The Three-Law Problem
When a Non-Resident Indian (NRI) sells immovable property in India, the transaction is governed simultaneously by: (1) the Income Tax Act 1961 — for computation and payment of capital gains tax and TDS obligations; (2) the Foreign Exchange Management Act 1999 (FEMA) — for permissibility of the transaction and the method of receiving sale proceeds; and (3) RBI Guidelines — for repatriation of the proceeds outside India.
Most NRIs focus only on the income tax aspect and overlook the FEMA and repatriation compliance, leading to complications when they want to transfer the money to their country of residence.
An NRI can sell residential and commercial property in India to a resident Indian without prior RBI approval. Sale to another NRI/PIO also generally permitted. Sale to a foreign national (non-NRI, non-PIO) requires prior RBI approval except in limited circumstances.
Income Tax — TDS by the Buyer
The most important income tax compliance for an NRI property sale is TDS under Section 195. Unlike resident sellers (where TDS is 1% of consideration above ₹50 lakh), the buyer of an NRI's property must deduct TDS at the applicable capital gains rate:
- Long-term capital gains (property held >24 months): TDS at 12.5% of the full sale consideration (not just the gain), plus applicable surcharge and cess
- Short-term capital gains: TDS at 30% of sale consideration (slab rate for NRI) plus surcharge and cess
Critical: TDS is on the gross sale consideration, not just the gain. On a ₹1 crore property, the buyer deducts ₹12.5 lakh+ as TDS even if the NRI's actual LTCG is only ₹20 lakh. The NRI then files an ITR to claim a refund of excess TDS — a process that takes 6–18 months.
Lower TDS Certificate — Section 197
To avoid the cash flow impact of excess TDS, the NRI can apply for a Lower TDS Certificate (LDTC) under Section 197 before the sale. The LDTC authorises the buyer to deduct TDS at the actual rate applicable on the estimated LTCG, rather than on the gross consideration. This dramatically reduces the TDS and avoids a large refund claim.
FEMA Compliance
Under FEMA, an NRI can receive the sale proceeds of immovable property through:
- NRO account: The most common route. Sale proceeds are credited to the NRI's NRO (Non-Resident Ordinary) account. TDS is deducted before credit.
- Direct remittance: If the property was purchased with foreign funds or NRE/FCNR funds, a proportionate amount may be repatriated directly.
The number of repatriations from NRO is limited to USD 1 million per financial year per NRI (aggregate of all capital account repatriations). Sale proceeds above this limit require prior RBI approval under the Liberalised Remittance Scheme or a specific application.
Repatriation Process — Step by Step
- Ensure sale proceeds are credited to NRO account after TDS deduction
- Obtain Form 15CA and 15CB from a Chartered Accountant (15CB certifies the nature of remittance and applicable TDS)
- Submit Form 15CA online through the income tax e-filing portal
- Provide the bank with: Form 15CA/15CB, copy of sale deed, TDS payment challans, and PAN card
- Bank remits funds to NRI's foreign account in the applicable foreign currency
| Compliance | Who Does It | Timing | Consequence of Non-Compliance |
|---|---|---|---|
| TDS deduction (Sec 195) | Buyer | At time of payment | Buyer treated as assessee-in-default; demand + 100% penalty |
| Lower TDS Certificate (Sec 197) | NRI (applies) | Before sale closes | If not obtained, full gross TDS deducted; refund wait |
| ITR filing by NRI | NRI | July 31 following FY | TDS refund delayed; interest penalty on tax shortfall |
| Form 15CA / 15CB | CA / Bank | Before remittance | Bank won't process remittance; FEMA violation risk |
| USD 1M repatriation limit | NRI | Per financial year | Excess needs RBI approval; violations attract FEMA penalties |
Special Cases
Agricultural Land
An NRI cannot purchase agricultural land, plantation property, or farm houses in India. If inherited, they can hold it but cannot sell to another NRI — must sell to a resident Indian only.
Inherited Property
Property inherited by an NRI is freely repatriable subject to the USD 1 million annual limit and provided the property was not acquired in violation of FEMA/FERA.