NRI Capital Gains & TDS on Property Sale in India

How Capital Gains Are Taxed for an NRI Property Seller

India's Income Tax Act, 2025 took effect from 1 April 2026, replacing the Income Tax Act, 1961, and renumbered the provisions that govern this area — the underlying rules for NRI sellers, however, carry forward largely unchanged from the Finance Act 2024 amendments. If you've held the property for more than 24 months, the gain is long-term and taxed at a flat 12.5% under Section 197 of the new Act (the old Section 112). If you've held it for 24 months or less, the gain is short-term and simply added to your total income for the year, taxed at whatever slab rate applies once your Indian-sourced income is aggregated.

The detail that catches many NRI sellers off guard is that the 12.5% rate applies without indexation — there is no adjustment for inflation between your purchase year and your sale year. Resident individuals and Hindu Undivided Families received a transitional relief for property acquired before 23 July 2024, letting them choose the better of 20% with indexation or 12.5% without it. NRIs are excluded from that comparison relief. Regardless of when you originally purchased the property, an NRI seller pays the flat 12.5% rate on the gain computed without indexation. This single distinction can mean a materially larger tax bill for an NRI than a resident sibling selling an identical, jointly-inherited property in the same transaction — a point worth flagging early if a sale is being coordinated across NRI and resident family members.

TDS: Why the Buyer Withholds So Much, and What Fixes It

Under Section 393(2) of the Income Tax Act, 2025 (the old Section 195), any buyer purchasing property from an NRI seller must deduct TDS before paying the sale consideration — this is a materially different, and stricter, mechanism than the 1% TDS a buyer deducts under the standard resident-to-resident provision. There is no minimum transaction threshold that exempts smaller sales, and by default the buyer computes TDS on the entire sale price, not your net capital gain, applying the capital gains rate plus applicable surcharge and cess. For a property purchased decades ago at a modest price and sold today, the gap between "TDS on full price" and "tax on actual gain" can run into a significant, avoidable over-withholding at registration.

The corrective step is applying to the jurisdictional Assessing Officer under Section 395 of the Income Tax Act, 2025 (the old Section 197 certificate, previously filed on Form 13, now Form 128) for an order directing the buyer to deduct TDS only on your actual computed capital gain, or at a nil rate where no gain arises after exemptions. This application needs your original purchase deed, records of any capital improvements, a valuation basis for the sale, and PAN details, and it should be filed well before the sale agreement is signed — the certificate is not something that can be produced retroactively at the registrar's office. We coordinate this filing with a chartered accountant so the certificate is issued and in the buyer's hands before closing, rather than leaving the seller to chase a refund for months afterward.

Buyers deducting TDS from an NRI seller must also obtain a TAN (Tax Deduction and Collection Account Number), not merely use their PAN, and are required to file a quarterly TDS return and issue a TDS certificate to the seller documenting what was withheld — a compliance step many first-time individual buyers are unaware of until the seller's advocate flags it during the transaction.

Exemptions That Can Reduce or Eliminate the Gain

Several reinvestment-based exemptions that apply to resident sellers extend equally to NRIs, and using the right one correctly can substantially reduce, or in some cases eliminate, the taxable gain.

Section 82 (formerly Section 54): Reinvesting in Another Residential Property

If the property sold was a long-term residential asset, reinvesting the capital gain into another residential property in India — subject to conditions on timing (generally within one year before or two years after the sale, or three years if constructing) and the number of residential properties already owned — can exempt the gain up to the amount reinvested.

Section 85 (formerly Section 54EC): Capital Gains Bonds

Investing the gain, up to a prescribed limit, in notified capital gains bonds (such as those issued by REC or NHAI) within six months of the sale provides an exemption without requiring the funds to go into another property, useful for NRIs who don't want to hold further Indian real estate but still want the tax relief.

Section 86 (formerly Section 54F): Reinvesting Proceeds From a Non-Residential Asset

Where the asset sold was not itself a residential property, reinvesting the net sale proceeds into a residential property in India can exempt the gain proportionately, again subject to ownership and timing conditions.

Each of these exemptions carries a lock-in period, and disposing of the reinvested asset within the restricted window generally reverses the exemption and triggers tax retroactively. Because the conditions are specific and unforgiving of small errors, we recommend having the exemption computation checked against your exact facts before the return is filed, rather than assuming eligibility.

The India-USA Angle: What a DTAA Does and Doesn't Cover

A common misconception is that the India-USA Double Taxation Avoidance Agreement, addressed under Section 159 of the Income Tax Act, 2025 (formerly Section 90), somehow exempts NRIs from Indian capital gains tax on property located in India. It does not — India retains the right to tax capital gains arising from Indian-situs immovable property regardless of where the seller resides. What the DTAA generally does is prevent the same gain from being taxed twice in full: where the gain is also reportable on your US return, a foreign tax credit for the Indian tax paid can typically be claimed against your US liability, which is a computation for your US CPA, not something we file. We handle the India-side capital gains, TDS certificate, and exemption work; coordinating the resulting documentation with your US CPA for FBAR, FATCA, and foreign tax credit purposes is a separate, parallel track we're glad to support with paperwork but do not perform ourselves.

If TDS Was Already Over-Deducted

If a sale has already closed and the buyer withheld TDS on the full sale price because no Section 395 certificate was obtained in time, the remedy is filing an Indian income tax return for that financial year, correctly computing the actual capital gain (net of applicable exemptions), and claiming a refund of the excess TDS. Refunds typically take several months to process after the return is filed, longer if the return is selected for scrutiny given the size of the TDS credit involved. This is the reason we push clients to apply for the certificate before signing the sale agreement wherever the transaction timeline permits it — a refund claim recovers the money eventually, but a certificate keeps it from being withheld in the first place.

Why NRIs in the USA Choose Us for Capital Gains & TDS Matters

How We Handle a Capital Gains & TDS Matter, Start to Finish

1. Free Consultation From the USA

   Send us the property details and purchase history and we walk through the likely gain, applicable rate, and exemption options on a call in your time zone.

2. Certificate Application

   We prepare and file the Section 395 (Form 128) application with the Assessing Officer well ahead of your planned sale date.

3. CA Coordination

   We work with a chartered accountant to compute the actual gain, apply the correct rate, and prepare exemption documentation where applicable.

4. Sale & TDS Compliance

   We confirm the buyer deducts TDS correctly under the certificate, and that TAN, quarterly filing, and TDS certificate obligations are met.

5. Return Filing & Refund, If Needed

   Where a certificate wasn't obtained in time, we coordinate the return filing and refund claim for excess TDS withheld.

6. US-Side Handoff

   We provide your US CPA with the documentation needed for FBAR, FATCA, and foreign tax credit purposes.

Related Reading & Services

Capital gains and TDS on a property sale rarely stand alone — they usually connect to the rest of the transaction and to what happens with the proceeds afterward. Our buying and selling property in India from the USA service covers the full transaction process, and our banking and repatriation of funds service explains how Form 15CA/15CB and FEMA rules govern moving sale proceeds to the USA once tax is settled. Our NRI taxation and income tax service covers the broader tax-notice picture if a mismatch arises after filing. If the property in question was inherited, see our succession certificate and inheritance service for the court process that must precede a sale. On the blog, NRI rental income tax and TDS rules covers the related tax treatment if you rented the property before selling, and FEMA rules for NRI property ownership covers what you can buy or hold in the first place.

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