Whalesbook
The Problem: High TDS on NRI Property Sales
NRIs selling property in India face a common financial hurdle: high Tax Deducted at Source (TDS) on the full sale price. This can significantly reduce immediate capital, as the deduction is often applied to the total transaction value, not just the profit. To manage this, NRIs need a proactive approach to use available legal options for preserving their funds.
Understanding the Rs 12.5 Lakh TDS Hit
When an NRI sells Indian property, the buyer is required to deduct TDS under Section 195 of the Income Tax Act. While resident Indians typically pay 1% TDS on property sales over ₹50 lakh, NRIs face much higher rates. These can be around 12.5% for long-term capital gains or slab rates (often near 30%) for short-term capital gains. Crucially, if a lower deduction certificate isn't obtained, this TDS can be applied to the entire sale value. For example, if an NRI sells a property for ₹1 crore, and actual capital gains are low after accounting for inflation (indexation) and potential exemptions, a buyer might still deduct 12.5% TDS on the full ₹1 crore, totaling ₹12.5 lakh. This large amount stays with the tax authorities for six to twelve months until the NRI files their tax return and claims a refund. This delay creates a substantial gap in immediate funds, affecting financial plans abroad.
Form 128: Your Solution for Lower TDS
The key to avoiding this capital lock-up is applying before the sale for a Lower or Nil TDS Certificate. This process, detailed in the Income Tax Act, 2025, uses Form 128 (previously Form 13 under Section 197, now under Section 395). The form allows NRIs to show the Assessing Officer (AO) that their actual tax due is less than the standard TDS amount. By submitting evidence of purchase costs, indexation benefits, and any exemptions electronically through the TRACES portal, the AO can issue a certificate. This certificate authorises the buyer to deduct TDS at the correct, lower rate, allowing the NRI to receive the full sale proceeds without funds being held up.
Awareness and Timing are Key
A significant reason for this issue is a lack of awareness among taxpayers. While the Income Tax Act aims to ensure tax collection from non-residents, the standard high TDS rates create problems when actual profits are small. Many NRIs, and sometimes even tax advisors, miss the chance to apply for a lower TDS certificate, opting instead for the refund process. It's vital to remember: the application for a lower TDS certificate must be submitted before the property sale is finalized and funds are transferred. Applying after TDS has already been deducted means the certificate won't apply to that sale, and only a refund will be possible later. Tax advisory platforms stress this point: "One critical mistake people make: They apply AFTER the deal. That doesn’t work. You must apply before receiving money."
Beyond Property Sales: Wider Use Cases
Form 128 isn't just for property sales; it can also be used for other income sources subject to TDS, such as interest, royalties, professional fees, and rent, if the actual tax liability is lower. In the current economic climate of 2026, NRIs are showing increased interest in India's real estate, drawn by favorable exchange rates and a developing, transparent market. Forecasts suggest NRI property investments could grow substantially by 2026. This trend makes tools like Form 128, which help retain capital, more crucial for financial planning. With around 1.2 lakh Form 128 applications filed annually, many eligible taxpayers likely still don't know about this option.
Procedural Hurdles and Buyer Responsibilities
The main challenges with Form 128 involve a lack of information and slow adoption of procedures. While it's a valid legal option, its success depends on taxpayers being aware and acting quickly. The process is largely digital through the TRACES portal, aiming for speed, but mistakes in paperwork or processing delays can still cause problems. Adapting to the Income Tax Act, 2025, requires familiarity with updated forms and sections, highlighting the importance of current knowledge. Buyers also have responsibilities: when purchasing from NRIs, they need a Tax Deduction and Information Number (TAN) to deposit TDS under Section 195, unlike the PAN used for resident transactions. If buyers don't comply, they face penalties and interest, adding complexity for all parties involved in NRI property deals.
Looking Ahead: Digital Compliance and NRI Growth
Indian tax authorities are promoting digital compliance, using platforms like TRACES for Form 128 to improve the taxpayer experience and avoid unnecessary capital delays. As NRIs increasingly engage with India's real estate and financial markets, driven by economic prospects and connections, the use and awareness of provisions like Form 128 are set to rise. Legally reducing excessive TDS by applying for Form 128 on time makes it a vital tool for NRIs managing their finances and capital in India.