Legal Risks of Buying Bangalore Property from NRI Tax Defaulters

What Legal Checks Are Needed When an NRI Seller Has Not Filed Indian Income Tax Returns for Multiple Years in Bangalore?

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

When a non-resident Indian selling a Bangalore flat has not filed Indian income tax returns for one or more years during which they held the property and derived any Indian income – including rental income from the flat if it was rented out – the buyer faces a specific set of legal risks that go beyond the standard TDS obligation for NRI property sellers: the income tax department may have issued or may subsequently issue a notice or attachment order against the NRI’s Indian assets for the unfiled return period, the higher TDS rate applicable to NRI sellers may be insufficient to cover the actual tax liability if the seller’s Indian income was materially underreported, and the lower TDS certificate process through which NRI sellers typically reduce the statutory TDS rate may be unavailable or may raise specific questions about the seller’s compliance history.

What Are the Income Tax Obligations of an NRI Who Owns Property in India?

An NRI who owns property in India has specific Indian income tax obligations regardless of their country of residence. If the property was rented out during the NRI’s period of ownership, the rental income is taxable in India as income from house property – and the NRI must file an Indian income tax return for any year in which their Indian income – including the deemed rental income on a second property left vacant – exceeded the basic exemption threshold. An NRI who held the Bangalore flat as a self-occupied property but had no other Indian income may have been below the filing threshold – but an NRI who rented the flat, received rental income and did not file an Indian return has an outstanding income tax compliance gap.

The capital gain arising on the sale of the flat is also taxable in India – long-term capital gain at 12.5% without indexation for properties held more than two years. The buyer must deduct TDS at 12.5% of the sale consideration when purchasing from an NRI seller under Section 195 of the Income Tax Act – significantly higher than the 1% TDS applicable to resident sellers. If the NRI seller’s actual tax liability on the capital gain is lower than 12.5% of the sale consideration – because of the cost of acquisition reducing the taxable gain – the seller can apply to the income tax department for a lower TDS certificate under Section 197 before the sale.

Table 1: NRI Seller Income Tax Compliance Risks for Buyers

What Are the Buyer’s Specific TDS Obligations When Buying From an NRI Seller?

The buyer of a property from an NRI seller must deduct TDS under Section 195 of the Income Tax Act at the prescribed rate – currently 12.5% of the sale consideration for long-term capital gains on property held more than two years, with surcharge and education cess added for higher consideration amounts. The TDS must be deducted from the payment made to the NRI seller and deposited with the income tax department within seven days of the end of the month in which the payment was made, using Form 27Q. The buyer must then provide the NRI seller with a TDS certificate in Form 16A.

If the NRI seller has obtained a lower TDS certificate under Section 197 from the income tax department – based on a calculation showing that the actual capital gain tax is lower than 12.5% of the sale consideration – the buyer can deduct TDS at the lower rate specified in the certificate. Without a valid Section 197 certificate, the buyer must deduct at the full statutory rate. A buyer who deducts at a lower rate without a valid certificate is personally liable for the shortfall, plus interest and a potential penalty.

How Do I Verify the NRI Seller’s Income Tax Compliance Before Buying?

Step 1: Ask the NRI seller for their Indian PAN card and confirm it is valid and active. An NRI without a PAN cannot be paid the sale proceeds by the buyer in a tax-compliant manner – the buyer’s TDS obligation requires the seller’s PAN.

Step 2: Ask the NRI seller whether the flat was rented out during their ownership. If it was, ask for copies of the ITR filings for the relevant years showing the rental income declaration. A seller who cannot produce ITR filings for years when the flat was rented has a filing gap.

Step 3: Search the TRACES portal (incometax.gov.in) for any income tax demand or attachment notice against the NRI seller’s PAN. A pending demand or attachment on the seller’s PAN is a material risk for the buyer.

Step 4: Confirm whether the NRI seller has applied for or obtained a Section 197 lower TDS certificate for the specific sale. If yes, obtain a copy of the certificate and confirm it covers the specific property and the proposed sale consideration.

Step 5: Have a CA and a property lawyer jointly assess the NRI seller’s income tax compliance position before the sale proceeds – the CA advises on the TDS calculation and the lower certificate process, and the property lawyer assesses the title risk from any outstanding tax demand.

Table 2: NRI Seller Income Tax Compliance Documentation Checklist

Frequently Asked Questions

Q1. What TDS rate applies when buying property from an NRI seller in Bangalore?

When buying property from an NRI seller, the buyer must deduct TDS under Section 195 of the Income Tax Act at 12.5% of the sale consideration for long-term capital gains on property held more than two years, plus applicable surcharge and education cess. For short-term capital gains on property held two years or less, the rate is 30% plus surcharge and cess. If the NRI has a Section 197 lower TDS certificate from the income tax department, the buyer can deduct at the lower rate specified in the certificate.

