When an NRI sells immovable property in India, the buyer is required to withhold tax under Section 195. Critically, the withholding applies to the sale consideration, not to the capital gain — which means that on a property bought years ago and sold at a modest gain, the tax deducted can vastly exceed the actual liability, leaving the seller to recover the excess through a refund claim a year or more later.
The single decision that changes the outcome
An application in Form 13 under Section 197, made sufficiently before payment or credit and before completion, allows the Assessing Officer to certify deduction at a lower rate calculated on the actual expected gain. This is the difference between funding the transaction comfortably and waiting several quarters for a refund.
- Determine holding period — more than 24 months makes the gain long-term
- Compute the gain properly, including cost of acquisition and improvement
- Apply for the lower deduction certificate in Form 13 sufficiently before payment or credit — the withholding event, not the signature date, is what the certificate must precede
- Execute the sale with the buyer deducting per the certificate
- Complete the Form 15CA/15CB formalities applicable to the remittance from the NRO account
Exemptions under Sections 54 and 54EC are available to non-residents on the same terms as residents, subject to their conditions on reinvestment and timing. Where reinvestment is intended, the capital gains account scheme may be required if the timeline crosses the return filing date.
Why the withholding is so much larger than the tax
Section 195 requires the buyer to deduct tax on the sum paid to a non-resident where that sum is chargeable to tax. The deduction is computed on the consideration, not on the gain, unless a certificate says otherwise. On a property held for many years and sold at a modest real gain, the amount withheld can be several times the eventual liability.
The buyer's position is also more exposed than most buyers realise. Where tax is deductible and is not deducted, the buyer can be treated as an assessee in default, with interest, and the corresponding expenditure consequences follow. This is why buyers' advisers press for a certificate rather than accept a seller's assurance — and why a seller who has not obtained one will usually face the highest deduction the buyer's adviser considers safe.
Computing the gain properly
The holding period determines the character of the gain: immovable property held for more than twenty-four months yields a long-term capital gain. From the consideration, the cost of acquisition and the cost of improvement are deducted, together with expenditure incurred wholly and exclusively in connection with the transfer — brokerage, legal fees and statutory charges.
Two points recur in practice. Where the stated consideration is below the stamp duty value, Section 50C substitutes the stamp duty value as the sale consideration, subject to the tolerance band the section allows. And where the property was inherited or received as a gift, the cost and the holding period of the previous owner are taken, which frequently converts what appears to be a short holding into a long-term gain.
The exemptions, and the account that keeps them alive
- Section 54 — reinvestment of the gain from a residential house into another residential house in India, within the prescribed periods
- Section 54F — reinvestment of the net consideration from an asset other than a residential house, subject to conditions on other property owned
- Section 54EC — investment in specified bonds within six months of transfer, subject to the monetary ceiling in that section
Both Sections 54 and 54F are available to non-residents on the same terms as residents. Where the reinvestment will not be completed before the due date for filing the return, the unutilised amount must be deposited under the Capital Gains Accounts Scheme before that date, or the exemption is lost even though the reinvestment later takes place.
Repatriating the proceeds
Sale proceeds are credited to the seller's non-resident ordinary account. Remittance abroad is made within the limit permitted for such accounts — ordinarily USD 1 million per financial year, subject to the applicable RBI and FEMA conditions and to the authorised dealer’s documentation requirements.
Form 15CB is a certificate on the taxability of the remittance and the tax withheld. It is issued after the position is established — which is why the certificate cannot repair a computation that was never done, and why the paperwork at this stage moves quickly where the earlier stages were completed properly.
Nothing in this sequence is difficult. Everything in it is order-dependent, and every step taken out of order costs a quarter.The AKV working rule
Where a treaty changes the answer
Gains on immovable property situated in India are, under the great majority of India's treaties, taxable in India. A treaty rarely relieves the gain itself. What it can affect is the treatment in the country of residence, where a credit for Indian tax is generally available, and the documentation needed to claim it — typically the tax residency certificate, Form 10F and the Indian withholding certificate. Coordinating the two filings in the same period avoids a credit being claimed in one year against tax paid in another.
The sequence, restated
- Establish residential status for the year of sale, and the holding period of the asset
- Compute the expected gain, with documentary support for cost, improvement and transfer expenses
- Apply in Form 13 for a lower deduction certificate — sufficiently before payment or credit, and before completion
- Confirm the buyer holds a TAN and will deposit and report under Section 195
- Complete any reinvestment, or deposit under the Capital Gains Accounts Scheme before the return due date
- Establish which Form 15CA Part applies and whether Form 15CB is required on these facts, then remit within the permitted limit
- File the return in India, claiming credit for the tax deducted
Scope of advice. This firm advises on the Indian tax, exchange-control and regulatory position. Where a matter also turns on the law of the country in which you are resident or in which an entity is incorporated, we set out the Indian position and coordinate with your adviser in that jurisdiction; we do not render advice on foreign law.
Discussing your position. If any part of this affects a transaction you are contemplating, the useful conversation is the one that happens before it is executed. A scoping call is the appropriate first step.
This article is general commentary on the law as it stands and is not advice on any specific facts. Tax and exchange-control positions change with amendments, notifications and judicial decisions; please confirm the current position with the firm before acting.