TDS and capital gains are two crucial tax considerations for Non-Resident Indians (NRIs) selling property in India. Real estate can be a valuable investment, but understanding your tax obligations ensures compliance with Indian laws and avoids penalties.

This article explains how TDS and capital gains taxation work for NRIs based on the Income Tax Act, 1961, official guidelines, and practical procedures, in clear, accessible terms.

What is TDS for NRIs Selling Property in India?

TDS (Tax Deducted at Source) is the amount a buyer deducts from the sale proceeds before paying the seller. For NRIs, this is mandatory under Section 195 of the Income Tax Act, 1961.

  • Applicability: Applies to all NRIs selling immovable property in India. Some rural agricultural land may be exempt.

  • TDS Rate: Usually 20% on long-term capital gains, plus applicable surcharge and cess. For short-term gains, the rate may follow income tax slabs.

  • Responsibility: The buyer deducts and deposits TDS. Failure to do so can attract penalties.

TDS ensures Indian authorities can track and collect taxes on property sales by non-residents. NRIs can claim credit for TDS when filing income tax returns.

Understanding Capital Gains for NRIs

Capital gains tax is levied on profits from selling property. For NRIs, rules are defined under Sections 45, 48, and 50 of the Income Tax Act, 1961.

Types of Capital Gains

  1. Short-Term Capital Gains (STCG):

    • Property held less than 24 months.

    • Taxed at the NRI’s income tax slab rate.

  2. Long-Term Capital Gains (LTCG):

    • Property held more than 24 months.

    • Taxed at 20% with indexation benefits.

Indexation Benefit

Indexation adjusts the property’s purchase price for inflation, reducing taxable capital gains. The Cost Inflation Index (CII) is used for calculation:

LTCG=Sale Price−Indexed Cost of Acquisition−Indexed Cost of Improvements−Expenses of Transfer\text{LTCG} = \text{Sale Price} – \text{Indexed Cost of Acquisition} – \text{Indexed Cost of Improvements} – \text{Expenses of Transfer}

Interaction Between TDS and Capital Gains

When an NRI sells property:

  1. Buyer deducts TDS on the total sale price.

  2. NRI files income tax return reporting actual capital gains.

  3. If TDS exceeds actual tax liability, the excess can be refunded.

Example: TDS is deducted at 20% on ₹1 crore sale, but indexed capital gains tax is ₹12 lakh. NRI can claim a refund for the excess TDS deducted.

Steps for NRIs to Comply

  1. Obtain PAN (Permanent Account Number) – mandatory for TDS and tax filing.

  2. Determine Property Type – short-term or long-term based on holding period.

  3. Calculate Capital Gains – include indexed purchase cost, improvements, and transfer expenses.

  4. TDS Deduction by Buyer – deposit using Form 26QB.

  5. File Income Tax Return – report gains and claim TDS credit.

  6. Claim Refunds – if excess TDS paid.

Exemptions and Reliefs

  1. Section 54 – Residential Property Reinvestment:

    • LTCG exempt if reinvested in residential property in India within 1 year before or 2 years after sale.

  2. Section 54EC – Investment in Bonds:

    • LTCG exempt if invested in specified government bonds within six months.

    • Limit: ₹50 lakh per year.

  3. Double Taxation Avoidance Agreement (DTAA):

    • Avoids paying tax on the same income in India and the country of residence.

Practical Tips for NRIs

  • Plan TDS and capital gains in advance to avoid cash flow issues.

  • Maintain records of purchase, renovation, sale, and TDS certificates.

  • Filing returns on time avoids interest under Sections 234A, 234B, 234C.

  • Use professional guidance for complex cases.

FAQs

Q1: Can NRIs sell property without TDS?
No. Section 195 mandates TDS deduction.

Q2: Difference between STCG and LTCG?
STCG: held <24 months, taxed at slab rate. LTCG: held >24 months, taxed 20% with indexation.

Q3: Can NRIs claim refund for excess TDS?
Yes. File income tax returns to claim the excess.

Q4: Are there capital gains exemptions for NRIs?
Yes. Sections 54, 54EC, and DTAA provide relief if conditions are met.

Q5: How is TDS calculated?
20% of total sale consideration for LTCG under Section 195.

Legal References

  • Income Tax Act, 1961 – Sections 195, 45, 48, 50, 54, 54EC

  • Cost Inflation Index (CII) – Ministry of Finance

  • Form 26QB – TDS on property transactions

TDS and capital gains are essential for NRIs selling property in India. Compliance with Indian tax laws, proper planning, and documentation can simplify transactions and prevent penalties. By understanding tax rates, exemptions, and TDS procedures, NRIs can efficiently manage property sales while minimizing unnecessary tax burdens.