When NRIs Sell Property, Section 195 Can Alter Liquidity — Especially Under the New Capital Gains Framework

For many NRIs, the sale of immovable property in India appears commercially complete once the deed is registered and consideration is received. Yet from a regulatory standpoint, the most significant financial impact often emerges at that moment — through withholding under Section 195.

Section 195 of the Income-tax Act, 1961 (corresponding provisions under the Income-tax Act, 2025) requires any person making payment to a non-resident of a sum chargeable to tax in India to deduct tax at source at applicable rates.

In property transactions, this obligation falls on the buyer.

Following the amendments introduced by the Finance (No. 2) Act, 2024, long-term capital gains on immovable property transferred on or after 23 July 2024 are taxed as follows:

  • 12.5% without indexation, or

  • 20% with indexation, where the property was acquired before 23 July 2024 and the taxpayer opts for indexation (subject to applicable conditions).

If the property is held for 24 months or less, gains are treated as short-term and taxed at applicable slab rates, which in higher-income cases may reach 30%, plus surcharge and 4% cess.

This dual framework means that long-term capital gains computation now requires an evaluation of which method produces a lower tax outcome — 12.5% without indexation or 20% with indexation (where eligible).

However, Section 195 operates at the stage of payment. The buyer must deduct tax at the applicable rate, and in the absence of a lower deduction certificate under Section 197, withholding is typically applied conservatively.

Let us consider an illustration.

An NRI sells a residential property for Rs 4 crore.

The property was acquired in 2008 for Rs 1.5 crore.

Under the indexation method, the indexed cost may significantly increase (depending on Cost Inflation Index values), thereby reducing the taxable gain. Suppose the indexed cost becomes Rs 2.8 crore. The long-term capital gain would then be Rs 1.2 crore. At 20%, tax would amount to Rs 24 lakh (plus surcharge and cess).

Under the 12.5% method without indexation, the gain would be Rs 2.5 crore (Rs 4 crore minus Rs 1.5 crore), and tax at 12.5% would amount to Rs 31.25 lakh (plus surcharge and cess).

In such a case, indexation clearly produces a lower tax liability.

Now assume the NRI also intends to claim exemption under Section 54. The final tax liability may reduce even further.

Yet unless the position is structured and documented in advance, the buyer may deduct tax at the applicable long-term rate on a conservative basis.

If excess tax is deducted, the only remedy is refund through the income tax return filing process — which may take several months.

The result is not necessarily additional tax — it is temporary liquidity blockage.

In high-value property transactions, this distinction is critical.

The relevant enquiry must extend beyond:

“What is the applicable capital gains rate?”

It must also include:

“Which method applies in my case?”
“Have I evaluated indexation eligibility?”
“Will withholding reflect my projected liability?”
“How much of my sale consideration will be immediately available?”

This is where Section 197 assumes importance.

Section 197 allows a non-resident seller to apply to the Assessing Officer for a certificate authorising deduction of tax at a lower rate or nil rate, based on projected income and estimated tax liability.

The application must be made before execution of the transaction and supported by detailed capital gains computation, acquisition documents, proposed sale agreement and exemption planning evidence where applicable.

If the Assessing Officer is satisfied, a certificate is issued specifying the appropriate withholding rate. The buyer is legally bound to deduct tax in accordance with that certificate.

Section 197 does not reduce tax liability. It aligns withholding with projected liability.

Without such alignment, withholding is mechanical.

With it, liquidity becomes structured.

Under the revised capital gains framework, particularly where acquisition precedes 23 July 2024 and indexation remains beneficial, failure to evaluate both methods can materially alter tax outcome.

In cross-border property transactions, capital gains computation, exemption eligibility and withholding strategy must operate in coordination.

The transaction does not conclude at registration.

It concludes when tax, liquidity and compliance align with expectation.

And that alignment depends on preparation, not assumption.

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