"Buyers deduct just 1% TDS when I sell my flat in India": What ITA 2025 actually says about NRI property sales

"Buyers deduct just 1% TDS when I sell my flat in India": What ITA 2025 actually says about NRI property sales

Every week an NRI tells us the same thing: "My buyer will deduct 1% TDS, I'll get the rest, and I'll sort out the tax later." That single assumption has cost NRIs lakhs in blocked funds, frozen sale deeds, and notices from the Income Tax Department. The 1% rule belongs to resident sellers. When the seller is a non-resident, an entirely different — and far heavier — withholding regime applies, and it has carried straight through into the Income-tax Act, 2025 (ITA 2025) that governs Tax Year 2026-27 onwards.

Here is what the law actually requires, what changes on 1 October 2026, and how to stop tens of lakhs of your own money from being locked up at source.

What the law actually says

For a resident seller, the buyer deducts 1% TDS on the sale value under Section 194-IA of the Income-tax Act, 1961 (continued in the corresponding TDS schedule of ITA 2025), and only when the consideration is ₹50 lakh or more.

That section does not apply to you if you are an NRI. The moment the seller is a non-resident, the buyer's obligation shifts to Section 195 of the Income-tax Act, 1961 — the provision governing tax deduction on any sum paid to a non-resident — which has been carried forward into the deduction-at-source provisions of ITA 2025. Section 195 has no ₹50 lakh threshold and no flat 1% rate. Instead, the buyer must withhold tax at the rate applicable to the capital gain, which depends on whether the gain is long-term or short-term:

• Long-term capital gain (property held more than 24 months): TDS at 12.5% under the revised LTCG regime, plus applicable surcharge and 4% health & education cess. Note that since 23 July 2024 the LTCG rate on immovable property is 12.5% without indexation (with a grandfathering option for pre-July-2024 acquisitions). This rate continues under ITA 2025.
• Short-term capital gain (held 24 months or less): TDS at the NRI's slab rate — effectively up to 30% — plus surcharge and cess.

There is one more trap that catches almost everyone. Unless you obtain a certificate, the buyer is legally safest deducting tax on the entire sale consideration, not just the gain. So on a ₹2 crore flat, a cautious buyer may withhold 12.5% of ₹2 crore (₹25 lakh) plus surcharge and cess — pushing the deduction past ₹28 lakh — even if your actual taxable gain is only ₹40 lakh and your real tax is closer to ₹5 lakh. The difference sits with the government until you file a return and claim a refund, which can take a year or more.

Two compliance points that have been renamed under ITA 2025 matter here:

• The annual tax statement you use to confirm the TDS was actually deposited against your PAN — Form 26AS (now Form 168 under ITA 2025) — must show the deducted amount before you can claim credit.
• When you later repatriate the net proceeds abroad, your bank will require Form 15CA and Form 15CB (now Form 145 and Form 146 under ITA 2025) — the remitter declaration and the accountant's certificate. These are separate from the property TDS and are covered in our dedicated guide.

Practical implications for NRIs

Consider a concrete case. Priya, a US-based NRI, sells a Bengaluru apartment she bought in 2015 for ₹80 lakh and sells in 2026 for ₹2.2 crore. Her long-term gain (without indexation, at 12.5%) is roughly ₹1.4 crore, and her actual tax liability is around ₹17.5 lakh plus surcharge and cess.

If she does nothing, her buyer — wary of being treated as an "assessee in default" for under-deduction — withholds 12.5% plus surcharge and cess on the full ₹2.2 crore. That is about ₹30–34 lakh deducted at source against a real liability of roughly ₹18–20 lakh. Priya has just handed the government an interest-free loan of ₹12–14 lakh that she will spend the next year trying to recover.

Now compare a second NRI, Arjun, who applies for a Lower Deduction Certificate before closing. The Assessing Officer reviews his cost, holding period and computed gain, and authorises TDS only on the actual gain. Arjun's buyer deducts the right amount, Arjun repatriates promptly, and there is no refund chase. Same property value, completely different cash-flow outcome.

The numbers that drive this:

• No threshold. Section 195 applies even if you sell a ₹15 lakh plot. The ₹50 lakh floor is a resident-only feature.
• Surcharge stacks up. On gains above ₹50 lakh, surcharge of 10–15% applies on the tax; above ₹2 crore it can be higher. A buyer deducting "to be safe" will apply the top surcharge.
• The buyer carries the risk, so the buyer over-deducts. Under Section 195 the buyer, not you, is personally liable for short deduction plus interest and penalty. That is exactly why buyers default to deducting on the gross sale price.

