Key Takeaways
- Transition to New Act: The Income Tax Act, 1961 is being replaced by the simplified Income Tax Act, 2025, which will be effective from the financial year 2026-27. The new law aims to streamline compliance, reduce sections by nearly 40%, and replace the "Previous Year" and "Assessment Year" concepts with a simpler "Tax Year".
- TDS on NRI Property Sale: Under the current Section 195, buyers must deduct TDS on the entire sale consideration when purchasing property from an NRI. This often leads to excessive tax deduction, blocking the NRI's funds.
- Form 26AS Remains Critical: Form 26AS will continue to be a crucial document for NRIs, acting as a consolidated annual tax statement. It reflects TDS, advance tax paid, and high-value transactions, helping to verify tax credits before filing returns.
- Relief Through Lower TDS Certificate: The most effective tool for NRIs is to apply for a Lower/Nil TDS Certificate. The application, previously in Form 13, is now made in the new Form 128 under the new Act. This allows the buyer to deduct TDS on the actual capital gains amount rather than the gross sale value.
PART 1: EXECUTIVE SUMMARY
This guide provides a professional overview of the significant shift from the Income Tax Act, 1961, to the new Direct Tax Code, embodied in the Income Tax Act, 2025, effective April 1, 2026. Our focus is on its impact on Non-Resident Indians (NRIs) involved in real estate transactions, specifically concerning Tax Deducted at Source (TDS) verification through Form 26AS.
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The Old Law (1961): Under the Income Tax Act, 1961, the process of TDS on property sales by NRIs was governed by Section 195. This mandated the buyer to deduct TDS at high rates (20% for long-term gains, 30% for short-term gains, plus surcharge and cess) on the entire sale consideration. This often resulted in a significant portion of the NRI's funds being locked as excess tax, which could only be claimed as a refund later. Verification of this TDS credit was done through Form 26AS. To mitigate this, NRIs could apply for a Lower TDS Certificate using Form 13.
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The New Law (2025): The Income Tax Act, 2025, aims to simplify and rationalise the tax framework. While the fundamental principles of NRI taxation on India-sourced income remain, key procedural changes are being implemented. For TDS on property sales, the core mechanism of Section 195 continues, but is now consolidated under new sections. A significant procedural relief is the introduction of Form 128 for applying for a Lower TDS Certificate, replacing the old Form 13. Furthermore, a notable proposal suggests allowing buyers to deposit TDS using their PAN, eliminating the need for them to obtain a separate Tax Deduction Account Number (TAN), which simplifies compliance.
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Who is Impacted: This transition primarily affects NRIs selling immovable property in India. The changes are designed to ease the compliance burden on both the NRI seller and the property buyer. By streamlining the process for obtaining a lower TDS certificate and simplifying the buyer's deposit obligations, the new law aims to improve cash flow for the NRI seller and make the transaction smoother for the buyer.
PART 2: DETAILED TAX ANALYSIS
1. Background for Non-Resident Indians
When an NRI sells a property situated in India, the capital gains arising from the sale are taxable in India. The buyer of the property is legally obligated under Section 195 of the Income Tax Act, 1961, to deduct Tax at Source (TDS) before making the payment to the NRI.
The primary challenge for NRIs has been that the TDS is calculated on the total sale value, not just the capital gains portion. For instance, on a property sold for ₹2 Crore with a capital gain of ₹50 Lakhs, the TDS under the old regime would be calculated on the full ₹2 Crore, leading to an excessive deduction far exceeding the actual tax liability. This locks up a significant amount of the NRI's funds until they file a tax return and claim a refund, a process that can be lengthy.
Form 26AS is the annual tax credit statement that allows the NRI to verify that the TDS deducted by the buyer has been correctly deposited with the government. It is the basis for claiming credit for the taxes paid when filing the income tax return. Any discrepancy between the TDS deducted and the amount reflected in Form 26AS can lead to disputes and delays in processing refunds.
