Buying Property from an NRI in India: Tax and Legal Factors to Check

Real estate transactions with non-residents are now routine in India. Families relocate abroad, inherit property here, or invest from overseas. So it is common for a resident buyer to find themselves negotiating with a Non-Resident Indian (NRI) or an Overseas Citizen of India (OCI) seller.

Although the sale process looks similar to a residential transaction, the rules governing payments, taxes, and documentation are different. These differences place certain compliance duties on the buyer, including proper tax deduction and the required TDS return filing. Any gap in these steps can lead to interest or penalties, which is why this guide outlines the main tax and legal requirements to keep your NRI property purchase on steady ground.

Understanding Who Qualifies as a Non-Resident Seller

When you buy property from someone living abroad, the first step is to understand how the law classifies the seller. This helps you know which rules apply, what paperwork you need, and how the payment should be handled. It also prevents confusion later, especially during registration and TDS filing.

What most buyers assume:

• Anyone with an NRI or an OCI card is automatically treated as a non-resident

What the law actually considers:

• Residential status is determined under Section 6 of the Income Tax Act and primarily depends on the number of days the seller stayed in India during the relevant financial year, with 182 days being the primary threshold in most cases
• If the seller has not met this requirement, the Income Tax Act treats them as a non-resident citizen.

Why this matters:

• TDS rates change when the seller is a non-resident
• The buyer must file Form 27Q TDS along with several other required forms
• Reporting and documentation requirements become stricter

How to confirm the residential status:

• Ask the seller for a brief written declaration
• Request a simple travel summary if needed

Once you know the correct status, planning the rest of the transaction becomes clear and straightforward.

Why NRI Property Deals Involve More Compliance

When you buy from a resident seller, most obligations stay on the seller’s side. But in an NRI deal, the buyer carries several responsibilities. Buyers are the ones who must deduct TDS, deposit it on time, and file the correct forms. Property purchasers also have to follow FEMA rules, since the sale proceeds often move outside India.

The government ensures every rupee paid in such deals remains traceable. This is why payment rules, documentation, and reporting requirements are stricter. Buyers who understand this early handle the deal smoothly. Those who assume the usual rules apply often face notices years later.

FEMA Rules You Must Follow When Buying Property from an NRI

An NRI sale is not only a tax matter. FEMA sets clear rules on what the seller can transfer, how the money must move, and which documents are valid. A quick check on these points keeps the transaction clean and prevents trouble during registration or bank scrutiny.

1. What an NRI is allowed to sell

• Residential and commercial property can be sold freely
• Agricultural land, farmhouses, and plantations come with restrictions and often need specific approval

2. How payment must be made

• The buyer must pay only through an Indian bank account
• NEFT, RTGS, IMPS, and crossed cheques are valid
• Cash and foreign-source payments are not permitted

3. If the NRI wants to repatriate the funds

• Banks require Form 15CA/15CB for tax clearance
• Repatriation is done through the NRO account and is capped at USD 1 million per financial year

4. When a Power of Attorney signs for the NRI

The POA must be:

• Notarised abroad
• Apostilled or consularised
• Registered in India

These steps ensure the document is valid for a property sale.

Keeping these FEMA rules in view avoids the compliance gaps that commonly arise in NRI property deals.

Mode of Payment: Why the Law Insists on Clean Banking Channels

The payment stage sets the tone for the entire transaction. The law expects a clear money trail, free from any foreign transfers or cash deposits.

Here is what you must follow:

• Pay the full consideration only through recognised banking channels
• Direct bank transfer, crossed cheque, or crossed demand draft are valid options
• Cash payments are strictly prohibited under any circumstances
• Payments must come only from a resident Indian bank account
• Funds from relatives or well-wishers must also come through Indian banks

These rules help track the movement of funds and ensure compliance with FEMA. Following them protects both buyer and seller from future disputes.

What to Review Before You Pay the NRI Seller

Before you work out TDS or fix the payment timeline, take time to check the basic legal documents. Properties held by Non-Resident Indians often pass through long ownership chains, involve family inheritances, or are managed through Power of Attorney holders.

A short review at this stage helps you avoid delays during registration and protects you from future disputes.

Verify the following:

• Chain of ownership to confirm the seller has a clear and valid title
• Up-to-date property tax receipts to ensure there are no unpaid dues
• Loan or mortgage details to check whether the property is still under a bank charge
• Validity of the Power of Attorney if someone is signing on behalf of the seller
• Identity proof and PAN of the seller to match the details used for TDS and registration

TDS Rules When a Resident Buys From a Resident

It helps to start with the rules for a regular property transaction between two residents. This gives you a baseline for understanding why NRI transactions involve stricter requirements.

