How capital gains are calculated on inherited property
For inherited property, the cost of acquisition is not reset to the property's value on the date of
inheritance — under Section 49 of the Income Tax Act, the cost is carried over from the original owner
who acquired the property, and the holding period is also counted from the original owner's date of
acquisition, not from the date of inheritance. In practice this means most inherited property sales qualify
as long-term capital gains, and the seller is entitled to indexation benefit (adjusting the original cost
for inflation using the Cost Inflation Index) when computing the taxable gain, where applicable under the
provisions in force at the time of sale.
TDS under Section 195 — why it's higher than for resident sellers
Section 194-IA (the 1% TDS most people are familiar with) applies only when the seller is a resident.
When the seller is a non-resident, the buyer must instead deduct TDS under Section 195, and — unless a
lower-deduction certificate has been obtained (see below) — the buyer is required to deduct TDS on the
entire sale consideration at the rate applicable to the capital gain, not just 1%. This is the single most
common source of dispute between NRI sellers and buyers in these transactions, since buyers are often
unfamiliar with Section 195 and mistakenly apply the resident 1% rate, which can expose the buyer to
interest and penalty for short deduction.
Getting a lower or nil TDS certificate (Form 13 / Section 197)
Because Section 195 TDS is otherwise calculated on the full sale value rather than the actual gain, an
NRI seller can apply to the jurisdictional Assessing Officer (via Form 13, under Section 197) for a
certificate authorizing a lower or nil rate of TDS, based on the actual computed capital gain rather than
the gross sale price. This is worth doing whenever the actual gain is meaningfully lower than the full sale
value — which, for inherited property with a low carried-over cost, may not always be the case, but is
worth evaluating with a chartered accountant before the sale closes, not after TDS has already been
deducted.
Repatriation of sale proceeds via FEMA
Sale proceeds (net of TDS) are typically credited to the NRI's NRO (Non-Resident Ordinary) account in
India. From there, FEMA rules permit repatriation abroad of up to USD 1 million per financial year
(cumulative across all eligible remittances from that NRO account, not per-transaction), subject to the
authorized dealer bank receiving Form 15CA (and, where applicable, Form 15CB certified by a chartered
accountant) confirming applicable taxes have been paid or provided for. Banks generally require the
underlying sale documents, PAN details, and the CA certification before processing the remittance, so
this should be planned for as part of the transaction timeline, not as an afterthought once funds have
already landed in the NRO account.
Claiming relief against double taxation in the USA
Because the capital gain is also generally reportable on a US tax return, the India-USA Double Taxation
Avoidance Agreement (DTAA) and the US foreign tax credit provisions allow the NRI to claim credit in the
USA for the tax already paid in India on the same gain, subject to US tax rules on foreign tax credits —
this is a US tax filing matter and should be handled with a US tax professional familiar with foreign
property sales, alongside the Indian-side computation.
Common mistakes in this process
- Assuming the resident 1% TDS rate (Section 194-IA) applies — it does not, once the seller is a
non-resident; Section 195 applies instead, typically at a materially higher effective rate unless a
lower-deduction certificate is obtained.
- Not applying for a Section 197 lower-deduction certificate before the sale closes, resulting in TDS
deducted on the full sale value rather than the actual gain, which then has to be claimed back as a
refund when filing the Indian tax return — a slower and more inconvenient outcome than getting the
certificate in advance.
- Delaying the Form 15CA/15CB paperwork until after the sale proceeds have already reached the NRO
account, which slows down repatriation.
- Not accounting for the carried-over cost-of-acquisition rule, and mistakenly using the property's
value on the date of inheritance as the cost basis.
Do I need a PAN card to sell property in India as an NRI?
Yes. A PAN is mandatory for the transaction and for correct TDS deduction — without it, TDS is deducted
at a significantly higher rate, and the seller will also need it to file the Indian income tax return
reporting the sale.
Can I reinvest the sale proceeds to reduce capital gains tax?
Generally yes, subject to conditions — Section 54 (reinvestment in another residential property in
India) and Section 54EC (investment in specified capital-gains bonds, within the prescribed time limit)
are the commonly used exemptions, but eligibility and limits should be checked against the provisions in
force at the time of the sale with a chartered accountant.
Is the buyer personally responsible if TDS isn't deducted correctly?
Yes. If the buyer fails to deduct TDS under Section 195, or deducts it at the wrong (lower) rate, the
buyer can face interest and penalty consequences from the Income Tax Department — this is precisely why
many buyers are cautious about NRI-seller transactions and why getting the TDS calculation right upfront
matters to both sides.
How long does repatriation typically take after the sale closes?
It depends heavily on how early the Form 15CA/15CB paperwork and CA certification are arranged — banks
generally cannot process the remittance until that documentation, along with the underlying sale deed and
PAN details, is complete, so arranging this in parallel with the sale (rather than after) shortens the
overall timeline meaningfully.
