NRIs frequently invest in Indian real estate through builder-buyer agreements where possession or registration may be delayed. This blog explains how such properties are taxed under the Income-tax Act, 1961 (as applicable from AY 2025–26), focusing on capital gains classification and TDS obligations.
1. What Constitutes a Capital Asset?
Under Section 2(14), any right in property is treated as a capital asset. Therefore, even if a property is not registered, rights arising from an allotment letter or builder-buyer agreement are taxable capital assets.
2. Period of Holding – The Most Misunderstood Area
As per Section 2(42A), the holding period begins from the date of allotment or builder-buyer agreement, not from the date of registration or possession. Courts have consistently upheld this principle.
3. Long-Term vs Short-Term Classification
| Situation | What is Transferred | Holding Period Start |
| Sold before possession | Allotment / contractual rights | Allotment date |
| Possession received, not registered | Immovable property (beneficial ownership) | Allotment date |
| Builder cancellation & refund | Relinquishment of rights | Allotment date |
4. Tax Rates Applicable to NRIs
| Type of Gain | Tax Rate | Indexation |
| Long-Term Capital Gain | 12.5% + surcharge + cess | Not available |
| Short-Term Capital Gain | Applicable slab rate | Not applicable |
5. TDS Obligations under Section 195
When an NRI sells property or property rights, the buyer must deduct TDS under Section 195. Legally, TDS is required only on the income component (capital gains). However, buyers often deduct TDS on the gross consideration due to compliance risk.
| Nature of Gain | Effective TDS Range | Reason |
| LTCG | Approx. 13% – 18% | 12.5% tax plus surcharge & cess |
| STCG | Approx. 31% – 36% | Slab rate plus surcharge & cess |
Higher TDS is often applied incorrectly when buyers deduct on gross sale value instead of actual capital gains.
6. Lower / Nil TDS Certificate (Section 197)
NRIs should proactively apply for a lower or nil TDS certificate to ensure that tax is deducted only on the actual capital gains. This significantly improves cash flow and avoids long refund cycles.
7. Key Takeaways for NRIs
- Registration is not a trigger for capital gains taxation
- Allotment date determines holding period
- Under-construction properties are fully taxable capital assets
- Correct TDS planning is critical to avoid excess deduction
