"The buyer only deducts 1% TDS": What ITA 2025 actually says about NRIs selling ancestral property

A cousin in Bengaluru sold his flat last year, the buyer deducted 1% TDS, and now every NRI in the family WhatsApp group believes the same rule applies to them. It does not. When an NRI sells inherited or ancestral property in India, the buyer must deduct TDS on the entire sale price — not 1%, and not on the gain — under a completely different section of the law. Getting this wrong is the single most expensive mistake NRIs make on an Indian property sale, and it routinely locks up lakhs of rupees for a year or more.

Here is what the law actually says, what it means for your money, and the one certificate that changes everything.

What the law actually says

There are two TDS regimes for property sales in India, and which one applies depends entirely on the residential status of the seller.

When a resident sells property worth ₹50 lakh or more, the buyer deducts 1% TDS under Section 194-IA of the Income-tax Act, 1961 (re-enacted as the corresponding withholding provision under the Income-tax Act, 2025). That is the "1% rule" your relatives keep quoting.

When an NRI sells property, Section 194-IA does not apply at all. Instead, the buyer must deduct TDS under Section 195 of the ITA 1961 (carried into the ITA 2025 with the same substance, only a renumbered section reference). Section 195 requires the buyer to deduct tax on the amount that is chargeable to tax in India. In practice, unless the seller has obtained a certificate authorising a lower deduction, banks and buyers deduct on the gross sale consideration, not on the capital gain.

The rates the buyer must apply are the long-term capital gains rates. Following the July 2024 overhaul that the ITA 2025 preserves, the position is:

• Property acquired (or, for inherited property, acquired by the previous owner) before 23 July 2024: the seller may choose 20% LTCG with indexation or 12.5% without indexation, whichever is lower.
• Property acquired on or after 23 July 2024: 12.5% without indexation, no choice.

On top of the base rate, the buyer adds the applicable surcharge (based on the sale value slab) and 4% health and education cess. On a high-value sale, the effective TDS rate deducted on the gross amount can climb well past 23%.

Crucially, for ancestral or inherited property, the holding period and cost of acquisition are not reset at the date you inherited it. Under Section 49(1) of the ITA 1961 (retained in the ITA 2025), you "step into the shoes" of the previous owner: the cost of acquisition is what the original owner paid, and the holding period includes the period the property was held by the previous owner. This is why inherited property is almost always long-term in the seller's hands — and why the gain, correctly computed, is often far smaller than the gross sale price the buyer is deducting on.

The ITA 2025, in force from 1 April 2026, uses the term "Tax Year" rather than "Previous Year" or "Assessment Year." So the sale you complete in the current period falls in Tax Year 2026-27.

Practical implications for NRIs

Consider a real scenario. You inherit your late father's Chennai house. He bought it in 2001 for ₹15 lakh. You sell it in Tax Year 2026-27 for ₹1.8 crore.

Because you inherited it, your cost base is your father's ₹15 lakh (with indexation available up to 22 July 2024 if you use the 20% route), and the holding period runs from 2001 — clearly long-term. Your actual capital gain, after indexing the cost, might be roughly ₹1.2–1.3 crore, and your actual tax perhaps ₹25–30 lakh.

But the buyer, deducting under Section 195 on the gross ₹1.8 crore at the LTCG rate plus surcharge and cess, will withhold somewhere around ₹40–43 lakh — because a buyer is not entitled to compute your gain for you. That is ₹13–15 lakh more than you actually owe, sitting with the government until you file your return and claim a refund.

Refunds on NRI property sales routinely take 6 to 18 months. That is money you cannot repatriate, cannot reinvest, and cannot use for the exemption reinvestment clock that is already ticking.

The fix is the Lower Deduction Certificate. You apply to the Assessing Officer, who computes your actual gain and issues a certificate directing the buyer to deduct TDS only on the real capital gain (or even nil, in some cases). This was Form 13 under the ITA 1961 and IT Rules 1962; under the IT Rules 2026 read with the ITA 2025, it is now Form 128. The certificate must be obtained before the sale deed is registered and before the buyer pays you — once TDS is deducted at the full rate, your only route is a refund via the return.

