GST and TDS Rules for Buying Bangalore Property from NRIs

What GST and TDS Obligations Apply When a Buyer Purchases a Bangalore Flat From an NRI or OCI Seller?

By the Property Law Team | Legal Brigade | Bar Council of Karnataka

When a Bangalore flat buyer purchases a completed flat from an NRI or OCI seller – a flat that has already received its Occupancy Certificate – the transaction does not attract GST because the sale of a completed residential flat is an immovable property transaction outside GST’s scope, but the buyer has a mandatory TDS obligation under Section 195 of the Income Tax Act to deduct tax at the applicable rate on the capital gains element of the payment made to the non-resident seller, obtain a TAN for TDS purposes, deposit the TDS with the IT Department and issue the TDS certificate to the NRI seller – a process significantly more complex than the 1% TDS under Section 194-IA that applies to purchases from resident sellers.

GST on NRI Property Sales – Completed vs Under-Construction

GST applies to under-construction flats – not to completed flats. This rule applies regardless of whether the seller is a resident Indian or an NRI. When an NRI sells a completed Bangalore flat (one that has received its OC), the sale does not attract GST. When an NRI sells an under-construction flat – acting in the capacity of a developer who is selling an allotment during construction – GST at the applicable rate (5% for non-affordable or 1% for affordable) applies, with the NRI-developer being liable for GST registration and remittance.

In practice, most NRI property sales in Bangalore involve completed flats – an NRI who purchased a flat, received possession and the OC, and is now selling. Such a sale has no GST implication. The GST question only arises if the NRI is acting as a developer or if the NRI is reselling an under-construction allotment before the OC is issued. The buyer should confirm the flat’s OC status before assessing the GST position.

The Section 195 TDS Process for Buyers of NRI Property

Section 195 requires the buyer to deduct TDS at the rate applicable to the NRI seller’s capital gains before making any payment to the NRI. The process differs significantly from Section 194-IA (which applies to resident seller purchases): Section 195 TDS is calculated on the capital gains element – not on the total purchase consideration; the rate depends on whether the gains are long-term (12.5%) or short-term (slab rate); and the buyer must obtain a TAN before deducting TDS.

The most important practical tool for managing Section 195 TDS is the NRI seller’s application for a lower TDS certificate under Section 197 from the Income Tax Department. If the NRI’s actual tax liability on the capital gains is less than the Section 195 TDS rate (because of exemptions, deductions or the DTAA rate), the NRI applies to the IT Department for a certificate authorising the buyer to deduct TDS at the lower rate. Without this certificate, the buyer must deduct at the full Section 195 rate – potentially withholding more than the NRI’s actual tax liability.

Step-By-Step TDS Process for a Buyer Purchasing From an NRI Seller

Step 1: Confirm the seller’s NRI or OCI status – obtain a copy of the seller’s passport, the NRI bank account details and a declaration of non-resident status.

Step 2: Obtain a TAN (Tax Deduction and Collection Account Number) from the IT Department if the buyer does not already have one – TAN is required for TDS deposits.

Step 3: Ask the NRI seller to apply for a lower TDS certificate under Section 197 if their actual tax liability is less than the Section 195 rate. Wait for the certificate before completing the purchase.

Step 4: Calculate the TDS on the capital gains element – using the Section 195 rate (or the Section 197 lower rate if a certificate is obtained) and deduct the TDS from the payment to the NRI seller.

Step 5: Deposit the TDS with the IT Department within 30 days and issue Form 16A (TDS certificate) to the NRI seller – the seller uses this to claim the TDS credit against their final tax liability.

Q1. Why is Section 195 TDS more complex than Section 194-IA for resident seller purchases?

Section 194-IA is simple – 1% TDS on the total consideration above Rs 50 lakh regardless of the seller’s actual gain. Section 195 requires the buyer to determine the capital gains element, confirm the holding period (long-term vs short-term) and deduct TDS at the applicable capital gains rate. Section 195 also requires TAN registration and the consideration of DTAA provisions that may reduce the applicable rate.

Q2. What if the buyer does not deduct TDS on an NRI seller purchase?

