When an NRI in Malaysia sells inherited property in India, the buyer must deduct TDS under Section 195 of the Income Tax Act, generally at 20% plus applicable surcharge and cess on long-term capital gains. The India-Malaysia Double Taxation Avoidance Agreement, revised in 2012 and effective from 2013, can provide relief against double taxation on this gain depending on the NRI's Malaysian tax residency and Malaysia's own foreign-sourced income rules, and the NRI can still repatriate net proceeds abroad, up to USD 1 million (or equivalent) per financial year, from an NRO account, subject to Form 15CA/15CB certification.
How capital gains are calculated on inherited property
Under Section 49 of the Income Tax Act, the cost of acquisition for inherited property carries over
from the original owner rather than resetting to the property's value on the date of inheritance, and
the holding period counts from the original owner's date of acquisition -- so most inherited-property
sales qualify for long-term capital gains treatment, with indexation benefit available where
applicable. This computation is identical for an NRI seller based in Malaysia as it would be for one
based anywhere else.
TDS under Section 195 -- why it is higher than for resident sellers
Section 194-IA's 1% TDS applies only to resident sellers. For a non-resident seller, the buyer must
instead deduct TDS under Section 195, generally on the full sale consideration at the capital-gains
rate unless a lower-deduction certificate has been obtained.
Getting a lower or nil TDS certificate (Form 13 / Section 197)
An NRI seller in Malaysia can apply to the jurisdictional Assessing Officer, via Form 13 under
Section 197, for a certificate authorizing TDS at a lower or nil rate based on the actual computed
gain -- worth evaluating with a chartered accountant before the sale closes.
Repatriation of sale proceeds via FEMA
Net sale proceeds are typically credited to the NRI's NRO account in India. FEMA rules permit
repatriation abroad of up to USD 1 million (or equivalent) per financial year, cumulative across
eligible remittances from that account, subject to the authorized dealer bank receiving Form 15CA (and
Form 15CB where applicable) -- this process is the same for an NRI remitting to a Malaysian bank
account as it is for any other destination country.
The India-Malaysia DTAA and Malaysia's foreign-sourced income exemption
India and Malaysia revised their Double Taxation Avoidance Agreement in 2012, effective from 2013,
which governs how this capital gain is treated where both countries could otherwise tax it. Separately,
Malaysia has historically exempted most foreign-sourced income received by resident individuals from
Malaysian tax, though this exemption has been narrowed and is scheduled to expire on 31 December 2026
under Malaysian budget announcements -- an NRI who is also Malaysian tax-resident should confirm the
exemption's status and any conditions applicable at the time of the sale with a Malaysian tax advisor,
since this does not change the Indian TDS or capital-gains obligation described above, only what
Malaysia may separately seek to tax.
Common mistakes in this process
- Assuming the resident 1% TDS rate applies once the seller has become an NRI.
- Not applying for the Section 197 lower-deduction certificate before the sale closes.
- Leaving Form 15CA/15CB paperwork until after proceeds reach the NRO account.
- Assuming Malaysia's foreign-sourced income exemption is permanent or unconditional, without
checking its current scope and scheduled expiry with a Malaysian tax advisor.