The multiple-heir trap

Ancestral property is rarely inherited by one person. Suppose the Chennai house passes to three siblings — you (an NRI) and two brothers who are residents in India. Buyers and even sub-registrars frequently get this wrong by applying a single TDS rule to the whole transaction. The correct treatment is status-by-status, share-by-share: the buyer deducts 1% under Section 194-IA on the two resident brothers' shares, but must deduct under Section 195 on your one-third share alone. Your ₹60 lakh slice of an ₹1.8 crore sale is taxed as an NRI sale; theirs are not.

Two things follow. First, insist that the sale deed and the buyer's TDS filings record each co-owner's share separately, so the buyer can file Form 27Q for your portion and Form 26QB for the resident portions. Second, if you apply for a Form 128 Lower Deduction Certificate, it covers only your share — your resident co-owners do not need one. Mixing these up is a common reason NRI co-owners find their entire proceeds over-deducted.

Surcharge: the number people forget

The headline LTCG rate is only part of the deduction. Surcharge is layered on top based on the total income slab, and on a large property sale it bites: 10% surcharge above ₹50 lakh, 15% above ₹1 crore, with the higher 25% and 37% rates on capital gains capped at 15% under the current framework the ITA 2025 continues. Add 4% cess on the tax-plus-surcharge, and a "12.5%" or "20%" rate quietly becomes an effective withholding of 14–24% of your gain. This is exactly why deducting on the gross sale value, rather than the real gain, produces such a large frozen refund.

Step-by-step: what to do

• Establish your cost base and holding period first. Get the original purchase deed or, for ancestral property, the earliest ownership document showing what the previous owner paid and when. This determines whether you use 20%-with-indexation or 12.5%-without.
• Apply for a Lower Deduction Certificate (Form 128, formerly Form 13) on the TRACES/e-filing portal before you sign the sale agreement. Expect the Assessing Officer to take a few weeks; build this into your timeline.
• Ensure the buyer has a TAN. For an NRI sale under Section 195, the buyer deducts under their Tax Deduction Account Number and files Form 27Q (not the Form 26QB used for resident sales). A buyer who wrongly files under Section 194-IA has created a problem for both of you.
• After deduction, verify the credit in your Form 26AS (now Form 168 under the ITA 2025). The TDS the buyer deducted must appear here before you can claim it in your return.
• Plan your capital-gains exemption reinvestment. Section 54 (reinvest in one residential house) and Section 54EC (invest up to ₹50 lakh in NHAI/REC/PFC bonds within 6 months) — both retained in the ITA 2025 — can reduce or eliminate the gain. Decide this before you sell, because the deadlines run from the date of transfer.
• Repatriate correctly. File Form 15CA (now Form 145 under the ITA 2025) and, where required, Form 15CB (now Form 146, certified by a Chartered Accountant) with your authorised dealer bank. Sale proceeds from an inherited property go through your NRO account and can be repatriated up to USD 1 million per financial year, which is the standard NRO repatriation ceiling.

Closing

Selling ancestral property as an NRI is not a 1% TDS transaction, and treating it as one is how families end up with lakhs frozen in a refund queue. The gain is usually smaller than the deduction, the certificate that fixes it must be filed before the deed is signed, and the form names have all changed under the ITA 2025 — so the checklist your relatives used in 2019 is out of date.

For your specific situation, book a consultation at harunraaj.com.

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See Also

• "Gifts to family in India are always tax-free": What ITA 2025 actually says about NRI gift tax
• "A will alone transfers my parent's Indian assets": What the law actually says for NRI heirs
• NRIs Cannot Freely Invest in All Indian Mutual Funds: The KYC, FATCA, and Category Rules Under ITA 2025

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