Who Bears the Penalty When TDS Is Not Deducted on NRI Property Sale — Buyer, Seller, or Both?

You found the perfect property. The deal is done. The papers are signed. And then months later, a letter arrives from the Income Tax Department.

Your stomach drops.

It turns out the seller was an NRI — and you, the buyer, never deducted TDS the right way. Maybe you deducted 1% like you do for any regular property purchase. Maybe you skipped it altogether. Either way, the taxman wants answers.

This is one of the most common and expensive mistakes in NRI property transactions. And the worst part? Most buyers don’t even realise they’ve made a mistake until the notice lands.

This blog breaks down exactly who is liable when TDS is not deducted on an NRI property sale, what the consequences look like for both buyer and seller, and what you can actually do if the default has already happened.

First, Why Is TDS on NRI Property Sale Different?

Here’s the thing most buyers don’t know.

When you buy property from a resident Indian, you deduct 1% TDS under Section 194IA. Simple. Standard. Done.

But when the seller is an NRI, the rules change completely. You’re now under Section 195 of the Income Tax Act. And the TDS rates here are not 1%. They range from 20% to 30% or more, depending on whether the gains are short-term or long-term.

Think of it this way. Buying from a resident Indian is like ordering from a local restaurant — you know exactly what you’re getting. Buying from an NRI is like an international order — different rules, different taxes, different process.

The buyer is legally required to deduct TDS before making any payment to the NRI seller. Not after. Before.

Who Is Legally Responsible for Deducting TDS — Buyer or Seller?

Let’s answer this directly, because a lot of confusion exists around this.

The buyer is legally responsible for deducting TDS. Full stop.

Section 195 of the Income Tax Act places the obligation squarely on the person making the payment — which is the buyer. It does not matter what the sale agreement says. It does not matter if the seller assured you they’ll handle the taxes. It does not matter if your lawyer or agent told you otherwise.

The law sees the buyer as the deductor. If TDS is not deducted before the payment reaches the NRI seller, the default belongs to the buyer.

This is the kind of thing that trips people up because the seller is the one earning money from the deal. It feels logical to say “it’s their income, it’s their tax.” But under Section 195, the buyer is the gatekeeper. The government expects the buyer to withhold the tax before it leaves India.

One crisp line to remember: In an NRI property sale, the buyer is primarily liable for TDS non-deduction — but the NRI seller can also face consequences for repatriation issues or misrepresentation of status.

What Happens to the Buyer If TDS Is Not Deducted?

This is where it gets serious.

If you’re the buyer and you didn’t deduct TDS on an NRI property purchase, the Income Tax Department can come after you on multiple fronts. Here’s exactly what that looks like.

1. Treated as “Assessee in Default” under Section 201(1)

The moment you fail to deduct TDS, you become an assessee in default. This is a formal legal status. It means the tax authorities can now recover the unpaid TDS directly from you — even though it was the NRI seller’s income.

2. Interest under Section 201(1A)

Interest kicks in from the date the payment was made. There are two rates:

That interest adds up fast. Imagine you paid Rs. 1 crore to an NRI seller without deducting TDS. The correct TDS could be Rs. 20–30 lakhs. Interest at 1% per month on that amount over 2–3 years? You’re looking at lakhs more on top of the original liability.

3. Penalty under Section 271C

The penalty can equal the entire TDS amount you failed to deduct. So if the TDS was Rs. 25 lakhs — the penalty can also be Rs. 25 lakhs. That’s a potential 2x hit.

4. Prosecution under Section 276B

In serious or repeated cases, criminal prosecution is possible. We’re talking imprisonment between 3 months and 7 years. This is rare, but it is on the table.

What If the Buyer Used Section 194IA (1%) Instead of Section 195?

This is probably the single most common mistake in NRI property transactions.

The buyer thinks it’s a standard deal. Deducts 1% under Section 194IA. Files the TDS. Feels good about it. And then finds out the seller was an NRI all along.

The law treats this as a short deduction. The shortfall — meaning the difference between what you deducted (1%) and what you should have deducted (say, 22.88% or more under Section 195) — is fully recoverable from the buyer. Plus interest. Plus penalty on the shortfall amount.

Here’s the lesson: verify the NRI status of the seller before the deal closes. Ask for their passport copy, overseas address proof, NRO/NRE bank account details, or a declaration of residential status. Don’t assume. Don’t take the seller’s word at face value without documentation.

What Are the Consequences for the NRI Seller?

Now let’s flip to the other side.

The buyer is primarily liable. But does that mean the NRI seller walks away clean? Not always.

Repatriation gets blocked.

This is the big one for NRI sellers. When you sell property in India and want to move that money abroad, you need Form 15CA and 15CB. These forms certify that all taxes have been paid. Banks won’t transfer the funds without them.