Q2. Why is the TDS rate so much higher for NRI sellers compared to resident sellers?

For resident sellers, TDS under Section 194IA is 1% of the sale consideration – a withholding that is broadly equivalent to the approximate tax on a typical capital gain. For NRI sellers, the statutory TDS rate under Section 195 is set at the full capital gains tax rate – 12.5% or 30% – because the income tax department cannot easily collect tax from a non-resident who leaves India after the sale. The higher TDS rate ensures the tax is collected at source before the sale proceeds are remitted abroad.

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

A Section 197 lower TDS certificate is an order from the income tax department specifying a lower TDS rate for a specific transaction, based on the assessee’s actual estimated tax liability being lower than the statutory withholding rate. An NRI seller whose actual capital gain tax is materially lower than 12.5% of the sale consideration – because of a high cost of acquisition reducing the taxable gain – can apply under Section 197 to the income tax department for a certificate specifying the lower rate. The certificate is specific to the transaction – it names the buyer, the property and the proposed sale consideration.

Q4. What happens if the buyer deducts TDS at the wrong rate for an NRI seller?

A buyer who deducts TDS at the resident seller rate of 1% when the seller is an NRI – or who deducts at a lower rate without a valid Section 197 certificate – is personally liable for the shortfall in TDS. The income tax department can raise a demand against the buyer for the uncollected TDS amount plus interest at 1.5% per month from the date of deduction and a penalty of up to the uncollected amount. This personal liability of the buyer for the seller’s TDS is one of the most significant financial risks in NRI property purchases.

Q5. Can the income tax department attach a property after it has been sold to a new buyer?

The income tax department’s power to attach assets is exercised against the taxpayer who owes the tax – the NRI seller. An attachment issued against the NRI seller’s assets before the sale is registered will appear in the EC and prevent registration. An attachment issued after the sale is registered is more complex – the buyer who has a registered title has a stronger position against the attachment than a buyer who has not yet registered. However, in certain circumstances, particularly where the sale was made with knowledge of the pending tax liability, the income tax department may pursue the property in the buyer’s hands.

Q6. Does the NRI seller’s unfiled ITR affect the buyer’s title?

An NRI seller’s unfiled ITR does not in itself create a title defect – the seller’s title to the property is established by the registered documents and the EC, not by their income tax compliance history. However, the unfiled ITR creates a risk of a future income tax demand that could result in an attachment of the seller’s Indian assets – including, potentially, a claim against the property if the attachment was issued before the sale was completed and registered. The risk is low if the sale proceeds lawfully and the TDS is correctly deducted and deposited.

Q7. What is Form 27Q and why is it required for NRI property purchases?

Form 27Q is the TDS return that a buyer must file with the income tax department after deducting TDS from payments made to non-resident payees – including NRI property sellers. The buyer must file Form 27Q quarterly with the income tax department and must provide the NRI seller with a TDS certificate in Form 16A. Filing Form 27Q is a legal obligation of the buyer – failure to file or late filing attracts a penalty. The buyer should engage a CA to handle the Form 27Q filing for every NRI property purchase.

Q8. Can an NRI seller remit the sale proceeds abroad after paying the TDS?

Yes – an NRI seller can remit the net sale proceeds – after TDS deduction – to their foreign bank account through the NRE or NRO account route, subject to FEMA regulations on repatriation of sale proceeds. The annual repatriation limit for sale proceeds of immovable property is currently capped under RBI guidelines – the NRI should confirm the current limit with their bank before remitting the full amount in a single year if the proceeds are large. An e-FIRC is issued by the bank to document the outward remittance for the NRI’s records.

Q9. What if the NRI seller claims they had no Indian income during the ownership period?

An NRI seller who genuinely had no Indian income during the ownership period – no rental income, no interest on Indian bank accounts above the exemption and no other Indian source income – may have had no Indian income tax filing obligation. The buyer should still confirm this position with a CA before accepting the seller’s representation. If the flat was vacant throughout the NRI’s ownership period, the deemed rental income provisions under the Income Tax Act should be assessed for any obligation. An ITR filing even for a nil return is sometimes advisable to confirm the compliance position.

Q10. How does Legal Brigade handle the tax compliance assessment for NRI seller purchases?

Legal Brigade works with a CA on all NRI seller purchases to assess the TDS obligation, confirm the correct TDS rate, review any Section 197 lower TDS certificate, check the TRACES portal for outstanding demands against the seller’s PAN and confirm the EC is clear of any income tax attachment. Legal Brigade advises the buyer on the complete TDS compliance process – from deduction through Form 27Q filing to Form 16A issuance – as part of the NRI seller property purchase engagement.

Buying a flat in Bangalore from an NRI seller and uncertain about your TDS obligations or the seller’s Indian tax compliance?

The Section 197 certificate check and the TRACES demand search protect you from personal TDS liability.

WhatsApp → wa.me/8497029999

Frequently Asked Questions