When you buy land or property from a Non-Resident Indian (NRI), you are legally required to deduct TDS (Tax Deducted at Source) at 20% on long-term capital gains (or 30% on short-term gains) under Section 195 of the Direct Tax Code, 2025 — before paying the seller. However, NRIs often pay far more TDS than their actual tax liability. A Lower Deduction Certificate (Form 13) obtained from the Income Tax Department can legally reduce this TDS to the NRI's actual tax rate. Taxocity helps buyers and NRI sellers secure this certificate end-to-end, with 100% compliance and real human experts.

• Standard TDS rate: 20% + surcharge + cess on long-term capital gains; 30% + surcharge + cess on short-term gains
• With indexation benefits and DTAA relief, the NRI's actual tax can be significantly lower
• Lower Deduction Certificate can bring TDS down to the effective tax rate — sometimes as low as 5-10%

What is TDS on NRI Property Purchase?

Under Section 195 of the Direct Tax Code, 2025 (earlier Income Tax Act, 1961), any person who purchases immovable property — land, flat, commercial space — from an NRI must deduct TDS from the payment made to the seller. This obligation falls on the buyer, not the seller.

The rationale is simple: since the NRI is not a resident of India, the government wants to ensure tax is collected at source before the sale proceeds leave the country.

Applicable TDS Rates Under Section 195

Type of Capital Gain	Holding Period	TDS Rate (Base)	Effective Rate (incl. surcharge + cess)
Long-Term Capital Gain (LTCG)	More than 24 months	20%	~22.88% to ~23.92%
Short-Term Capital Gain (STCG)	24 months or less	30%	~31.2% to ~34.32%

The surcharge varies based on the total income of the NRI seller (10% for income between ₹50 lakh and ₹1 crore; 15% for income above ₹1 crore). Health and Education Cess is 4% on the tax plus surcharge amount.

Important: TDS under Section 195 is deducted on the entire sale consideration (i.e., the full selling price), not just on the capital gain portion. This is the key reason why TDS ends up being disproportionately high compared to the actual tax payable.

Why TDS is Disproportionately High

Consider this example. An NRI sells land for ₹1 crore. The original purchase price was ₹40 lakh. After indexation, the indexed cost becomes ₹65 lakh. The actual LTCG is only ₹35 lakh, and tax on that is roughly ₹7 lakh.

But without a lower deduction certificate, the buyer must deduct TDS at 20% on the full ₹1 crore — that is ₹20 lakh (plus surcharge and cess). The NRI seller gets only ₹80 lakh net, even though their actual tax liability is just ₹7 lakh.

The excess ₹13 lakh sits with the government as a refund claim, which can take 12–24 months to process. This creates a severe cash flow problem for NRI sellers — and often makes deals fall through.

What Counts as "Immovable Property" for Section 195?

• Agricultural land (in specified urban limits)
• Residential plots and land parcels
• Built-up residential property (house, flat, villa)
• Commercial land or office space
• Industrial plots

Note: Agricultural land outside notified municipal limits is generally exempt from capital gains tax, so TDS may not apply in such cases. Always verify with a tax expert before proceeding.

What is a Lower Deduction Certificate?

A Lower Deduction Certificate (LDC) — also called a Lower/Nil Withholding Certificate — is issued by the Jurisdictional Assessing Officer (JAO) of the Income Tax Department under Section 197 of the Direct Tax Code, 2025. It authorizes the buyer to deduct TDS at a lower rate than the standard statutory rate.

Once obtained, the buyer can deduct TDS only at the rate specified in the certificate (for example, 5% or 8%) instead of the full 20–30% rate. This ensures the NRI seller's working capital is not unnecessarily blocked in refund cycles.

Who Can Apply for the Certificate?

The NRI seller applies for the Lower Deduction Certificate — not the buyer. The application must be filed with the Assessing Officer who has jurisdiction over the NRI's PAN. The buyer then uses the certificate to deduct TDS at the reduced rate and remit it to the government.