The five mistakes that lock up NRI money

In our practice, the same avoidable errors recur on almost every NRI property sale:

• Treating the sale like a resident sale. Quoting "1% TDS" to a buyer who then under-deducts creates a liability the buyer will later push back onto you in negotiations or hold-backs.
• Applying for the Lower Deduction Certificate too late. Section 197 applications take weeks to process. NRIs who apply after agreeing a closing date almost always miss the window and suffer gross-value deduction.
• Forgetting surcharge and cess in the cash-flow plan. On a large gain the surcharge alone can add several lakh to the deduction. Budgeting only for the base rate leaves NRIs short at closing.
• Selling jointly without splitting the gain correctly. Where a property is co-owned (for example with a resident spouse), each owner's share is taxed separately, and only the non-resident's share attracts Section 195. Mishandling this inflates the deduction.
• Not reconciling Form 168. If the buyer deducts but deposits late or against the wrong PAN, the credit will not appear and the refund stalls. Always verify the deposit before you leave the matter.

A third scenario shows the joint-ownership point. Meera (NRI) and her resident brother co-own a Pune flat 50:50 and sell for ₹1.6 crore. Only Meera's ₹80 lakh share falls under Section 195; her brother's share is governed by the resident 1% rule under 194-IA. A buyer who mistakenly deducts NRI-rate TDS on the whole ₹1.6 crore over-withholds by lakhs on the resident half. Documenting each owner's status and share in the sale deed prevents this.

What changes on 1 October 2026 under ITA 2025

Two genuine relaxations arrive with ITA 2025 implementation, and it is worth knowing them so you are not misadvised:

• No TAN required for the buyer (from 1 October 2026). Historically, a buyer purchasing from an NRI had to obtain a Tax Deduction and Collection Account Number (TAN) to deposit Section 195 TDS — a hurdle that scared off many resident buyers. Under the ITA 2025 framework this requirement is removed for these transactions, making the deduct-and-deposit process simpler.
• Procedural simplification, not a rate cut. The single "Tax Year" replaces the old "Previous Year / Assessment Year" split, so your filing and credit cycle is cleaner. But note clearly: the headline capital-gains TDS rate on NRI property has not dropped to 1%. The 2% figure circulating online relates to certain TCS categories, not to Section 195 deduction on your property gain. Do not plan your sale around it.

The core message is unchanged by ITA 2025: a non-resident seller is taxed on the gain at LTCG/STCG rates, and TDS will be over-deducted unless you act in advance.

Step-by-step: what to do before you sell

• Confirm your residential status for the Tax Year of sale. Section 6 (the same in both the 1961 and 2025 Acts) decides whether you are NRI, RNOR or resident. The TDS regime that applies turns on this.
• Establish your holding period and cost. More than 24 months = long-term (12.5% regime). Pull together your purchase deed, registration receipts, and proof of any capital improvements — these reduce the gain.
• Apply for a Lower Deduction / Nil Deduction Certificate (Form 13) under Section 197 with the jurisdictional Assessing Officer, ideally 6–8 weeks before the expected sale date. This is the single most valuable step — it caps TDS at your real liability instead of 12.5% of the gross price.
• Give the buyer the certificate in writing so they deduct the authorised amount and deposit it against your PAN.
• Verify the deposit in Form 168 (formerly Form 26AS) after the buyer files their TDS return. No credit, no refund.
• Plan repatriation with Form 145 and Form 146 (formerly 15CA/15CB) so the net proceeds can be remitted abroad without your bank holding them up.
• File your Indian return for the relevant Tax Year and claim any excess TDS as a refund.

FAQ

Q: My buyer insists on deducting only 1% like a normal sale. Is that allowed?
No. If the seller is a non-resident, 194-IA's 1% rate does not apply — Section 195 does. A buyer who deducts only 1% becomes an assessee in default and is personally liable for the shortfall plus interest. Most buyers, once advised, deduct at the higher capital-gains rate.

Q: Can I avoid the heavy deduction without a certificate?
Not reliably. Without a Section 197 Lower Deduction Certificate, the buyer's safest course is to deduct on the gross consideration. The certificate is the legitimate route to having TDS match your actual gain. Apply early.

Q: I'll get a refund anyway, so why bother?
Because the over-deducted amount — often ₹10–15 lakh on a single property — is locked with the department until your return is processed, which can take 12 months or more, with no guaranteed quick interest. For most NRIs that cash is needed for the very purpose of the sale.

Q: Does ITA 2025 reduce my capital-gains tax on the sale?
No. ITA 2025 simplifies procedure (single Tax Year, no TAN for the buyer from 1 October 2026) but does not cut the LTCG rate of 12.5% or the STCG slab treatment on NRI property gains. Plan for the real rate, not the rumoured 1% or 2%.

Q: Can I reinvest the gain to reduce the tax that gets deducted?
Yes. Reinvestment reliefs — for example investing the long-term gain in another residential house, or in specified capital-gains bonds within the prescribed window — can reduce or eliminate the taxable gain. But the buyer cannot apply these reliefs for you at source. You must factor them into your Section 197 Lower Deduction Certificate application so the Assessing Officer authorises a reduced deduction; otherwise TDS is taken first and you claim the benefit only when you file.

For your specific situation, book a consultation at harunraaj.com

Property sales are where NRIs most often lose money to avoidable over-deduction. A Lower Deduction Certificate applied for in time, against the right computed gain, is usually the difference between a clean exit and a year-long refund chase. For your specific situation, book a consultation at harunraaj.com.

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