NRI TDS Under Direct Tax Code 2025: Section 195 Changes Explained

Key Takeaways

• Shift in TDS Calculation: Under the current Section 195, Tax Deducted at Source (TDS) on property sales by Non-Resident Indians (NRIs) is often applied to the entire sale consideration, necessitating a lower deduction certificate. The proposed Direct Tax Code (DTC) 2025 aims to streamline this, potentially basing TDS more directly on the capital gains portion, although specific mechanisms are pending finalization.
• Procedural Simplification: The new framework is expected to simplify compliance. For instance, proposals suggest eliminating the need for a resident buyer to obtain a separate Tax Deduction and Collection Account Number (TAN) for a one-time transaction with an NRI, allowing the use of their PAN instead.
• Emphasis on AO Discretion: While the process for obtaining a lower or nil TDS certificate under Section 197 will likely transition to the new Code, the Assessing Officer's (AO) role in determining the actual tax liability remains pivotal. The guidelines under DTC 2025 are anticipated to provide AOs with a more structured framework for this evaluation.
• DTAA and Repatriation Clarity: The DTC aims to provide clearer, consolidated rules regarding the interplay of Double Taxation Avoidance Agreements (DTAA) and the procedures for repatriating funds, including the continued use of Forms 15CA and 15CB.

PART 1: EXECUTIVE SUMMARY

The proposed transition from the Income Tax Act, 1961, to the Direct Tax Code (DTC) 2025 marks a significant overhaul of India's direct tax system, with profound implications for Non-Resident Indians (NRIs), particularly concerning real estate transactions. This guide provides a professional analysis of the shift from the existing regulations under Section 195 to the anticipated new guidelines for Assessing Officers in 2026.

• The Old Law (1961): Under Section 195 of the Income Tax Act, 1961, any person making a payment to an NRI that is chargeable to tax in India is required to deduct TDS. For property sales, this often meant the buyer deducted TDS—typically at 20% for long-term capital gains plus surcharge and cess—on the entire sale consideration, not just the gain. To prevent this excessive deduction, NRIs had to apply to an Assessing Officer (AO) for a lower TDS certificate under Section 197 by filing Form 13, proving their actual capital gains liability was lower. This process, while effective, added a procedural layer and potential delays to transactions.

• The New Law (2025): The Direct Tax Code 2025 is designed to simplify and rationalize tax laws. While the core principle of deducting tax at source on payments to non-residents will continue, the methodology and compliance procedures are expected to be streamlined. New guidelines will likely empower Assessing Officers to issue certificates based on a more direct calculation of capital gains, reducing the default practice of applying TDS on the gross sale value. Furthermore, procedural hurdles, such as the buyer's requirement to obtain a TAN for a single transaction, are expected to be removed, simplifying compliance for all parties involved.

• Who is Impacted: This transition primarily affects NRIs selling immovable property in India and the resident buyers of such property. It also impacts financial institutions and tax professionals who facilitate these transactions. For NRIs, the changes promise a more logical tax deduction process and potentially improved cash flow from sales. For buyers, the simplification of compliance requirements will make transactions with NRIs less burdensome.

PART 2: DETAILED TAX ANALYSIS

1. Background for Non-Resident Indians

Under the Income Tax Act, 1961, the taxation of NRIs is source-based, meaning income that accrues or arises in India is taxable in India. When an NRI sells a property situated in India, the resulting capital gain is considered income that has accrued in India and is therefore subject to Indian tax laws.

Section 195 of the Act is the governing provision for TDS on all payments to non-residents. Its scope is broad and, crucially, it does not have a threshold limit for applicability. This means for any property sale by an NRI, regardless of the value, the buyer is legally obligated to deduct TDS. The rates are determined by the nature of the gain:

• Long-Term Capital Gains (LTCG): If the property is held for more than 24 months, the gain is long-term, and TDS is applicable at 20% (plus surcharge and cess).
• Short-Term Capital Gains (STCG): If the property is held for 24 months or less, the gain is short-term and taxed at the NRI's applicable income tax slab rates, often resulting in a 30% TDS rate (plus surcharge and cess).

A significant challenge under the 1961 Act is that the obligation to deduct is on the gross amount credited or paid. To avoid the disproportionately high tax deduction on the full sale price, the only recourse for an NRI is to approach the Income Tax Department by filing Form 13 and obtain a Lower Deduction Certificate under Section 197. This certificate, issued by an Assessing Officer, specifies the exact amount of capital gain and authorizes the buyer to deduct TDS only on that income portion.

2. Comparison: 1961 Act vs. Direct Tax Code 2025

The shift to the DTC 2025 intends to address the procedural complexities and ambiguities of the old Act. Below is a comparative analysis of the key changes affecting TDS on NRI property sales.

