Buying property from an NRI? Deducting TDS is buyer's responsibility—Here’s what to know

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You have found your dream property. The price works, the location is perfect, and the seller is ready to sign. But here is the catch: the seller is an NRI. Buying from a Non-Resident Indian (NRI) may seem like a regular real estate deal, but there is a twist - the responsibility of Tax Deduction at Source (TDS) and handling the tax paperwork lies with you.

“Most buyers don’t realise this until the taxman comes knocking,” says Sujit Bangar, Founder of TaxBuddy.com and Finbingo.com. “If you don’t deduct the right TDS or miss the filing process, the Income Tax Department can hold you responsible for the shortfall, interest, and penalties.”

First Step: Confirming NRI status

The first rule when buying a property is to confirm the seller’s residential status. A casual assurance won’t work. You must check their passport, visa, overseas address, and obtain a self-declaration confirming NRI status under FEMA and the Income Tax Act. This is not just a formality—it's your safeguard as a buyer.

NRIs can freely sell residential and commercial properties in India. However, if the property is agricultural land, plantation land, or a farmhouse, the seller must obtain prior permission from the Reserve Bank of India (RBI). Payments must be made in Indian rupees and credited only to the seller's Non-Resident Ordinary (NRO) account- which is a type of account to manage NRI's income earned within India.

“The sale process involves identifying a buyer—whether a resident Indian, another NRI, or an OCI holder—and preparing the required documents, which include the original title deed, sale agreement, PAN card, passport, OCI/PIO card (if applicable), and a Power of Attorney if the NRI is not physically present," explains Sachin Vyas, Principal Partner & CSO, Square Yards.

A carefully drafted sale agreement is essential. It should clearly mention the TDS clause and both parties’ responsibilities. "After registration at the local sub-registrar's office and payment of stamp duty, buyer's responsibility continues. As a buyer, you must file the TDS return using Form 27Q, issue Form 16A to the seller as proof of deduction, and maintain all supporting records, including payment receipts, TDS filings, and the registered agreement," explains Bangar.

How TDS works and why mistakes are expensive

When buying property from an NRI, TDS rules differ significantly from those for resident sellers. If the property has been held for more than two years, it qualifies as a long-term capital asset, and the buyer must deduct 12.5% TDS on the capital gains, plus surcharge and cess. If the property is sold within two years, the gains are short-term, and TDS jumps to 30% plus surcharge and cess.

“These rates don’t change based on the NRI’s country of residence,” says Bangar. “However, if the seller’s actual tax liability is lower, they can apply for a Lower Deduction Certificate from the Income Tax Department before executing the sale. That is the only way to legally deduct TDS at a lower rate.”

The consequences of getting this wrong can be severe. If the seller fails to disclose NRI status and the buyer assumes they are a resident, TDS might be deducted at 1% of total sales value under Section 194-IA, which applies only to resident sellers. This error makes the buyer liable for the shortfall, along with interest and penalties under Section 201.

Beyond taxation, such non-disclosure can also result in FEMA violations, especially if the sale proceeds are credited without proper approval. “If the authorities detect misreporting, the seller may face scrutiny, compliance notices, and potential legal action. Failure to declare NRI status negatively impacts both parties, and the risks far outweigh any short-term convenience,” warns Bangar.

When you buy from an NRI, you are not just buying property—you are also the tax gatekeeper. So, check all documents carefully before signing on the dotted lines.