The 1% rule you were expecting doesn't apply to you
Almost every buyer of Indian property has heard of the 1% TDS — deduct one per cent on a sale above ₹50 lakh, pay it with a simple form, done. That is Section 194-IA, and it is written only for buying from a resident seller. It needs no tax-deduction account number, and the whole thing runs through a single challan-cum-statement.
The instant the seller is a non-resident, that section switches off entirely. Your payment is now a payment to an NRI, and the law treats it like any other such payment: you deduct under Section 195. This is not a slightly different version of the 1% rule — it is a separate, heavier obligation with its own paperwork, and the duty sits squarely on you as the buyer.
| If the seller is… | Section | What you deduct on |
|---|---|---|
| Resident | 194-IA | 1% of the sale value |
| NRI | 195 | The capital-gains rate on the sale value |
Your own status doesn't move this line. A resident buyer and an NRI buyer have exactly the same Section 195 duty when the person they are buying from is an NRI. What decides everything is the seller's residential status — which is why confirming it on evidence, before you pay a rupee, is the first thing to do.
What Section 195 actually asks of you as the buyer
Section 195 turns you into a tax deductor, and there are five things you have to do — none of which a 1% buyer ever touches.
First, you take a TAN, a tax-deduction account number in your own name; you cannot deposit Section 195 tax without one, and where there are joint buyers each buyer needs their own. Second, you deduct on the full sale consideration at the seller's capital-gains rate — for a long-term sale the base rate is 12.5%, with surcharge and cess added on top, so the effective figure is higher. Third, you deposit the deducted tax by the 7th of the month after you deduct it. Fourth, you file a quarterly Form 27Q — the return for payments to non-residents; the Form 26QB a 1% buyer uses is for resident sellers only and will not work here. Fifth, you issue the seller a Form 16A, the certificate that lets them claim credit for the tax you cut.
| What you do | The instrument |
|---|---|
| Get a deductor number | TAN |
| Report the deduction | Form 27Q (quarterly) |
| Give the seller proof | Form 16A |
The deduction is on the gross sale price by default — not on the seller's gain — because you, as the buyer, have no way to know or certify what the seller's real gain is. The only thing that brings it down to the gain is a certificate the seller produces, which the next section covers.
When the deduction can come down — the seller's Form 13
Deducting 12.5% (plus surcharge and cess) on the whole sale value usually withholds far more than the seller's actual tax, because the tax is really due only on the gain, not the price. The seller knows this, and the law gives them a way to fix it — but it is the seller's step, not yours.
The seller can apply to the tax department, before the sale closes, for a lower-deduction certificate under Section 197 — commonly called a Form 13. The certificate states the correct, much smaller amount you should deduct, based on the seller's computed gain. Once the seller hands you that certificate, you deduct at the certified figure instead of the default gross-value rate.
The order matters for you. Until you are physically holding the certificate, you must deduct at the full Section 195 rate — a seller's verbal assurance that "my gain is small" or "my CA is sorting it out" is not a substitute, and acting on it leaves the shortfall on you. So a well-run deal has the seller's Form 13 in hand before the deed date; if it isn't, you deduct in full and the seller recovers any excess later through their own return.
Get it wrong and the bill is yours, not the seller's
This is the part that catches buyers out. If you under-deduct — most often by treating an NRI seller as a resident and cutting just 1% — the tax department does not chase the seller, who has been paid in full and may be back abroad. It comes to you, the buyer, as the person who was supposed to deduct.
Under Section 201 you can be treated as an assessee-in-default for the tax you failed to deduct, with interest under Section 201(1A) running on it — broadly 1% a month from when the tax should have been deducted, and 1.5% a month where it was deducted but deposited late. There can also be a separate penalty for the failure, and a late Form 27Q carries its own fee. None of this falls on the seller; it falls on the buyer who got the section wrong.
The exposure is real but it is also entirely avoidable, and it isn't meant to frighten you off the purchase. It comes down to two facts settled before you pay: that the seller is an NRI, and that you are therefore deducting under Section 195 — correctly, in full, unless a Form 13 certificate says otherwise.
A worked example: Kavita buys from an NRI seller
Kavita, a resident in Pune, agrees to buy a flat for ₹1.5 crore. Partway through she learns the seller, Mr Rao, has been in Canada for years and is an NRI. Her broker had assumed she would just deduct 1% — ₹1.5 lakh — under the rule everyone knows.
Because Mr Rao is a non-resident, that rule is off the table. Kavita must deduct under Section 195 on the full ₹1.5 crore. For a long-term sale that is 12.5% plus surcharge and cess — well over ₹18 lakh, not ₹1.5 lakh. Before she can deposit it she has to apply for a TAN in her own name, then deposit the tax by the 7th of the next month, file Form 27Q for the quarter, and issue Mr Rao a Form 16A.
Mr Rao's real gain is much smaller than the sale price, so deducting on the gross over-withholds heavily. To avoid that, he applies for a Form 13 certificate (Section 197) before the deed; it directs Kavita to deduct only on his computed gain, a far smaller figure, and she keeps to that. Had Kavita instead followed the broker and cut 1%, the roughly seventeen-lakh shortfall — plus interest under Section 201(1A) — would have been recovered from her, long after Mr Rao had been paid and left. Confirming his status and deducting under the right section was the whole game.