Buying property in India as an NRI — what FEMA allows and which TDS section applies

Under FEMA, an NRI or OCI can buy property in India about as freely as a resident, with one clear carve-out. Residential property and commercial property are open — a flat, a house, an office, a shop, as many as you like. What you cannot buy is land used for farming: agricultural land, a farmhouse or a plantation. That restriction holds even for an OCI, and it applies to purchase, not to inheritance — agricultural land that comes to you through a will or succession is a separate matter and can be held.

The practical risk is a property described loosely as "residential" that is in fact on land classified as agricultural, or a farmhouse plot. Because the bar is on the land's classification rather than what is built on it, it is worth confirming the land use on the title and revenue records before you commit, not after.

FEMA is equally clear on funding. The purchase price has to be paid in Indian rupees, through normal banking channels, from one of a short list of sources: money already in your NRE, NRO or FCNR account, or a fresh inward remittance from abroad. You cannot pay a seller in foreign currency, in cash, or out of an overseas account directly.

Keeping the payment trail clean matters beyond the purchase itself. When you later sell the property and want to take the proceeds out of India, the bank and your CA will look back at how it was originally funded. A purchase paid cleanly from NRE funds or inward remittance keeps your later repatriation simple; money that went in untraceably tends to surface as a problem at exit. So the source of every tranche — booking amount, instalments, final payment — is worth documenting as you go.

Every buyer of property above ₹50 lakh has to deduct tax before paying the seller. Which section applies, and how much you deduct, depends only on whether the seller is a resident or a non-resident — and this is where buyers most often go wrong.

If the seller is a resident, you deduct a flat 1% under Section 194-IA on the sale value, pay it using a simple challan-cum-statement, and you do not even need a TAN. It is a light-touch obligation.

If the seller is an NRI, Section 194-IA does not apply at all. You deduct under Section 195 on the full sale value by default, at the capital-gains rate (long-term and short-term differ, plus surcharge and cess), and you have to take a TAN and file a quarterly Form 27Q. The deduction comes down to the seller's actual gain only if the seller gives you a Form 13 (Section 197) lower-deduction certificate — until then it is on the gross consideration. The deduction is far heavier and the compliance is real.

The danger is treating an NRI seller as a resident — deducting just 1% when far more was due. The shortfall, plus interest, is recovered from you, the buyer, not the seller who has already left with the money. Confirming the seller's residential status before you pay is the cheapest insurance there is.

Arjun, an NRI in Singapore, is buying a flat in Hyderabad for ₹1.2 crore. The same purchase plays out two ways depending on who he is buying from.

If the seller is a resident, Arjun deducts 1% — ₹1.2 lakh — under Section 194-IA, deposits it with a challan-cum-statement, gives the seller the TDS certificate, and the deal closes. No TAN, no return to file.

If the seller is an NRI, the rule changes entirely. Section 194-IA is off the table; Arjun deducts under Section 195 on the full ₹1.2 crore sale value, at the long- or short-term capital-gains rate plus surcharge and cess — a much larger figure than ₹1.2 lakh. He has to apply for a TAN before he can deposit the tax, and then file Form 27Q for the quarter. If Arjun had simply deducted 1% as though the seller were resident, the unpaid balance plus interest would come back to him as the buyer's liability long after the NRI seller had been paid in full.

The seller, if they expect their actual tax to be lower than TDS on the gross value, can apply for a lower-TDS certificate (Form 13, Section 197) before the sale — which brings Arjun's deduction down to the gain the certificate specifies. But that is the seller's step to take; Arjun's job is to deduct correctly under the right section for whoever is on the other side.

It's worth being precise about where the FEMA line sits, because property is often marketed to NRIs in language that blurs it. The freedom is wide on one side and absolute on the other. A flat, an independent house, a villa, a residential plot, an office, a shop, a warehouse — all of that is open to an NRI or an OCI to buy, in any number, with no prior approval and no special filing. There is no ceiling on how much residential or commercial property you can hold.

