Buying from an NRI seller: the TDS trap that catches residents

Most resale purchases in India run on one number that everybody knows: 1 percent. Deduct 1 percent of the price, file the statement, hand the seller a certificate, done. That number is correct only if the seller is a resident. If the seller is a non-resident, a different provision applies, the 1 percent becomes roughly 15 percent, the Rs 50 lakh threshold disappears, and the person the department comes after when it goes wrong is the buyer. And since 1 April 2026 every section number in the old advice has changed, because the Income-tax Act 2025 replaced the 1961 Act; the rules did not soften with the renumbering.

The rate difference, in one number#

That is not a penalty and not a tax on the buyer. It is a withholding, and the seller reclaims whatever exceeds their real liability when they file their return, usually a year later. But it changes the transaction completely, because the money the seller expected at the sub-registrar's counter is now sitting with the government, and somebody has to have planned for that before the agreement was drafted.

Two sections, side by side#

The composite rate is where most buyers lose their footing, so here it is as arithmetic rather than as a phrase. The base is 12.5 percent where the seller held the property for more than 24 months. On top of that sits a surcharge that steps with the amount, and on top of that a health and education cess of 4 percent. Because the surcharge on long-term capital gains is capped at 15 percent, the whole stack lands in a narrow band:

If the seller held the property for 24 months or less, the gain is short-term and the deduction runs at the seller's applicable slab rate, which for a high-value flat means the top slab plus surcharge and cess. Short-term NRI sales are where the deduction can exceed 30 percent of the price, and they are the ones where a lower deduction certificate matters most.

An analogy: the deposit the landlord keeps#

Think of the non-resident deduction as a landlord's security deposit run in reverse. The landlord does not know what you will break, so they hold a round sum that is obviously more than the likely damage, and settle up when you leave. The tax department does not know what the NRI's actual gain was, cannot chase them once they have flown home, and so holds a round percentage of the whole price rather than a precise slice of the profit. The seller gets the excess back at settlement, which is the day their tax return is processed. Everyone in the chain understands the logic; the trouble is that only one party, the buyer, is legally responsible for making the deduction, and that party is usually the only one in the room who has never heard of the section.

Neha and the seller who had "an Indian passport"#

Neha, 34, buying a 2BHK in a completed Mulund building, agreed a price of Rs 1.20 crore with a seller whose PAN, Aadhaar and bank account were all Indian and who described himself as "settled in Dubai for work but very much Indian". Her broker's draft deducted 1 percent. Her lender's lawyer asked one question at the sanction stage: how many days had the seller spent in India in the last financial year? The answer was under 60. He was a non-resident for tax purposes, and the deduction was not Rs 1.20 lakh but about Rs 17.94 lakh.

The seller's real gain was around Rs 34 lakh, so his actual tax was in the region of Rs 5 lakh, and withholding Rs 17.94 lakh would have locked up Rs 13 lakh of his money for a year. He applied for a certificate under section 395, which took about six weeks and came back permitting deduction at a much lower rate on the consideration. Neha deducted the certified amount, deposited it, filed the statement and issued the seller his certificate. The delay cost her a six-week extension on the agreement. Discovering it after registration would have cost her the difference in cash. Names and numbers in this story are illustrative.

How to tell whether your seller is an NRI#

This is not an edge case. India has about 1.59 crore non-resident Indians by the Ministry of External Affairs' 2024 count, and Knight Frank India put NRIs' share of housing purchases at 12 to 15 percent in January 2026, up from single digits a decade earlier. Every flat an NRI bought is a flat an NRI may one day sell to a resident buyer.

Residential status under the Income-tax Act is a question of days present in India, not of citizenship, passport colour, address on the Aadhaar or where the bank account sits. An Indian citizen who has lived abroad for years is a non-resident; an OCI card holder living in Pune may well be a resident. Three practical checks before you pay anything:

1. Ask for a written declaration of residential status for the relevant financial year, signed, with the day count stated. It does not transfer your liability, but it establishes what you were told and it forces the seller to think about the question.
2. Look at where the money is going. A seller directing proceeds to an NRO account has told you their status without meaning to. A power of attorney executed abroad and apostilled is the same signal.
3. Ask your own chartered accountant, not the broker's. The broker is paid on closing. The one-time fee for an opinion on this single question is trivial against a deduction error measured in lakhs.

The one thing that actually solves it#

The lower deduction certificate under section 395 of the Income-tax Act 2025, formerly section 197, is the mechanism the law provides, and it exists precisely because deducting on a sale price rather than a gain is crude. The seller applies online on Form 128, formerly Form 13, setting out the purchase cost, the holding period, the improvements claimed and the reinvestment exemptions they intend to take. The assessing officer issues a certificate specifying a rate, and the buyer deducts at that rate and no lower.

Three rules a buyer should hold on to. The certificate belongs to the seller and must be applied for before the sale, so it belongs in the agreement timetable, not in the closing scramble. It is specific to the buyer named on it, so a certificate obtained for an earlier aborted deal is useless to you. And in the absence of a certificate there is no discretion: the seller's genuine belief that their gain was small, or their promise to pay their own tax, changes nothing about what the buyer must withhold.

A change worth knowing about lands on 1 October 2026. Under a Finance Act 2026 amendment, individual and HUF buyers will no longer need a TAN to deposit tax deducted from a non-resident seller, and will report it with their PAN on Form 141, the same challan-cum-statement a resident-seller purchase uses, which removes the single most common practical obstacle in these transactions. Until 30 September 2026 the old route applies: a TAN, a challan and a quarterly Form 144 statement. Company and firm buyers still need a TAN. It simplifies the plumbing; it changes nothing about the rate or the liability.

Where this sits in the rest of the purchase#

This is the exception to the resident-seller routine set out in TDS on a flat purchase, now filed on Form 141, and it is worth reading the two together, because the section, the rate and the process all change. The deduction itself is only one of the money events on closing day: the stamp duty, the registration fee and the four-month clock are covered in registration day at the sub-registrar, and the order in which the whole file should be verified is in the 12 documents to check before buying a flat. For a resale purchase specifically, pull the encumbrance certificate before the booking amount, not after, because an open mortgage entry and a non-resident seller together are a closing that needs planning rather than improvisation.

If the flat is in a project still on the register, the promoter's own filings are worth reading even for a resale: registration status, the litigation the promoter has disclosed, the certificate trail and whether the building ever received its occupancy certificate. ReraGenie's project pages carry all of that for every covered Maharashtra project, free, and the Rs 499 buyer report turns it into the specific questions to put to the seller before you sign.

The 60-second summary#

Establish the seller's residential status in writing before you pay a rupee. If they are a non-resident, forget the 1 percent and the Rs 50 lakh threshold: section 393(2) applies to the whole consideration at about 13 to 15 percent for a long-term holding, and at slab rates for a short-term one. If the seller wants their money released at closing rather than a year later, the lower deduction certificate under section 395 is their job and it takes weeks, so it belongs in the agreement timetable. And remember whose problem a mistake is: the department recovers from the buyer, with interest and penalty, long after the seller has gone home.

This article is educational and not tax or legal advice. Rates, thresholds and procedures change with each Finance Act; confirm the current position with a chartered accountant before you deduct.