There is considerable confusion among buyers and NRIs about whether Tax Collected at Source (TCS) applies when a resident in India pays an NRI for purchase of property, especially when the payment is made into the NRI’s NRO account. This article explains, in clear terms, why TCS does not apply in such a case, and what the correct tax mechanism is.
What Is TCS Under Section 206C(1G)?
TCS under section 206C(1G) of the Income-tax Act is triggered primarily in two situations:
1. When an authorised dealer (bank) remits money outside India under the Liberalised Remittance Scheme (LRS) for a resident, above specified limits.
When a seller of an overseas tour package receives money from a buyer.
In both cases, the focus is on outward remittance or overseas tour packages, not on routine domestic payments between two Indian bank accounts
The Scenario: Resident Buyer Paying NRI Seller
In the situation under discussion:
- The payer is a resident in India (buyer of the property).
- The payee is an NRI (seller of the property).
- The funds are being credited into the NRI’s NRO account with an Indian bank.
- The nature of the payment is sale consideration for purchase of immovable property situated in India.
This is a domestic transaction within the Indian banking system. No foreign remittance is taking place at the point when the resident pays the NRI’s NRO account
Is TCS Applicable in This Case?
On the above facts, TCS under section 206C(1G) is not attracted because:
- There is no outward remittance under LRS by a resident to a foreign account.
- There is no sale of an overseas tour package.
The resident is simply making payment in India to an NRI’s NRO account. Therefore, TCS is not applicable on such a payment
What Does Apply? TDS Under Section 195
Even though TCS is not applicable, this transaction is not tax-free from a withholding perspective. When a resident purchases property from an NRI, the relevant provision is section 195 of the Income-tax Act
Key points under section 195 are:
- The resident buyer is required to deduct tax at source on the sale consideration payable to the NRI seller.
- The applicable rate depends on whether the capital gain in the hands of the NRI is short-term or long-term, and on any lower/NIL deduction certificate obtained under section 197
- The common 1% TDS under section 194-IA applies only to resident-to-resident property transactions and is not applicable when the seller is an NRI.
In practice, this means the buyer must calculate or obtain professional assistance to determine the appropriate TDS under section 195, deduct that TDS from the consideration, pay the net amount to the NRI’s NRO account, and deposit the TDS with the government followed by filing Form 27Q and issuing Form 16A.
What Happens Later When the NRI Repatriates Funds?
A separate leg of the transaction arises if the NRI later wishes to repatriate the sale proceeds (after tax) from the NRO account to an overseas bank account.
At that stage:
- The repatriation is governed by FEMA and RBI rules.
- Banks typically require Form 15CA/15CB and supporting documents (sale deed, tax computation, proof of TDS, tax returns where relevant).
- The remittance is treated as an NRI’s own eligible repatriation, not as a resident’s outward remittance under LRS.
- This subsequent repatriation is distinct from the original payment made by the resident buyer and should not be confused with TCS under section 206C(1G).
Common Mistakes and Misconceptions
Some frequent errors seen in practice include:
- Assuming that any large payment involving an NRI automatically triggers TCS
- Applying 1% TDS under section 194-IA even when the seller is an NRI
- gnoring the need for a lower TDS certificate where the actual capital gains are much lower than the sale consideration, leading to excessive tax deduction and cash flow issues for the NRI
Clarifying the distinction between TCS and TDS, and between domestic payments and foreign remittances, is crucial for correctly handling these transactions.
Practical Checklist for a Resident Buying Property from an NRI
Before making payment to an NRI seller’s NRO account, a resident buyer should:
- Confirm that the seller is indeed an NRI for income tax purposes.
- Obtain details of the capital gains position (short-term vs long-term) and consider whether a lower TDS certificate under section 197 is required.
- Deduct TDS under section 195 at the appropriate rate from the sale consideration
- Deposit the TDS within the prescribed timeline and file Form 27Q.
- Issue Form 16A TDS certificate to the NRI seller
TCS under section 206C(1G) does not form part of this workflow where the payment is in India to an NRO account.
Key Takeaway
When a resident in India makes payment to an NRI’s NRO account towards purchase of immovable property situated in India, Tax Collected at Source (TCS) under section 206C(1G) is not applicable, because the transaction is neither an outward LRS remittance nor an overseas tour package payment. However, the resident buyer must comply with Tax Deducted at Source (TDS) obligations under section 195, including correct rate determination, timely deposit, and appropriate reporting.
Getting this distinction right protects both the resident buyer and the NRI seller from avoidable notices, cash flow problems, and non-compliance exposure.
FAQs
Q1. Does TCS apply when a resident pays an NRI for property via an NRO account? No. TCS under Section 206C(1G) is not applicable in this case. It is only triggered for outward remittances under the Liberalised Remittance Scheme (LRS) or overseas tour package payments — neither of which applies here.
Q2. Which tax provision applies when a resident buys property from an NRI? Section 195 of the Income Tax Act applies. The resident buyer must deduct TDS from the sale consideration at the applicable rate before paying the NRI seller.
Q3. Can a resident buyer use Section 194-IA (1% TDS) when purchasing property from an NRI? No. Section 194-IA only applies to resident-to-resident property transactions. When the seller is an NRI, Section 195 must be used instead.
Q4. How is the TDS rate determined under Section 195 for an NRI property sale? The rate depends on whether the capital gain in the NRI’s hands is short-term or long-term. A lower or NIL deduction certificate under Section 197 can also be obtained to reduce the TDS rate if the actual gains are lower than the sale price.
Q5. What forms does the resident buyer need to file after deducting TDS? The buyer must deposit the TDS with the government, file Form 27Q, and issue Form 16A as a TDS certificate to the NRI seller.
Q6. Is TCS involved when the NRI later repatriates the sale proceeds? No. When the NRI repatriates funds from their NRO account to an overseas account, that is governed by FEMA/RBI rules and requires Form 15CA/15CB. It is a separate transaction and should not be confused with TCS under Section 206C(1G).
Q7. What are the most common mistakes buyers make in NRI property transactions? The three most common errors are: assuming TCS applies on any large payment to an NRI, incorrectly using Section 194-IA instead of Section 195, and not obtaining a lower TDS certificate — which can cause excess deduction and cash flow issues for the NRI.
Q8. What is an NRO account and why is it relevant here? An NRO (Non-Resident Ordinary) account is an Indian bank account used by NRIs to manage income earned in India. Payments from resident buyers into an NRO account are domestic transactions within the Indian banking system — no foreign remittance occurs at this stage, which is why TCS does not apply.
