"The buyer only deducts 1% TDS": What ITA 2025 actually says about NRIs selling ancestral property

"The buyer only deducts 1% TDS": What ITA 2025 actually says about NRIs selling ancestral property

A cousin in Bengaluru sold his flat last year, the buyer deducted 1% TDS, and now every NRI in the family WhatsApp group believes the same rule applies to them. It does not. When an NRI sells inherited or ancestral property in India, the buyer must deduct TDS on the entire sale price — not 1%, and not on the gain — under a completely different section of the law. Getting this wrong is the single most expensive mistake NRIs make on an Indian property sale, and it routinely locks up lakhs of rupees for a year or more.

Here is what the law actually says, what it means for your money, and the one certificate that changes everything.

What the law actually says

There are two TDS regimes for property sales in India, and which one applies depends entirely on the residential status of the seller.

When a resident sells property worth ₹50 lakh or more, the buyer deducts 1% TDS under Section 194-IA of the Income-tax Act, 1961 (re-enacted as the corresponding withholding provision under the Income-tax Act, 2025). That is the "1% rule" your relatives keep quoting.

When an NRI sells property, Section 194-IA does not apply at all. Instead, the buyer must deduct TDS under Section 195 of the ITA 1961 (carried into the ITA 2025 with the same substance, only a renumbered section reference). Section 195 requires the buyer to deduct tax on the amount that is chargeable to tax in India. In practice, unless the seller has obtained a certificate authorising a lower deduction, banks and buyers deduct on the gross sale consideration, not on the capital gain.

The rates the buyer must apply are the long-term capital gains rates. Following the July 2024 overhaul that the ITA 2025 preserves, the position is:

• Property acquired (or, for inherited property, acquired by the previous owner) before 23 July 2024: the seller may choose 20% LTCG with indexation or 12.5% without indexation, whichever is lower.
• Property acquired on or after 23 July 2024: 12.5% without indexation, no choice.

On top of the base rate, the buyer adds the applicable surcharge (based on the sale value slab) and 4% health and education cess. On a high-value sale, the effective TDS rate deducted on the gross amount can climb well past 23%.

Crucially, for ancestral or inherited property, the holding period and cost of acquisition are not reset at the date you inherited it. Under Section 49(1) of the ITA 1961 (retained in the ITA 2025), you "step into the shoes" of the previous owner: the cost of acquisition is what the original owner paid, and the holding period includes the period the property was held by the previous owner. This is why inherited property is almost always long-term in the seller's hands — and why the gain, correctly computed, is often far smaller than the gross sale price the buyer is deducting on.

The ITA 2025, in force from 1 April 2026, uses the term "Tax Year" rather than "Previous Year" or "Assessment Year." So the sale you complete in the current period falls in Tax Year 2026-27.

Practical implications for NRIs

Consider a real scenario. You inherit your late father's Chennai house. He bought it in 2001 for ₹15 lakh. You sell it in Tax Year 2026-27 for ₹1.8 crore.

Because you inherited it, your cost base is your father's ₹15 lakh (with indexation available up to 22 July 2024 if you use the 20% route), and the holding period runs from 2001 — clearly long-term. Your actual capital gain, after indexing the cost, might be roughly ₹1.2–1.3 crore, and your actual tax perhaps ₹25–30 lakh.

But the buyer, deducting under Section 195 on the gross ₹1.8 crore at the LTCG rate plus surcharge and cess, will withhold somewhere around ₹40–43 lakh — because a buyer is not entitled to compute your gain for you. That is ₹13–15 lakh more than you actually owe, sitting with the government until you file your return and claim a refund.

Refunds on NRI property sales routinely take 6 to 18 months. That is money you cannot repatriate, cannot reinvest, and cannot use for the exemption reinvestment clock that is already ticking.

The fix is the Lower Deduction Certificate. You apply to the Assessing Officer, who computes your actual gain and issues a certificate directing the buyer to deduct TDS only on the real capital gain (or even nil, in some cases). This was Form 13 under the ITA 1961 and IT Rules 1962; under the IT Rules 2026 read with the ITA 2025, it is now Form 128. The certificate must be obtained before the sale deed is registered and before the buyer pays you — once TDS is deducted at the full rate, your only route is a refund via the return.

The multiple-heir trap

Ancestral property is rarely inherited by one person. Suppose the Chennai house passes to three siblings — you (an NRI) and two brothers who are residents in India. Buyers and even sub-registrars frequently get this wrong by applying a single TDS rule to the whole transaction. The correct treatment is status-by-status, share-by-share: the buyer deducts 1% under Section 194-IA on the two resident brothers' shares, but must deduct under Section 195 on your one-third share alone. Your ₹60 lakh slice of an ₹1.8 crore sale is taxed as an NRI sale; theirs are not.

