Whalesbook
THE SEAMLESS LINK
This financial efficiency gap highlights a critical issue for Non-Resident Indians (NRIs) divesting Indian assets. The standard Tax Deducted at Source (TDS) levied at elevated rates on property sales, calculated on the gross transaction value rather than net profit, can severely restrict capital availability. This situation necessitates a proactive strategy to leverage legal provisions designed to mitigate such impacts and preserve liquidity.
The Rs 12.5 Lakh Liquidity Squeeze
When an NRI sells property in India, the buyer must deduct TDS under Section 195 of the Income Tax Act. Unlike resident Indians who face a 1% TDS rate on property transactions above ₹50 lakh, NRIs are subject to much higher rates, typically 12.5% for long-term capital gains (LTCG) and slab rates (often around 30%) for short-term capital gains (STCG), applied to the capital gain amount, but often deducted on the full sale value if a lower deduction certificate is not obtained. For instance, on a ₹1 crore sale where actual capital gains might be minimal after indexation and exemptions, a buyer could deduct TDS at 12.5% on the entire ₹1 crore, amounting to ₹12.5 lakh. This substantial sum remains with tax authorities until the NRI files their income tax return and claims a refund, a process that can take six to twelve months. Such a delay creates a significant liquidity deficit, impacting financial planning and investment opportunities abroad.
Form 128: Proactive Liquidity Management
A crucial strategy to bypass this liquidity trap is the proactive application for a Lower or Nil TDS Certificate. Under the Income Tax Act, 2025, this is facilitated through Form 128, which replaces Form 13 under Section 197 of the old act, now falling under Section 395. This application allows taxpayers, including NRIs, to demonstrate to the Assessing Officer (AO) that their actual tax liability on the transaction is lower than the standard TDS rate. By submitting this form electronically via the TRACES portal, taxpayers can obtain a certificate authorising the buyer to deduct TDS at a reduced or nil rate. If the AO is satisfied with the submitted evidence—such as purchase costs, indexation benefits, and exemption proofs—the certificate is issued, ensuring the NRI receives the full sale proceeds without the immediate blocking of capital.
The Systemic Challenge: Awareness and Timing
The disparity between TDS and actual tax liability is often amplified by a lack of taxpayer awareness. The Income Tax Act's intent is to secure tax collection from non-residents, but the default high TDS rates create this disconnect when actual gains are low. Many NRIs, and even some tax professionals, overlook the possibility of obtaining a lower TDS certificate, accepting the deduction and refund route instead. The application for a lower TDS certificate must be made before the sale transaction is completed and payment is made to the seller; applying after TDS has been deducted renders the process ineffective for that specific transaction, leaving only the refund route available. This timing is critical, as emphasized by tax advisory platforms, stating, "One critical mistake people make: They apply AFTER the deal. That doesn’t work. You must apply before receiving money."
Broader Applicability and Market Context
Form 128 is not limited to NRI property sales; it is a versatile tool applicable to various income streams where TDS is levied, including interest, royalties, professional fees, and rent, provided the actual tax liability is lower. In the current economic climate of 2026, NRIs are increasingly investing in India's real estate market, attracted by favourable exchange rates and a growing, transparent sector. Projections indicate NRI investment share in Indian property could rise significantly by 2026. This growing engagement makes the ability to retain capital through mechanisms like Form 128 even more vital for financial planning. The number of Form 128 applications filed annually, around 1.2 lakh, suggests a substantial portion of eligible taxpayers remain unaware of this provision.
Structural Weaknesses and Execution Risks
The primary structural weakness lies in the information asymmetry and procedural inertia. While Form 128 provides a legal recourse, its effectiveness hinges on the taxpayer's awareness and promptness. The process, now primarily digital via the TRACES portal, aims for efficiency, but errors in documentation or processing delays can still lead to negative outcomes. The transition to the Income Tax Act, 2025, requires adherence to new forms and sections, underscoring the need for up-to-date knowledge. Furthermore, buyers purchasing property from NRIs must follow specific procedures, including obtaining a Tax Deduction and Information Number (TAN) for depositing TDS under Section 195, unlike resident transactions which use PAN. Failure to comply can expose buyers to penalties and interest, adding another layer of risk to transactions involving NRIs.
Future Outlook and Compliance Trends
The Indian tax authorities' push towards digital compliance through platforms like TRACES for Form 128 signifies a commitment to enhancing taxpayer experience and preventing undue liquidity blockage. As NRI engagement with India's real estate and financial markets continues to grow, driven by economic opportunities and cultural ties, the awareness and utilization of provisions like Form 128 are expected to increase. The ability to legally avoid excessive TDS through timely application of Form 128 positions it as an indispensable tool for financial planning and capital preservation for NRIs with interests in India.