NRI Selling Property in India 2026: TDS, Section 54 Exemption, Lower Deduction Certificate

An NRI sells a Mumbai flat for ₹1.5 crore that was bought in 2017 for ₹60 lakh. Buyer asks the broker about TDS. Broker says "1% under Section 194-IA." Buyer pays ₹1.485 crore to seller, deposits ₹1.5 lakh as TDS, files Form 26QB. Six months later both parties receive Income Tax Department notices: the buyer was the wrong section, the TDS was the wrong rate, and the NRI seller now has Section 271C penalty exposure for under-deduction. This scenario happens dozens of times every month at India's property registry offices. The 1% Section 194-IA rule does not apply when the seller is an NRI. The correct provision is Section 195, the default rate is 20% / 12.5% on the gross sale consideration, and the fix to avoid overdeduction is the Section 197 Lower Deduction Certificate. Here is the 2026 complete playbook with the post-23-July-2024 capital-gains rate changes, Section 54 / 54F / 54EC exemptions, and the documentation a sale-ready NRI seller actually needs.

The Section 194-IA trap

Section 194-IA of the Income Tax Act mandates 1% TDS on consideration paid for transfer of immovable property where the consideration is ₹50 lakh or more. This rule applies only when the seller is a resident. Where the seller is a non-resident (NRI / OCI / PIO), Section 195 — not Section 194-IA — governs. Section 195 mandates the buyer to deduct TDS on any sum payable to a non-resident that is chargeable to tax in India, at the rates in force.

For NRI sellers of immovable property, the "rate in force" is the long-term or short-term capital gains rate applicable to the transaction:

• Held > 24 months = LTCG; TDS at 20% on full sale consideration (or 12.5% under the new regime — see next section)
• Held ≤ 24 months = STCG; TDS at 30% + surcharge + cess on full sale consideration

Both rates are applied to the gross sale value, not the gain. A ₹1.5 crore sale of LTCG-eligible property = ₹30 lakh TDS by default. The actual capital gains tax in the ITR will almost always be far smaller — that gap is what the Lower Deduction Certificate fixes.

The post-23-July-2024 LTCG regime change

The Finance Act 2024 (No 2), effective 23 July 2024, restructured Indian capital-gains tax. For immovable property:

For most NRI sellers of pre-2024 property in modest-appreciation cities, the 20% with indexation path is still better because the indexed cost approaches the sale value. For high-appreciation properties (Mumbai, Bangalore prime), 12.5% without indexation often wins. Compute both before filing.

The Section 197 Lower Deduction Certificate

The structural fix to avoid 20% / 12.5% TDS on the gross sale value: apply for a Section 197 Lower Deduction Certificate (LDC). The Assessing Officer reviews the seller's actual capital-gains computation (cost + indexation + planned reinvestment under Section 54 / 54F / 54EC), determines the realistic tax liability, and issues a certificate authorising the buyer to deduct TDS at a lower rate — typically the effective LTCG rate on the actual gain.

Worked example: ₹1.5 crore sale of property bought in 2017 for ₹60 lakh. Indexed cost ≈ ₹91 lakh. LTCG ≈ ₹59 lakh. Tax at 20% with indexation ≈ ₹11.8 lakh. As a percentage of the gross ₹1.5 crore sale, that is roughly 7.9%. The LDC would authorise the buyer to deduct ~8% (₹12 lakh) instead of 20% (₹30 lakh). The NRI seller receives ₹1.38 crore in hand instead of ₹1.20 crore — an immediate ₹18 lakh cashflow improvement.

LDC application process

1. NRI seller applies online on the TRACES portal — Form 13.
2. Supporting documents: PAN, passport, property purchase deed, current sale agreement (signed Memorandum of Understanding or draft sale deed), construction-cost evidence, indexed-cost computation, FATCA / TRC if claiming DTAA-rate, list of planned reinvestments (Sec 54 / 54EC).
3. Assessing Officer in the seller's jurisdictional Income Tax Office reviews; may seek clarifications; typically 30-90 days to issue.
4. Certificate specifies the lower TDS rate and the buyer to whom it applies.
5. Buyer deducts at the certificate rate and files Form 27Q quarterly; issues Form 16B to seller.

Apply for the LDC before the sale is consummated and before the TDS is deducted. Retrospective LDCs are not available; the only post-sale remedy for excess TDS is the refund route via filing ITR-2 — a 12-18 month wait for the refund cheque or direct credit.

What the buyer must do

1. Obtain Tax Deduction Account Number (TAN) — required for any buyer deducting tax under Section 195. Apply via NSDL within days; takes 7-15 days.
2. Deduct TDS at the LDC rate (or 20% / 12.5% default if no LDC) on each payment to the NRI seller.
3. Deposit TDS to the Income Tax Department within 7 days of the end of the month of deduction.
4. File Form 27Q quarterly (15 July, 15 October, 15 January, 31 May for Q4).
5. Issue Form 16B to the seller within 15 days of due date for filing Form 27Q.

Failure to deduct or under-deduction is the buyer's liability — Sections 201 and 271C impose interest at 1% / 1.5% per month plus a penalty equal to the under-deducted amount. Buyers therefore often over-deduct to be safe; the NRI seller's only protection is the LDC.

