When property hunting in India’s major cities, buyers often encounter attractive deals involving Non-Resident Indian (NRI) or Overseas Citizen of India (OCI) sellers. These transactions present lucrative opportunities but come with specific legal, tax, and procedural requirements that buyers must understand to avoid complications and penalties.
Tax Deducted at Source (TDS): Your Primary Obligation
The most significant difference when purchasing property from NRIs/OCIs versus resident Indians is the substantially higher TDS rate. Under Section 195 of the Income Tax Act, buyers must deduct TDS from payments to NRI sellers.
Current TDS Rates (2025)
For Long-Term Capital Gains (property held >24 months):
- Base rate: 12.5% (without indexation benefit) for properties sold after July 23, 2024
- Effective rates including surcharge and cess:
- Sale value <₹50 lakh: 13.00%
- Sale value ₹50 lakh to ₹1 crore: 14.30%
- Sale value >₹1 crore: 14.95%
For Short-Term Capital Gains (property held ≤24 months):
- Up to 30% plus applicable surcharge and cess
This is a dramatic increase from the 1% TDS applicable when buying from resident Indians (for transactions >₹50 lakh).
Critical Compliance Point
Failure to deduct TDS can result in:
- Penalties of 1-1.5% per month on the outstanding amount
- The buyer becoming liable for the entire tax amount
- Interest charges and potential prosecution in severe cases
PAN Card Requirements: Non-Negotiable
A valid PAN card from the NRI seller is mandatory. Without it:
- TDS rate increases to 20% (even higher than the standard rates)
- The buyer cannot complete proper tax compliance
- Future complications may arise during property registration
Verification checklist:
- Ensure the name on the PAN card matches the sale deed exactly
- Verify the PAN card is valid and not expired
- Cross-check with other identity documents
Tax Deduction Account Number (TAN): Buyer’s Responsibility
Unlike purchases from resident Indians, buyers must obtain a TAN when purchasing from NRIs. This 10-digit alphanumeric code is essential for:
- Deducting and depositing TDS with the Income Tax Department
- Filing quarterly TDS returns (Form 27Q)
- Issuing TDS certificates to the seller
Important: If multiple buyers are involved, each buyer must obtain their own TAN.
Impact on Down Payment and Financing
The high TDS requirement significantly affects your financing calculations:
Increased Upfront Payment
- Instead of paying 1% TDS (for resident sellers), you may pay 13-15% as TDS
- This amount must be paid before property registration
- Your effective down payment increases substantially despite bank loan approval
Example Calculation
For a ₹1 crore property purchase from an NRI:
- Regular down payment: ₹20 lakh (assuming 80% loan)
- TDS to be deducted: ~₹14 lakh
- Total upfront requirement: ₹34 lakh
Payment Methods and FEMA Compliance
Acceptable Payment Channels
NRIs can receive payments through:
- NRO (Non-Resident Ordinary) accounts – Most common and recommended
- NRE (Non-Resident External) accounts – For foreign earnings
- FCNR (Foreign Currency Non-Resident) accounts
Why NRO Account Payment is Recommended
- FEMA Compliance: Ensures adherence to foreign exchange regulations
- Repatriation Clarity: Sale proceeds can be repatriated up to $1 million per financial year
- Tax Trail: Maintains proper documentation for tax purposes
- Reduced Complications: Minimizes regulatory scrutiny
Risks of Alternative Arrangements
Power of Attorney (PoA) Payments:
While legal, payments to PoA holders require:
- Explicit authorization in the PoA document
- Clear documentation in the sale deed
- Immediate transfer of funds to the NRI’s Indian account
Direct Overseas Payments: Generally not recommended and may violate FEMA regulations.
Lower TDS Certificate: Potential Relief for Sellers and Buyers
NRI sellers can apply for a Lower TDS Certificate under Section 197 to reduce the TDS burden:
Application Process
- Filed in Form 13 online with digital signature
- Requires comprehensive documentation including property purchase deed, sale agreement, and capital gains computation
- Processing time: 3-6 weeks
- Valid for specific financial year
Benefits
- TDS deduction only on actual capital gains rather than full sale value
- Significantly reduces blocked funds for the seller
- Smoother transaction process
Additional Compliance Requirements
Form 15CA and 15CB
For repatriation of sale proceeds, the following forms are required:
- Form 15CA: Online declaration of tax compliance
- Form 15CB: CA certificate confirming tax payment
TDS Filing and Certification
Buyers must:
- Deposit TDS by the 7th of the following month
- File quarterly TDS return (Form 27Q)
- Issue Form 16A (TDS certificate) to the seller
Risk Mitigation Strategies
Due Diligence
- Verify the seller’s NRI status through passport, visa, and residency documents
- Confirm property title and clearances
- Ensure FEMA compliance in the transaction structure
Professional Assistance
Given the complexity, consider engaging:
- Tax consultants familiar with NRI transactions
- Legal experts specializing in FEMA compliance
- Chartered accountants for proper documentation
Documentation
Maintain comprehensive records of:
- All payment transactions
- TDS certificates and returns
- FEMA compliance documents
- Communication with sellers and intermediaries
Recent Regulatory Changes (2024-25)
Key Updates
- Removal of indexation benefits for properties sold after July 23, 2024
- Reduced LTCG tax rate from 20% to 12.5% (without indexation)
- Continued high TDS rates despite lower final tax liability
- Enhanced scrutiny of NRI transactions
Conclusion
Purchasing property from NRIs/OCIs can offer excellent opportunities but requires meticulous planning and compliance. The substantially higher TDS rates, complex documentation requirements, and FEMA regulations demand professional guidance and careful financial planning.
Key Takeaways:
- Budget for 13-15% TDS in addition to your down payment
- Obtain TAN before initiating the transaction
- Ensure seller has valid PAN card and proper NRI documentation
- Consider encouraging sellers to apply for Lower TDS Certificates
- Maintain strict FEMA compliance throughout the process
- Engage qualified professionals for guidance
By understanding these requirements upfront, buyers can successfully navigate NRI property transactions while avoiding costly penalties and delays.
This guide is for informational purposes only. Always consult qualified tax advisors, legal experts, and chartered accountants for transaction-specific advice.