How to Get a Lower Deduction Certificate (Step-by-Step)

Step 1: Obtain PAN

The NRI must have a valid PAN (Permanent Account Number). Without a PAN, TDS is mandatorily deducted at 20% or the applicable rate — whichever is higher — and no certificate can be issued.

Step 2: File Application in Form 13

The NRI seller files Form 13 online on the Income Tax e-filing portal. This form requires detailed computation of income, capital gains, tax liability, and supporting documents. It can be filed by an authorized tax representative (CA or tax agent) on behalf of the NRI.

Step 3: Compute Capital Gains Accurately

The application must include a detailed capital gains computation covering:

• Date of purchase and original cost (or fair market value as on a reference date if applicable)
• Indexed cost of acquisition using the Cost Inflation Index (CII)
• Cost of improvement (if any)
• Sale consideration and transfer expenses
• Net LTCG or STCG
• Any DTAA benefit claimed (requires TRC, Form 10F, No-PE Declaration)

Step 4: Submit Supporting Documents

The following documents are typically required:

• Copy of PAN card
• Sale deed / agreement to sell
• Original purchase deed
• Passport copy (proof of NRI status)
• Tax Residency Certificate (TRC) — if DTAA benefit is being claimed
• Form 10F (if DTAA benefit is claimed)
• Bank account details in India (NRE/NRO account)
• Previous ITR copies (if filed in India)
• Income tax login credentials for e-verification

Step 5: Assessing Officer Reviews and Issues Certificate

The Assessing Officer reviews the application and supporting documents. If satisfied, the officer issues the Lower Deduction Certificate specifying the reduced TDS rate applicable to the transaction. This process typically takes 15–30 working days, though it can vary by jurisdiction.

Step 6: Buyer Deducts TDS at Reduced Rate

Once the NRI seller provides the certificate to the buyer, the buyer deducts TDS at the rate specified in the certificate, files Form 27Q (TDS return for non-resident payments), and issues Form 16A to the NRI seller.

Step 7: NRI Files ITR in India

The NRI must file an Income Tax Return in India for the financial year of the sale, claiming the TDS deducted as credit against the actual tax liability.

Implications of Not Getting a Lower Deduction Certificate

Scenario	Without LDC	With LDC
TDS Rate	20–30% on full sale price	Effective tax rate on capital gains (e.g., 5–8%)
Cash Flow for NRI	Blocked capital; heavy refund delay	Immediate access to most sale proceeds
Refund Wait Time	12–24 months	Minimal or nil refund required
Buyer's Compliance Risk	Risk of interest/penalty if TDS is short-deducted	Fully compliant with IT Department norms
Transaction Feasibility	Deals may fall through due to NRI's cash shortfall	Smoother transaction for both parties

Consequences of Non-Deduction or Short-Deduction of TDS

The buyer is treated as an "assessee in default" under the Direct Tax Code if TDS is not deducted or is deducted at a lower rate without a valid certificate. Consequences include:

• Interest at 1% per month from the date TDS was deductible to the date of actual deduction
• Interest at 1.5% per month from the date of deduction to the date of deposit
• Penalty equal to the amount of TDS not deducted (Section 271C)
• Prosecution in serious cases
• The buyer cannot claim the payment as a deductible expense if TDS is not deposited

DTAA and Its Impact on TDS Rate

If the NRI is a tax resident of a country that has a Double Taxation Avoidance Agreement (DTAA) with India, the capital gains tax rate under the DTAA may be lower than domestic law rates. In such cases, the NRI can claim the DTAA benefit while applying for the Lower Deduction Certificate.