Section 54 — residential property reinvestment exemption

If the LTCG from sale of a residential property is reinvested in another residential property in India:

• Purchase the new property within 1 year before or 2 years after the sale date; OR
• Construct a new property within 3 years from the sale date.

LTCG to the extent of the new investment is exempt. The exemption is capped at ₹10 crore for individual reinvestments effective AY 2024-25 (Finance Act 2023 introduced this cap).

If sale proceeds cannot be reinvested before the ITR due date, deposit the unreinvested amount in a Capital Gains Account Scheme (CGAS) at any nationalised bank by the ITR due date. Use the CGAS amount for the property purchase / construction within the 2-3 year window. CGAS preserves the exemption while parking the funds.

Section 54F — any LTCG reinvested in residential property

If the LTCG comes from sale of any long-term asset (other than residential property) — gold, listed equity, debt MF, commercial property — and the proceeds are reinvested in a residential property, Section 54F exempts a proportional share of the LTCG. Conditions: the NRI must not own more than one other residential property on the sale date, and must not buy / construct any other residential property within 2-3 years post sale.

Section 54EC — capital-gain bonds

LTCG up to ₹50 lakh from sale of any long-term capital asset (including residential property) can be reinvested in specified bonds within 6 months of the sale date to claim Section 54EC exemption. Eligible issuers: National Highways Authority of India (NHAI), Rural Electrification Corporation (REC, now PFCL), Power Finance Corporation (PFC), Indian Railway Finance Corporation (IRFC). Lock-in 5 years; coupon around 5-5.25% taxable.

Section 54EC is useful when reinvestment in a new property is not feasible (timing, no need for second property). Stacks with Section 54 — the NRI can claim Section 54 on part and Section 54EC on the rest, within the ₹50 lakh 54EC ceiling.

Repatriating sale proceeds out of India

Sale proceeds of Indian property by an NRI flow to the NRO account. Repatriation of NRO balance is capped at USD 1 million per financial year. Process:

1. Sale proceeds credited to NRO post-TDS.
2. File Form 15CA on the income tax portal disclosing the proposed remittance.
3. For each transaction above ₹5 lakh, also obtain Form 15CB — a CA certificate confirming tax compliance and DTAA position.
4. Bank releases USD equivalent (or other foreign currency) to the NRI's foreign account, subject to the $1M / FY cap.

Lifetime limit: NRI can repatriate sale proceeds of up to two residential properties in their lifetime under FEMA Regulation 6(2)(c) without RBI permission. Beyond two properties, RBI permission is required.

Pre-sale checklist for the NRI seller

1. Valid PAN, linked Aadhaar (where applicable for OCI), updated KYC at the bank holding NRO account.
2. Property documents — registered sale deed, mutation, society NOC, tax-paid certificates up to date.
3. Apply for Section 197 LDC at least 60-90 days before the planned sale.
4. Compute LTCG under both indexation and non-indexation paths (for pre-23 Jul 2024 properties); pick the lower.
5. Plan Section 54 / 54F / 54EC reinvestment in advance; pre-identify the new property or bond issuance.
6. Inform buyer of Section 195 obligation; ensure buyer has TAN.
7. Open or verify NRO account at the bank where sale proceeds will land.
8. If repatriating, line up the CA for Form 15CB issuance.

Frequently asked questions

Can the buyer deduct 1% TDS instead of 20% / 12.5% by mistake?

Many do. The Income Tax Department's data-matching of Form 26QB (Section 194-IA filings) against the seller's PAN (NRI flag) catches these. Buyer ends up with Sec 201 / 271C exposure for under-deduction. The right path is always Section 195 + Form 27Q for NRI sellers.

Is the LDC really necessary if I will get the excess back as refund?

The refund route works but takes 12-18 months and the seller is out of pocket meanwhile on a substantial sum. LDC delivers the cashflow at the time of sale. For sales above ₹50 lakh, LDC almost always pays for itself.

Does Section 54 apply to a property purchased outside India?

No. Section 54 reinvestment must be in a residential property in India. Foreign property does not qualify for Section 54 / 54F exemption.

What if the new property purchase exceeds the LTCG?

Then the entire LTCG is exempt under Section 54. The additional purchase price beyond the LTCG comes from other funds — no additional tax benefit beyond the LTCG exemption.

Can I claim Section 54 if the new property is bought in joint name with my spouse?

Yes, as long as the NRI is a co-owner and the sale-proceeds are demonstrably the source of the purchase. The exemption applies to the extent of the NRI's investment in the new property.

What is the TDS rate if the property is held 18 months?

For property, the LTCG threshold is 24 months. 18 months = STCG. TDS at 30% + surcharge + cess on the full sale consideration applies to NRI seller. No Section 54 / 54F shelter for STCG. LDC can still reduce to actual tax computed at slab rates.

Sources: Income Tax Act Section 195, Section 197, Section 54, Section 54F, Section 54EC; Finance Act 2024 (No 2) explanatory memorandum; Income Tax Rules Rule 28AA (LDC procedure); CBDT circulars on Section 195 and Form 15CA / 15CB; FEMA Notification 5/2000 + RBI Master Direction on repatriation; accessed May 2026. Real-estate tax events are fact-specific — engage an Indian CA with NRI cross-border experience for the LDC application and ITR. Editorial research, not tax advice.