A buyer who does not deduct TDS under Section 195 from a payment to an NRI seller is in default – the IT Department treats the buyer as an “assessee in default” and can recover the TDS amount from the buyer along with interest and penalty. The buyer’s failure to deduct TDS does not extinguish the NRI’s tax liability – both the buyer (for non-deduction) and the NRI (for the capital gains) face IT Department scrutiny.

Q3. What is the Section 197 lower TDS certificate and how does the NRI obtain it?

The Section 197 lower TDS certificate is an IT Department order specifying a reduced TDS rate for a specific transaction – issued when the taxpayer demonstrates that their actual tax liability is lower than the standard withholding rate. The NRI seller applies to the IT Department’s non-resident circle with the transaction details, the capital gains computation and the DTAA provisions reducing the rate. The IT Department typically processes the application within 30 days.

Q4. Does the DTAA between India and the NRI’s country of residence affect the TDS rate?

Yes – DTAAs between India and the NRI’s country of residence may provide for a lower rate of tax on capital gains than the standard Indian rate. For example, the India-UAE DTAA does not provide for capital gains exemption – UAE-resident NRIs pay Indian capital gains tax at the standard rate. The India-US DTAA provides for capital gains taxation in India. A CA experienced in international tax should advise on the DTAA position.

Q5. Is there a difference in TDS treatment for an OCI seller vs an NRI seller?

Both NRI sellers and OCI sellers are non-residents for Indian income tax purposes – Section 195 TDS applies to both. The capital gains computation, the applicable DTAA and the Section 197 lower certificate process are the same for both. The distinction between NRI and OCI is for FEMA purposes (both have the same FEMA treatment for property transactions); for income tax, both are non-residents.

Q6. What if the NRI seller’s property was inherited – is capital gains computed differently?

For inherited property, the cost of acquisition is the fair market value as on April 1 2001 (if the original owner acquired before this date) or the actual cost to the previous owner. The holding period for determining long-term vs short-term includes the holding period of the previous owner – so an inherited property held by the deceased for many years qualifies for LTCG treatment even if the NRI inherited it recently.

Q7. Can the buyer use the NRI seller’s Section 197 certificate to reduce the TDS below 1%?

Yes – if the Section 197 certificate specifies a TDS rate below 1%, the buyer deducts at the Section 197 rate. A Section 197 certificate that authorises NIL TDS (zero deduction) allows the buyer to pay the full consideration to the NRI seller without any TDS deduction. The NRI seller then manages their capital gains tax liability directly with the IT Department.

Q8. What Form must the buyer use for the NRI seller TDS deposit?

The buyer uses Challan 281 for TDS deposits under Section 195. The TDS is deposited to the non-resident’s account (not the buyer’s own TAN account). The IT Department’s online TDS deposit portal processes Section 195 deposits separately from the standard Section 194-IA deposits. A CA experienced in international tax transactions should assist with the correct deposit procedure.

Q9. Can the sub-registrar refuse to register the sale deed if TDS was not deducted?

The sub-registrar in Karnataka does not independently verify TDS deduction at registration for Section 195. However, the IT Department cross-references property registration data with TDS records – a property registration involving a non-resident seller that is not accompanied by a Section 195 TDS deposit will trigger an IT Department inquiry. The buyer faces assessment as an assessee in default for non-deduction.

Q10. How does Legal Brigade assist buyers purchasing from NRI or OCI sellers?

Legal Brigade confirms the seller’s NRI or OCI status and the completed flat’s OC status (to confirm GST does not apply), advises on the Section 195 TDS calculation and the Section 197 lower certificate process, assists the buyer with TAN registration if needed and coordinates with a CA for the TDS deposit and Form 16A issuance. Legal Brigade also confirms the FEMA repatriation framework for the NRI seller’s sale proceeds.

Buying a Bangalore flat from an NRI or OCI seller and uncertain about the TDS obligation under Section 195 and whether GST applies? Legal Brigade and our CA handle the TDS calculation, the Section 197 lower certificate and the complete compliance process.

WhatsApp → wa.me/8497029999

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