The closed side is short but firm: agricultural land, a farmhouse, and a plantation (a tea, coffee or rubber estate). An NRI or OCI cannot buy any of these, and the rule reads the same whether you hold an Indian passport as an NRI or a foreign one as an OCI. Buying one anyway isn't a paperwork slip — the transaction can be treated as void, and the Enforcement Directorate can act under FEMA, with penalties that can run to several times the amount involved and even confiscation of the land.

The one door that stays open on the closed side is inheritance. Agricultural land, a farmhouse or a plantation can come to you through a will or succession and be held — what you cannot do is go out and purchase it. The trap, then, is a deal dressed up as residential that sits on land still classified as agricultural, so the safe move is to read the land use off the title and revenue records before you sign, not to take the brochure's word for it.

FEMA cares not just about what you buy but about how the money reaches the seller, and the permitted routes are narrow on purpose. The price has to be paid in Indian rupees, through normal banking channels, from one of these sources: funds already sitting in your NRE, NRO or FCNR account, or a fresh inward remittance wired from abroad. That's the whole list. You cannot hand over foreign currency, you cannot pay in cash, and you cannot pay a seller directly out of an overseas account.

The reason to take this seriously isn't only the rule itself — it's what happens years later when you sell. When you eventually want to take the sale proceeds out of India, the bank and your CA trace back how the property was originally paid for. A purchase funded cleanly from NRE money or a clearly documented inward remittance keeps that repatriation straightforward, because the foreign-source money can be shown to have come in and gone back out. Money that went in through an untraceable route tends to resurface as a problem precisely at the point you want your cash abroad.

What makes this manageable is treating it as you go rather than reconstructing it afterwards. Each payment — the booking amount, every instalment, the final tranche — should be tied to a specific account and, for a remittance, the right purpose code, so the source of every rupee is on record from day one.

An under-construction flat is usually paid for in stages — a booking amount, then instalments tied to construction milestones — and the TDS rule has to be applied stage by stage rather than once at the end. Where the builder is a resident (which most Indian developers are), the deduction is the familiar 1% under Section 194-IA, but how the ₹50 lakh threshold works trips people up.

The threshold is judged on the total agreement value of the flat, not on any single instalment. So a ₹90 lakh flat is over the line from the start, even though no individual instalment is anywhere near ₹50 lakh. Once the total crosses ₹50 lakh, you deduct 1% on every payment you make to the builder — including the booking amount — as and when you pay it. You don't wait until the cumulative total has reached ₹50 lakh and you don't skip the early instalments.

Each instalment is its own deduction with its own paperwork: 1% comes off that payment, and a Form 26QB challan-cum-statement is filed for it within 30 days of the end of the month in which you paid. Over a multi-year build that means several Form 26QB filings, one per instalment, against the same property and seller. If the developer is instead a non-resident, none of this applies — the payments fall under Section 195 rather than 194-IA, which changes the rate and brings in the TAN and Form 27Q obligations covered above.

Every property has a stamp-duty value — the circle-rate or ready-reckoner figure the state uses to charge stamp duty. If you buy for less than that figure, the tax law can treat the discount as income in your hands, even though you never received any cash. This is Section 56(2)(x), and it lands on you as the buyer, taxed as income from other sources.

There is a tolerance built in, so a small gap is fine. The provision only bites where the shortfall — the stamp-duty value minus the price you actually paid — is more than the higher of ₹50,000 or 10% of the consideration. Stay inside that 10% band and nothing is added. Cross it, and the whole excess of the stamp-duty value over your price is treated as your taxable income, not just the part beyond the tolerance.

A quick illustration. If a flat's circle-rate value is ₹1 crore and you pay ₹95 lakh, the ₹5 lakh gap is within 10%, so there's no addition. Pay ₹80 lakh for the same flat and the ₹20 lakh gap is well outside the band — that ₹20 lakh can be taxed in your hands. The same undervaluation can separately raise a capital-gains question for the seller, so a price that looks like a bargain on paper can carry tax on both sides of the deal. Before treating a below-circle-rate price as a clean saving, it's worth pricing in this exposure — or checking whether the circle rate itself is genuinely out of step with the market, which is a recognised ground to contest the addition.