To avail DTAA benefits, the NRI seller must provide:

• Tax Residency Certificate (TRC) from the foreign country's tax authority
• Form 10F (self-declaration form)
• No Permanent Establishment (No-PE) Declaration
• PAN card
• Income Tax Login in India (requires Indian PAN)
• DSC of the authorised foreign signatory (regular DSC of a director does not work; a specific foreign-individual DSC is needed with email/phone OTP, video verification, address proof, photo, and passport copy)

Note: If DTAA benefit is claimed by the NRI, filing of an ITR in India becomes mandatory.

Buyer's Compliance Checklist

If you are buying land from an NRI, your compliance obligations include:

• Obtain a TAN (Tax Deduction Account Number) — mandatory for TDS deduction
• Deduct TDS at applicable rate (or lower rate as per LDC) at the time of payment or credit, whichever is earlier
• Deposit TDS with the government within 7 days from the end of the month of deduction (or by 30th April for March deductions)
• File Form 27Q quarterly TDS return
• Issue Form 16A to the NRI seller within 15 days of filing Form 27Q
• Obtain Form 15CA/15CB if remitting payment abroad (for NRI seller's foreign bank account)

Form 15CA and 15CB: Remittance Compliance

When the sale proceeds are to be remitted to the NRI's foreign bank account, the buyer must file Form 15CA (an online declaration) and obtain Form 15CB (a certificate from a Chartered Accountant). These are separate from TDS compliance but are mandatory for the bank to process the outward remittance.

Common Mistakes to Avoid

• Treating NRI as Resident: Some buyers mistakenly deduct TDS under Section 194IA (1% for resident sellers) instead of Section 195. This is incorrect and exposes the buyer to penalties.
• Deducting on Net Gain, Not Sale Price: TDS under Section 195 is on the full sale consideration, not the capital gain. Only with a valid LDC can the rate be reduced.
• Not Verifying NRI Status: Always verify whether the seller is indeed an NRI. Ask for passport and visa documentation.
• Ignoring Form 27Q: Many buyers forget that TDS on NRI payments must be reported in Form 27Q (not Form 26QB used for resident sellers).
• Delaying LDC Application: The LDC must be obtained before the payment is made. Retroactive application is not possible.

How Taxocity Helps NRI Sellers and Buyers

Taxocity, with over three decades of tax compliance experience and a 4.8/5 rating from 5,000+ clients, provides end-to-end support for NRI property transactions. Our team of real human experts handles:

• Capital gains computation and tax planning for NRI sellers
• Application and follow-up for Lower Deduction Certificate (Form 13)
• DTAA analysis and documentation (TRC, Form 10F, No-PE Declaration)
• DSC procurement for foreign signatories
• TAN registration for buyers
• Form 27Q TDS return filing
• Form 15CA/15CB for outward remittances
• ITR filing in India for NRI sellers

We offer a 100% compliance guarantee so that both buyers and NRI sellers can complete the transaction without legal risk or cash flow surprises.

Key Takeaways

1. TDS on buying land from an NRI is governed by Section 195 of the Direct Tax Code, 2025 — at 20% (LTCG) or 30% (STCG) on the full sale price, plus surcharge and cess.
2. A Lower Deduction Certificate (Form 13) can legally reduce TDS to the NRI's actual tax liability — applied for by the NRI seller before the transaction.
3. Without an LDC, the NRI faces a massive refund wait of 12–24 months; the buyer risks penalty for short-deduction.
4. Buyers must deduct TDS, file Form 27Q, and issue Form 16A — not Form 26QB (which is only for resident sellers).
5. If remitting abroad, Form 15CA/15CB is mandatory for the bank to release funds.
6. DTAA benefits can lower the rate further — but require TRC, Form 10F, No-PE Declaration, and a foreign-individual DSC.
7. Always start the LDC process early — it takes 15–30 working days and cannot be applied retroactively.

---

Disclaimer: This article is for informational purposes only and does not constitute tax advice. Tax laws are subject to amendments and individual circumstances vary. Please consult a qualified tax advisor or compliance expert before making any decisions related to TDS, capital gains, or property transactions involving NRIs.