3. Repatriation & DTAA Implications

The changes in TDS law are intrinsically linked to the repatriation of funds and the application of Double Taxation Avoidance Agreements (DTAA).

Repatriation of Funds: Under the Foreign Exchange Management Act (FEMA), NRIs are permitted to repatriate up to USD 1 million per financial year from their NRO account, which includes property sale proceeds. However, this process is contingent on demonstrating full tax compliance. Banks and Authorized Dealers will not permit the remittance without proof of tax payment.

• Current Process: To repatriate funds, an NRI must furnish Form 15CA (an online declaration) and Form 15CB (a certificate from a Chartered Accountant) to the bank. Form 15CB certifies that the amount being remitted is after due payment of all applicable taxes in India. The TDS certificate (Form 16A) issued by the buyer is a critical document for the CA to issue Form 15CB.
• Impact of DTC 2025: The DTC is unlikely to change the fundamental requirement of Forms 15CA and 15CB, as they are crucial for monitoring outbound remittances. However, by streamlining the TDS process and ensuring the tax deducted is closer to the actual liability, the subsequent repatriation process should become smoother. Delays caused by large refund claims will likely be minimized.

DTAA Implications: India has DTAA agreements with over 90 countries. These treaties determine which country has the right to tax certain income and provide relief from double taxation.

• Capital Gains from Immovable Property: Most DTAAs grant the source country (India, in this case) the primary right to tax capital gains arising from the sale of immovable property situated therein. Therefore, the NRI cannot claim a complete exemption from Indian tax on such gains.
• Claiming Lower DTAA Rates: While the right to tax remains with India, some DTAAs may prescribe a lower tax rate than the domestic 20%. To claim this benefit, an NRI must provide a Tax Residency Certificate (TRC) from their country of residence, along with a self-declaration in Form 10F.
• DTC 2025 and DTAA: The new Code will continue to respect the principle that DTAA provisions override domestic law if they are more beneficial to the taxpayer. The DTC is expected to integrate DTAA-related compliance more seamlessly into the tax filing and certification process, providing greater clarity on documentation and procedures for claiming treaty benefits.

4. NRI Action Plan & Documentation

To navigate the transition and ensure compliance, NRIs should adopt a proactive approach.

Action Plan:

1. Engage a Tax Professional Early: Consult a CA or tax advisor as soon as the property sale is contemplated. They can provide guidance on capital gains calculation, the applicability of the old vs. new law based on the transaction date, and the process for obtaining a lower TDS certificate.
2. Advance Application for Lower TDS: Initiate the process for the lower TDS certificate well in advance of the sale deed registration. The application process, even if streamlined under the DTC, will still require time for processing by the tax department.
3. Correctly Determine Capital Gains: Accurately calculate the capital gains by factoring in the indexed cost of acquisition and improvement, as well as any eligible exemptions (e.g., under Section 54 or 54EC for reinvestment).
4. Coordinate with the Buyer: Clearly communicate the TDS obligations to the buyer. Provide them with the lower TDS certificate once obtained to ensure the correct tax amount is deducted. Under the proposed DTC changes, remind the buyer that they may be able to use their PAN instead of obtaining a TAN.
5. Ensure Timely Filing and Repatriation: Post-sale, ensure the buyer deposits the TDS and files the TDS return on time. Obtain Form 16A from the buyer. File your Indian income tax return to report the capital gain and claim credit for the TDS. For repatriation, coordinate with your CA and bank to prepare and submit Forms 15CA and 15CB.

Documentation Checklist:

• For Lower TDS Application:
  • Draft of the Sale Agreement/MOU
  • Copy of the Purchase Deed of the property
  • Valuation report (if applicable)
  • Detailed computation of long-term/short-term capital gains
  • Proof of any reinvestments planned to claim exemptions
  • PAN card of the NRI seller and the buyer
  • Tax Residency Certificate (TRC) and Form 10F if DTAA benefits are being claimed
• For Repatriation:
  • Final Sale Deed
  • TDS Certificate (Form 16A) from the buyer
  • Form 15CA (Self-declaration)
  • Form 15CB (Chartered Accountant Certificate)
  • Bank account statements
  • Copy of the Indian Income Tax Return filed

5. Conclusion

The transition to the Direct Tax Code 2025 represents a forward-looking step towards simplifying India's tax framework. For NRIs engaged in real estate transactions, the proposed changes, particularly to the TDS regime under Section 195, are poised to bring welcome relief from procedural burdens. The move to align TDS more closely with actual capital gains and the simplification of compliance for buyers will make the process more efficient and transparent. However, the role of the Assessing Officer in validating the tax liability remains central. NRIs must remain vigilant, plan their transactions meticulously, and seek expert guidance to ensure they are fully compliant with the evolving legal landscape.

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