purchase Year: 2016 (held for more than 24 months = LTCG)

Applicable TDS Rate: 20% + 15% surcharge + 4% cess

Calculation:

Base TDS = 20% of Rs. 90,00,000 = Rs. 18,00,000

Surcharge (15% on TDS, since sale > Rs. 1 Cr — not applicable here as < 1 Cr) = NIL

Surcharge (10% since LTCG between 50L-1Cr) = Rs. 1,80,000

Cess (4% on TDS + surcharge) = Rs. 79,200

Total TDS to be deducted = Rs. 20,59,200

Mr. Ramesh receives: Rs. 69,40,800 (after TDS deduction)

Note: This is illustrative. Actual liability depends on cost of acquisition, indexation, and DTAA.

Key Takeaways

Section 195 applies to all payments to non-residents that are chargeable to tax in India.

As a buyer of NRI property, you must deduct TDS before making any payment — the obligation is yours, not the seller's.

Use Form 27Q for TDS returns (not Form 26QB, which is for resident sellers).

Obtain Form 15CB from a CA and file Form 15CA online before remitting proceeds abroad.

NRI sellers can claim DTAA benefits or apply for a lower TDS certificate under Section 197.

Non-compliance can result in interest, penalties, and prosecution for the buyer.

Frequently Asked Questions (FAQs)

Q1. Is TDS under Section 195 applicable if I am buying agricultural land from an NRI?

Agricultural land in rural areas as defined under the Income Tax Act is not considered a 'capital asset' and therefore capital gains tax — and TDS under Section 195 — does not apply. However, agricultural land within municipal limits may be treated as a capital asset. You should verify the classification before proceeding.

Q2. What happens if I do not deduct TDS under Section 195?

If you fail to deduct TDS or deduct it at a lower rate, you are treated as an 'assessee in default' under Section 201. This makes you personally liable to pay the entire TDS amount, along with interest at 1.5% per month and a penalty up to the TDS amount under Section 271C.

Q3. Can the TDS be paid from the buyer's own funds?

Yes, the buyer can bear the TDS cost from their own pocket instead of deducting it from the sale amount — provided both parties agree. However, this effectively increases the buyer's cost of acquisition. The TDS must still be deposited in the government's account and reported correctly.

Q4. Does Section 195 apply only to property transactions?

No. Section 195 applies to all payments to non-residents that are chargeable to Indian tax — including interest, royalties, technical service fees, and other income. Property transactions are just one of the most common scenarios where it is triggered.

Q5. Where do I deposit TDS under Section 195 and by when?

TDS must be deposited using Challan ITNS 281 on the Income Tax portal or through authorised banks. For NRI-related TDS, the deposit is due within 7 days from the end of the month in which the deduction was made. For March, the due date is 30th April.

Conclusion

Section 195 is a critical compliance requirement for any property transaction involving an NRI seller. Whether you are a buyer navigating TDS deduction, or an NRI seller trying to minimise your tax outgo, getting the numbers and filings right is essential.

Errors in TDS deduction, Form 15CA/15CB filing, or surcharge calculations can result in significant financial and legal consequences. Given the complexity of the rules — especially with DTAA provisions and recent Finance Act amendments — it is strongly advisable to work with qualified tax professionals who specialise in NRI taxation.

At KarrTax, we help both NRI sellers and resident buyers navigate Section 195 compliance with confidence, ensuring every rupee is accounted for and every filing is done correctly.

Need Expert Help with TDS on NRI Property Sales?

Section 195 compliance can be complex and costly if done incorrectly. Our tax experts at KarrTax are here to guide you every step of the way — from

calculating the right TDS to filing Form 15CA/15CB and ensuring a smooth property transaction.

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