If TDS wasn’t deducted properly, the CA cannot honestly certify Form 15CB. Which means Form 15CA can’t be filed. Which means the money sits in India. Blocked. The NRI seller can’t repatriate their own sale proceeds.

Think of it as a traffic barrier on a highway. The money wants to leave India. The forms are the barrier. And without proper TDS compliance, the barrier stays up.

The IT Department can recover tax directly from the NRI seller.

Even if the buyer failed to deduct TDS, the Income Tax Department has the right to go directly after the NRI seller for the capital gains tax owed. The government doesn’t care about your internal arrangements. The tax has to be paid — and if the buyer didn’t withhold it, the seller still owes it.

Misrepresentation leads to much bigger trouble.

If the NRI seller told the buyer they were a resident Indian — and the buyer deducted only 1% under 194IA as a result — the seller is in serious trouble. This is misrepresentation. The IT Department can initiate scrutiny, levy penalties, and in extreme cases, pursue prosecution.

Capital gains notices.

Even without TDS deduction, the IT Department can still send capital gains assessment notices to the NRI seller. They track property registrations. They know the deal happened. If no tax shows up against the NRI’s PAN, a notice usually follows.

Can Both Buyer and Seller Be Penalised at the Same Time?

Yes. Absolutely.

The buyer can be penalised for not deducting TDS. At the same time, the seller can face scrutiny for unpaid capital gains tax or for misrepresenting their residential status.

The Income Tax Department has full authority to go after both parties simultaneously. These are separate obligations. The buyer’s default doesn’t cancel the seller’s liability, and the seller’s non-compliance doesn’t excuse the buyer’s failure to deduct.

This “or both?” part of the question has a very real answer: both. At the same time. Through separate proceedings.

How to Regularise a Past TDS Default on NRI Property Sale

Already made the mistake? Here’s the good news: it can be fixed.

Voluntary compliance before a tax notice is always treated more favourably than responding after a notice arrives. Act now if you know there’s a default.

Step 1: Calculate the correct TDS that should have been deducted.

Get a CA to compute the right TDS under Section 195. This depends on the type of capital gains — short-term or long-term — and the applicable surcharge and cess. Don’t guess this number.

Step 2: Deposit the TDS now, with interest.

Pay the TDS amount through Challan 26QB (for NRI property transactions). Include the interest under Section 201(1A) — 1% per month from the date of payment up to the date of deduction, and 1.5% per month from deduction to deposit. Calculate this carefully. Underpaying interest just creates more problems.

Step 3: File TDS return in Form 27Q.

This is the TDS return form for payments made to non-residents. File it with the correct challan details and seller information. Many buyers don’t even know this form exists — which is part of why defaults go undetected for so long.

Step 4: Respond to any existing IT notice with documentation.

If you’ve already received a notice, don’t ignore it. Gather all the transaction documents — sale deed, payment records, challan receipts, TDS return acknowledgment. A proper response with complete documentation is your best shot at minimising the penalty.

Step 5: Work with a CA who specialises in NRI tax matters.

This is not the time for a generalist. NRI property transactions involve international tax rules, FEMA regulations, and Form 15CA/15CB compliance. You need someone who deals with this regularly.

How Can Buyers and NRI Sellers Avoid This Situation Altogether?

Prevention is always cheaper than the cure. Here’s what both sides should do before closing any NRI property deal.

Verify NRI status before the deal, not after.

Ask the seller for proof of NRI status upfront. Passport copy, visa stamp, overseas address, or NRO/NRE account details. Get a written declaration of residential status. This one step protects you from the 194IA vs 195 mistake.

Apply for a Lower Deduction Certificate if needed.

If the NRI seller believes the actual tax liability is lower than the standard TDS rate, they can apply under Section 197 for a Lower Deduction Certificate using Form 13. This certificate, once issued by the IT Department, allows the buyer to deduct TDS at a reduced rate legally. It’s a clean, legitimate route that avoids over-deduction and still keeps everyone compliant.

Get Form 15CA and 15CB sorted before remitting funds.

These forms are mandatory for international remittances from property sales. A qualified CA certifies the tax computation in Form 15CB. The buyer or seller then files Form 15CA online. Without these, the bank won’t transfer the money abroad.

Don’t rely on assumptions or builder-era advice.

The “just deduct 1%, it’s always been done that way” advice is dangerous in NRI transactions. Property agents, builders, and even some lawyers are not tax experts. Always loop in a CA who understands NRI property transactions specifically.

The team at MostlyNRI regularly guides NRI sellers and their buyers through exactly this kind of situation — from pre-sale planning to TDS compliance to repatriation.

Frequently Asked Questions