Capital Gains on Transfer of Property by Non-Residents: What Every NRI Seller (and Buyer)must know -Updated for the Income-tax Act, 2025
Every year, thousands of Non-Resident Indians sell property back home — an ancestral house, a flat bought during a posting in India, or land inherited from parents. Most walk into the transaction expecting a straightforward sale. What they actually encounter is one of the more layered corners of Indian tax law: capital gains taxation compounded by a punishing withholding tax regime.
With the Income-tax Act, 2025 now in force (effective 1 April 2026, applicable from Tax Year 2026-27 onward), the substance of these rules is unchanged — but every section number a practitioner has relied on for decades has moved. This article restates the framework using the new Act's numbering, with the familiar 1961 references alongside for continuity, since both will be in active use for the next few filing cycles.
Having advised extensively on non-resident taxation, I find the same handful of misunderstandings surfacing in almost every transaction. This is for NRIs planning a sale, and for resident buyers who don't want to get caught on the wrong side of a TDS default.
1. Where Does the Charge Arise?
Under Section 5 of the 2025 Act (unchanged in number and substance from old Section 5), a non-resident is taxable in India only on income that accrues, arises, or is deemed to accrue or arise in India, or is received in India. Capital gains on transfer of an immovable property situated in India fall within Section 9 (read with Schedule I) — the successor to old Section 9(1)(i) — deemed to accrue in India regardless of where the sale deed is executed, where proceeds are received, or where the seller resides. There is no escaping the charge merely by structuring payment or execution outside India.
2. Classifying the Gain: Short-Term vs Long-Term
The charging and computation provisions for capital gains, formerly spread across Sections 45 and 48, are now consolidated under Chapter IV-E of the 2025 Act:
- Capital gains (charge): old Section 45 → Section 67
- Mode of computation: old Section 48 → Section 72
- Full value of consideration in certain cases (stamp duty value override for property): old Section 50C → Section 78
The holding-period test itself is unchanged:
- Held for more than 24 months → Long-Term Capital Asset → LTCG
- Held for 24 months or less → Short-Term Capital Asset → STCG
For property acquired by inheritance or gift, the holding period of the previous owner continues to be included — a point that often changes the classification entirely and is frequently overlooked.
3. The Rate Provision: Old Section 112 is now Section 197
This is the one every practitioner needs to relearn by number. The general LTCG rate provision — old Section 112 — is now Section 197 of the Income-tax Act, 2025 ("Tax on Long-Term Capital Gains"). The Select Committee's redraft codifies, rather than changes, the post-Budget-2024 regime:
- LTCG on property: flat 12.5%, without indexation benefit
- STCG on property: taxed at the applicable slab rates
The transitional relief allowing a choice between 20% with indexation and 12.5% without indexation, for property acquired before 23 July 2024, has been carried forward into Section 197 — but it remains restricted to resident individuals and HUFs. Non-residents continue to get no such option: they are taxed at the flat 12.5% rate without indexation, irrespective of when the property was originally acquired. This distinction, easy to miss because it now sits inside unfamiliar section numbering, remains a material difference in tax outgo for every NR computation.
(Note: Section 198 is the successor to old Section 112A — the STT-linked concessional rate for listed equity, equity-oriented funds and business trust units. It is not the relevant provision for immovable property, and NRIs on such instruments are in any event governed separately under Section 115AD-equivalent provisions, not Section 112A/198.)
4. The Withholding Tax Trap: Old Section 195 is now Section 393(2)
This is where most transactions unravel. All non-salary TDS provisions on payments to non-residents — previously scattered as Section 195 — are now consolidated into Section 393(2) [Table Sl. No. 17] of the 2025 Act. The mechanics are unchanged:
- When the seller is a non-resident, the resident-seller provision (1% TDS above ₹50 lakh, formerly Section 194-IA, now folded into the Section 393 TDS table for resident payees) does not apply at all.
- No threshold exemption under Section 393(2) — TDS applies from the first rupee, regardless of transaction value.
- TDS is deductible on the entire sale consideration, not just the capital gain component — unless the seller has obtained a lower/nil deduction certificate.
- Effective rates run well above the final tax liability once surcharge and cess are added — often 14–15%+ for LTCG, and up to 30%+ for STCG — frequently resulting in a large refund position for the NRI.
- The buyer must still obtain a TAN, deduct correctly, deposit the tax, and file Form 27Q (this return filing mechanism is retained under the 2025 Act). Buyers who deduct at the resident rate by mistake, or fail to deduct altogether, remain exposed to disallowance, interest, and penalty consequences under the TDS-default provisions carried forward from old Section 201.
Practical takeaway: Buyers purchasing from an NRI seller should independently verify residential status and never rely solely on the seller's assurance — the compliance burden and consequences of default sit with the buyer.
5. Fixing the Cash-Flow Problem: Old Section 197 (LDC) is now Section 395
Given that TDS at source almost always overshoots actual tax liability, the single most valuable planning step is applying for a Lower or Nil Deduction Certificate (LDC) from the Assessing Officer — well before the sale closes. This certificate provision, formerly Section 197 of the 1961 Act, is now Section 395 of the Income-tax Act, 2025. The application form has also changed: Form 128 replaces old Form 13 for taxpayer-side applications, and Form 129 replaces old Form 15E for payer-side applications in non-resident remittance cases.
Applying under Section 395 aligns the withholding with the real tax payable (after cost, exemptions, and available reliefs) rather than forcing the seller into a refund-and-wait cycle that can take a full assessment cycle to resolve.
6. Exemptions Are Very Much Available
Non-residents are entitled to the same LTCG exemptions as residents, now renumbered as follows:
- Section 82 (old Section 54) — reinvestment of capital gains in a new residential house in India
- Section 86 (old Section 54F) — reinvestment of net sale consideration where the asset sold is not a residential house
- Section 85 (old Section 54EC) — investment of gains (up to ₹50 lakh) in specified bonds (NHAI/REC) within six months
These remain powerful planning tools and should be built into the Section 395 LDC application itself, not claimed only at the return-filing stage.
7. Does the DTAA Help?
This is the most common — and most costly — misconception, and nothing here has changed with the new Act. Most of India's tax treaties (with the UAE, USA, UK, Singapore, and others) contain an Immovable Property Article that expressly preserves the source country's taxing right. The DTAA relief provisions themselves (old Sections 90/90A/91) are now Sections 159 and 160 of the 2025 Act, but the substantive position is unchanged: DTAA does not shield gains on Indian immovable property from Indian tax, whatever relief it may offer on other income streams like dividends or interest. Relief, where available, typically comes through the foreign tax credit mechanism in the country of residence, not through exemption in India.
8. Don't Forget FEMA and Repatriation
Tax compliance is only half the story. Repatriating sale proceeds abroad requires routing through an NRO account, and remittance is subject to FEMA limits (currently USD 1 million per financial year). On the tax side, the familiar Form 15CA/15CB certification has been replaced: Form 145 (in place of Form 15CA) and Form 146 (in place of Form 15CB, the Chartered Accountant certificate) now govern reporting for foreign remittances exceeding the prescribed threshold. This step is frequently an afterthought and derails otherwise well-planned transactions at the last mile.