Two things follow. First, insist that the sale deed and the buyer's TDS filings record each co-owner's share separately, so the buyer can file Form 27Q for your portion and Form 26QB for the resident portions. Second, if you apply for a Form 128 Lower Deduction Certificate, it covers only your share — your resident co-owners do not need one. Mixing these up is a common reason NRI co-owners find their entire proceeds over-deducted.

Surcharge: the number people forget

The headline LTCG rate is only part of the deduction. Surcharge is layered on top based on the total income slab, and on a large property sale it bites: 10% surcharge above ₹50 lakh, 15% above ₹1 crore, with the higher 25% and 37% rates on capital gains capped at 15% under the current framework the ITA 2025 continues. Add 4% cess on the tax-plus-surcharge, and a "12.5%" or "20%" rate quietly becomes an effective withholding of 14–24% of your gain. This is exactly why deducting on the gross sale value, rather than the real gain, produces such a large frozen refund.

Step-by-step: what to do

• Establish your cost base and holding period first. Get the original purchase deed or, for ancestral property, the earliest ownership document showing what the previous owner paid and when. This determines whether you use 20%-with-indexation or 12.5%-without.
• Apply for a Lower Deduction Certificate (Form 128, formerly Form 13) on the TRACES/e-filing portal before you sign the sale agreement. Expect the Assessing Officer to take a few weeks; build this into your timeline.
• Ensure the buyer has a TAN. For an NRI sale under Section 195, the buyer deducts under their Tax Deduction Account Number and files Form 27Q (not the Form 26QB used for resident sales). A buyer who wrongly files under Section 194-IA has created a problem for both of you.
• After deduction, verify the credit in your Form 26AS (now Form 168 under the ITA 2025). The TDS the buyer deducted must appear here before you can claim it in your return.
• Plan your capital-gains exemption reinvestment. Section 54 (reinvest in one residential house) and Section 54EC (invest up to ₹50 lakh in NHAI/REC/PFC bonds within 6 months) — both retained in the ITA 2025 — can reduce or eliminate the gain. Decide this before you sell, because the deadlines run from the date of transfer.
• Repatriate correctly. File Form 15CA (now Form 145 under the ITA 2025) and, where required, Form 15CB (now Form 146, certified by a Chartered Accountant) with your authorised dealer bank. Sale proceeds from an inherited property go through your NRO account and can be repatriated up to USD 1 million per financial year, which is the standard NRO repatriation ceiling.

FAQ

Q: Does the buyer really deduct on the full sale price and not the gain?
Yes — unless you produce a Lower Deduction Certificate (Form 128). Without it, Section 195 deduction defaults to the gross consideration at the LTCG rate plus surcharge and cess. The 1% "on gains isn't even the gain" confusion comes from mixing up Section 194-IA (residents) with Section 195 (NRIs).

Q: I inherited the property — is my cost of acquisition zero?
No. Under Section 49(1), you inherit the previous owner's cost and holding period. Your cost is what the original owner paid, and the holding period includes their years of ownership — which is why inherited property is nearly always taxed as a long-term gain, not a short-term one.

Q: How much can I send abroad after the sale?
Up to USD 1 million per financial year from your NRO account, using Form 15CA (Form 145) and a CA-certified Form 15CB (Form 146). This ceiling covers the aggregate of your NRO repatriations for the year, not just this one sale.

Q: The buyer already deducted at the full rate — can I still recover the excess?
Yes, but only by filing your income tax return for Tax Year 2026-27 and claiming a refund of the excess. Realistically that takes 6–18 months. This is exactly why the Form 128 certificate — obtained before registration — is worth the effort.

Q: Can I avoid the tax entirely by reinvesting?
Often, yes. Section 54 lets you reinvest the gain in one residential house in India (purchase within two years or construct within three) and exempt the corresponding gain. Section 54EC lets you park up to ₹50 lakh in NHAI, REC or PFC bonds within six months of the sale. Both are preserved under the ITA 2025. But the exemption must be planned before you sell — the reinvestment clock starts on the transfer date, and money already locked in a TDS refund queue cannot be reinvested in time.

Q: My buyer wants to deduct 1% because "the property is in India and so am I paying." Is that acceptable?
No. The buyer's own residence is irrelevant. What matters is that you, the seller, are an NRI, which mandates Section 195 and Form 27Q. A buyer who deducts 1% under Section 194-IA and files Form 26QB has under-deducted, and the Income Tax Department can treat them as an assessee-in-default under the ITA 2025 — recovering the shortfall, interest and penalty from the buyer. Protecting the buyer here also protects your clean title.

Closing

Selling ancestral property as an NRI is not a 1% TDS transaction, and treating it as one is how families end up with lakhs frozen in a refund queue. The gain is usually smaller than the deduction, the certificate that fixes it must be filed before the deed is signed, and the form names have all changed under the ITA 2025 — so the checklist your relatives used in 2019 is out of date.

For your specific situation, book a consultation at harunraaj.com.

Need help with this?

Our team handles the paperwork. You focus on your business.