2. Comparison: 1961 Act vs Direct Tax Code 2025
The transition to the Income Tax Act, 2025, is a move towards simplification and ease of compliance. While core taxation principles for NRIs are not drastically altered, the procedural aspects see significant improvements.
| Feature | Income Tax Act, 1961 (Old Law) | Income Tax Act, 2025 (New Law) |
|---|---|---|
| Governing Section for NRI TDS | Section 195 | TDS provisions consolidated into new sections (e.g., Sec 393 for non-salary withholding) for better structure. |
| Basis of TDS Deduction | Gross Sale Consideration (unless a lower TDS certificate is obtained). | Same principle applies, but the process to avoid excess deduction is streamlined. |
| TDS Rate (LTCG) | 20% plus applicable surcharge and cess on the gross sale value. | The base rate remains largely aligned, but proposals have discussed capping surcharges. The key change is the ease of applying TDS on actual gains. |
| Lower TDS Certificate Form | Form 13 filed under Section 197. | New Form 128 replaces Form 13 for applications under the new act. |
| Buyer's Compliance | Buyer required to obtain a Tax Deduction and Collection Account Number (TAN) to deposit TDS. | Proposed simplification allows the buyer to deposit TDS using their PAN, removing the mandatory TAN requirement for such transactions. |
| Tax Year Concept | Uses "Previous Year" (year of earning) and "Assessment Year" (year of filing). | Replaced with a simplified "Tax Year" concept for better clarity. |
| Form 26AS | Acts as an annual tax statement reflecting all tax credits. | Continues to be the primary tool for tax credit verification, integrated with the Annual Information Statement (AIS) for a comprehensive view. |
3. Repatriation & DTAA Implications
Repatriation: The repatriation of sale proceeds by an NRI remains subject to the regulations of the Foreign Exchange Management Act (FEMA). An NRI can remit up to USD 1 million per financial year from their Non-Resident Ordinary (NRO) account, which includes the proceeds from property sales. To facilitate this, NRIs must submit Form 15CA (a declaration) and Form 15CB (a certificate from a Chartered Accountant) to the authorized dealer bank. The issuance of a Lower TDS certificate under the new Act can expedite this process, as it provides clarity on the tax liability.
Double Taxation Avoidance Agreement (DTAA): The DTAA benefits remain intact under the new law. An NRI resident in a country with which India has a DTAA can claim benefits to avoid being taxed in both countries. Form 26AS is a key document for foreign tax authorities to verify taxes paid in India, facilitating claims for foreign tax credits. The streamlined compliance under the 2025 Act is expected to make the documentation process for claiming DTAA relief more straightforward.
4. NRI Action Plan & Documentation
To navigate the new system effectively, NRIs selling property must adopt a proactive approach.
Step-by-Step Action Plan:
- Engage a Tax Professional Early: Begin the process as soon as the sale is contemplated.
- Calculate Estimated Capital Gains: Accurately compute the long-term or short-term capital gains, including the indexed cost of acquisition and improvement. This calculation is the foundation for the Lower TDS application.
- Coordinate with the Buyer: Inform the buyer of their TDS obligations and the plan to apply for a Lower TDS Certificate. Under the new law, confirm if they can use their PAN for TDS deposit, which simplifies their part of the process.
- File Form 128: Submit the application for the Lower TDS Certificate (Form 128) online through the TRACES portal as soon as the Agreement to Sell is finalized.
- Submit Comprehensive Documentation: Provide all required supporting documents with the application to avoid queries from the Assessing Officer.
- Verify TDS in Form 26AS: Once the sale is complete and the buyer deposits the TDS, the NRI must log into their income tax account to view and verify the credit in their Form 26AS.
- File Income Tax Return: File the appropriate Income Tax Return (ITR) to report the capital gains, claim the TDS credit as reflected in Form 26AS, and claim a refund if any excess tax was deducted.
Documentation Checklist for Lower TDS Certificate (Form 128):
- Seller's Documents: PAN Card, Passport copies (to prove NRI status), and Indian tax returns for the last 2-3 years.
- Property Documents: Registered Purchase Deed (of the original acquisition), evidence of any improvement costs, and a signed Agreement to Sell with the current buyer.
- Transaction Details: A detailed capital gains computation sheet.
- Buyer's Details: PAN of the buyer is mandatory. Under the new law, the buyer's TAN might not be needed if the PAN-based deposit system is fully implemented.
5. Conclusion
The transition to the Direct Tax Code, materialized as the Income Tax Act, 2025, marks a pivotal step towards simplifying tax compliance in India. For NRIs selling property, the changes are largely procedural and beneficial. The introduction of Form 128 for lower TDS applications and the potential removal of the buyer's TAN requirement are welcome reliefs that address long-standing hurdles. The role of Form 26AS as the definitive proof of tax credit remains central to the process. Proactive planning, clear communication with the buyer, and meticulous documentation are essential for NRIs to leverage these new, streamlined procedures and ensure a smooth, tax-efficient property sale.
💡 NRI Tax Tip: Managing foreign assets or DTAA? Ensure you are compliant with the updated NRI taxation rules in 2025. </biko_message>