In a resident-to-resident sale:

• The buyer deducts 1% TDS on the sale value
• The tax is deposited using Challan 26QB, which is a simple one-time form
• The TDS must be deposited by filing Form 26QB within 30 days from the end of the month in which the deduction is made
• The same 1% deduction applies even when you pay the seller in advance instalments

This process is simple because the law places most responsibilities on the seller. Once the seller becomes a non-resident, these rules no longer apply. The rate increases, different forms are required, and the buyer’s role becomes far more detailed.

For a clearer understanding of the resident-to-resident process, you can refer to our detailed guide on Form 26QB: What is Form 26QB TDS on purchase of immovable property

TDS Rules When a Resident Buys From a Non-Resident

Once the seller qualifies as an NRI, the TDS process changes entirely. The responsibility shifts to the buyer, and this is where most mistakes occur.

Applicable TDS Rates

• Short-term capital gains (property held < 24 months): Taxed at the seller’s income-tax slab rate (up to 30% + surcharge + cess)
• Long-term capital gains (held ≥ 24 months): 20% with indexation (+ surcharge + cess)
• Surcharge: May apply at 10%, 15%, 25% or 37%, depending on the seller’s total taxable income along with applicable health and education cess.

Key rules buyers must follow

• TDS is deducted on the entire sale consideration, not only on the capital gain
• TDS must be deposited within 7 days from the end of the month of deduction
• Every payment, including advance instalments, requires TDS deduction
• The buyer must file Form 27Q quarterly, not Form 26QB
• TDS credit appears to the seller only when Form 27Q is filed correctly

These steps matter because they ensure that the tax is properly credited to the NRI seller. Many resident buyers know only the process for domestic deals, so they try filing Form 26QB here as well. This is where things go wrong. For NRI transactions, the reporting rules are different, and understanding Form 27Q on NRI payments helps avoid mismatches, tax notices, and long appeals.

Correct filing from the start keeps the transaction clean and avoids long disputes.

Section 195: The Core of NRI Property Tax Rules

Section 195 is the rule that governs any payment made to a non-resident. In a property sale, it sets out what the buyer must do before releasing money to the seller. The entire TDS process for NRI transactions flows from this section.

Under Section 195, the buyer must:

• Deduct TDS at the rate that applies to the seller’s capital gains, whether long-term or short-term
• Obtain a TAN, since a PAN is not enough for reporting deductions
• Deposit the tax within the prescribed time after each payment
• File Form 27Q with the correct details for every quarter
• Provide the TDS certificate to the seller once the deposit is made

These responsibilities stay with the buyer, and any delay or incorrect deduction can lead to interest or a penalty. The seller’s own compliance does not remove the buyer’s obligations, which is why this part of the process needs steady attention.

If you made a mistake while filing Form 27Q, you can check our guide on how to fix different types of TDS return errors: Types of Corrections in TDS Returns

Capital Gains Tax for the NRI Seller

A Non-Resident Indian seller is taxed in India on the capital gains arising from the sale of property located in India. The tax depends on how the gain is calculated under the Income Tax Act.

Key factors that determine the tax:

• Original purchase cost, supported by proper documents
• Holding period, which decides whether the gain is short-term or long-term
• Indexation benefits for long-term capital gains, which adjust the cost of acquisition for inflation
• Eligible deductions, such as reinvestment options under Sections 54 or 54EC subject to fulfilment of prescribed conditions, if the seller plans to claim them

The seller must file an Income Tax Return in India to report the gain and claim any relief or refund. If the expected tax is lower than the standard TDS rate, the seller may obtain a lower or nil deduction certificate under Section 197, which allows the buyer to deduct TDS at the reduced rate.

It is useful to confirm this early, as the certificate affects the timing and amount of payment to the seller.

Practical Tips to Keep the Transaction Smooth With an NRI Seller

A few small steps can prevent delays, mismatches in tax records, and avoidable notices from the department.

• Apply for a TAN card early. You cannot deduct or deposit TDS under Section 195 without it
• Check the seller’s PAN carefully. A single digit error can block TDS credit for the seller
• Share challans and TDS certificates on time. These documents help the seller file their return and confirm that tax has been deposited correctly
• Keep a complete record of payments and filings. This protects the buyer if any clarification is needed later
• Ask the seller about a lower deduction certificate at the start. It affects the payment schedule and avoids last-minute revisions

Following these steps keeps the paperwork steady and helps both parties complete the transaction without unnecessary complications.

Conclusion

Buying property from a Non-Resident Indian or an Overseas Citizen of India becomes far simpler when the key rules are understood from the start. Clear payment trails, timely TDS deductions, and organised records keep the transaction on firm legal ground.

If you need support with TAN registration, Section 195 compliance, or any part of the TDS filing process, our team at LegalWiz.in can help you complete the steps with confidence.