TDS u/s 195 is deducted only to ensure capital gain tax compliance.

2) case of sale of property by NRI, it is mandatory for buyer to deduct 20.66% TDS on the sale price of the property if capital gain is long term capital gain.

3) NRI is liable to pay Capital Gain Tax only on the Capital Gain arising out of sale of the property but unfortunately TDS is deducted on the total Sale Value of the property. If there are no GAINS from the sale of property and actually NRI incur LOSS from the sale of the property if TDS refund is not claimed. As a result, NRI has to go through the process of claiming TDS refund from Income Tax Department.

Selling of property by NRI is taxable under u/s 195 of the Income Tax Act, 1961.

TDS of 1% u/s 194IA is not applicable if seller is NRI. TDS u/s 194IA is only applicable for resident Indian sellers.

Broadly speaking any NRI selling a property in India, there are 3 main points related to taxation as per income tax act, 1961

Long term capital gain tax will be 22.66% if NRI is selling a property in India after holding it for more than 3 years. In case holding period is less than 3 years then Short Term Capital Gain Tax will be applicable as per income tax slab. In case of short term capital gain, TDS applicable will be 33.99% irrespective of tax slab of the NRI.

Since NRI is staying outside India therefore it is very difficult to ensure capital gain tax compliance after the property transaction is completed. In order to ensure compliance, Income Tax Department came out with an innovative idea to ensure that buyer deduct TDS at the time of making payment to NRI seller.

In case of sale of property by NRI, it is mandatory for buyer to deduct 20.66% TDS on the sale price of the property if capital gain is long term capital gain. In case of short term capital gain, TDS will be 33.99% irrespective of income tax slab of NRI.

Now anomaly in this rule is that NRI is liable to pay Capital Gain Tax only on the Capital Gain arising out of sale of the property but unfortunately TDS is deducted on the total Sale Value of the property. Therefore in most of the cases there are no GAINS as such from the sale of property and actually NRI incur LOSS from the sale of the property if TDS refund is not claimed. As a result, NRI has to go through the process of claiming TDS refund from Income Tax Department.

NRIs can plan to to re-invest the capital gain from sale of property to save capital gain tax. Long term Capital Gain can be invested in either property or tax exempt bonds to save long term capital gain tax. In such cases, NRI can apply for Tax Exemption Certificate from Income Tax Department under section 195 of the income tax act, 1961.