A Professional Guidance Note for NRIs Selling Property in India
I. Executive Summary
A recent judgment by the Delhi High Court in [NRI v. Union of India & Ors., 2025] has redefined how the Indian tax system must balance procedural compliance with substantive justice. An NRI seller faced a ₹46 lakh tax demand because the resident buyer wrongly deposited 20% TDS in Form 26QB—meant for residents—instead of Form 27Q, applicable for non-resident transactions under Section 195. This error led to denial of TDS credit in the NRI’s AIS and ITR, triggering tax, penalty, and repatriation complications. The Court, however, ruled in favour of the NRI, directing the Revenue to rectify the credit and process refund.
This case holds critical compliance lessons and legal implications for NRIs, resident property buyers, and tax professionals.
II. Legal Framework
1. Section 195 – TDS on Payments to Non-Residents
“Any person responsible for paying to a non-resident... shall, at the time of payment, deduct income-tax thereon at the rates in force.”
— Section 195, Income-tax Act, 1961
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Applicability: Any sum (excluding salaries) paid to an NRI taxable under the Act.
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TDS Rate: 20% on capital gains from property (plus surcharge and cess).
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TAN Requirement: Mandatory for buyer to deduct and deposit TDS under Section 195.
2. Section 199 – Credit of TDS
“Any deduction made in accordance with... Chapter XVII shall be treated as a payment of tax on behalf of the person from whose income the deduction was made.”
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Credit is linked to PAN and Form 26AS/AIS.
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Procedural lapses should not override this statutory entitlement.
3. Form 26QB vs 27Q – The Core Error
| Particulars | Form 26QB | Form 27Q |
|---|---|---|
| Section Applicable | 194-IA | 195 |
| Buyer Type | Resident | Resident |
| Seller Type | Resident | Non-Resident (NRI) |
| TDS Rate | 1% | 20% (plus surcharge & cess) |
| TAN Required | Not Required | Mandatory |
| TDS Certificate | Form 16B | Form 16A |
III. The Landmark Case: Facts & Chronology
Case Citation:
[NRI v. Union of India & Ors., Delhi High Court, W.P. (C) 5216/2025, Decided on May 27, 2025]
Summary Timeline:
| Date | Event |
|---|---|
| 1998 | NRI (USA-based) bought a Pune property |
| 2015 | Agreed to sell for ₹2 crore; buyer deducted 20% TDS (~₹18.68 lakh) |
| Oct 2015 | NRI paid advance tax ₹1.91 lakh and repatriated balance |
| Mar 2023 | Notice under Section 148 issued alleging income escaped assessment |
| Mar 2025 | Assessment order demanded ₹46 lakh tax; penalty u/s 270A initiated |
| Mar 2025 | NRI explained TDS deposited under wrong form (26QB instead of 27Q) |
| May 2025 | Delhi HC ordered correction and refund based on tax paid and law |
IV. Key Issues & Legal Interpretation
🔸 1. Substance Over Form
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TDS @20% was deducted and deposited with the government.
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Mistake: Deposit was done in Form 26QB (meant for residents).
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Held: Revenue suffered no loss. Tax liability was discharged.
“A buyer’s procedural error cannot prejudice a compliant NRI seller.”
— Delhi HC, May 2025
🔸 2. Judicial View on SOP vs Statutory Rights
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SOP required buyer’s indemnity and consent to correct the form.
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Court held: Administrative SOP cannot override taxpayer’s statutory right to TDS credit under Section 199.
🔸 3. AIS/26AS Not Reflecting Credit
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Since Form 26QB did not link the TDS to the NRI’s PAN, credit did not reflect.
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The I-T system’s rigidity led to tax demand and penalty—even though funds were with the government.
V. Compliance Advisory for NRIs and Resident Buyers
✅ NRI Seller Compliance Checklist
| Action | Why It Matters |
|---|---|
| Inform buyer you are an NRI | Ensures correct section (195) and form (27Q) |
| Verify TAN availability | Form 27Q requires TAN—not just PAN |
| Insist on Form 27Q and Form 16A | Critical for TDS credit in AIS/26AS |
| Monitor Form 26AS & AIS | Ensure timely credit before ITR filing |
| File ITR within timeline | Claim TDS credit or refund correctly |
| Document everything | Avoid disputes in case of future litigation |
Resident Buyer Responsibilities
| Task | Risk of Non-Compliance |
|---|---|
| Deduct TDS @20% + cess under Sec 195 | Short deduction leads to penalty |
| Use TAN & file Form 27Q | Filing 26QB for NRI seller is invalid |
| Issue Form 16A to seller | Proof of TDS deduction and deposit |
| Correct any filing errors swiftly | Errors in form type can delay seller’s refund for years |
| Cooperate in form correction | Courts may compel you to assist if NRI moves legal route |
VI. Consequences of Procedural Error
| Error | Outcome |
|---|---|
| Filing 26QB instead of 27Q | TDS doesn’t reflect under NRI PAN |
| AIS and 26AS mismatch | TDS credit cannot be claimed in ITR |
| Tax demand under Sec 148 | Treated as income escaping assessment |
| Penalty under Sec 270A | Misreporting of income risk |
| Delay in refund | Even years after TDS deposited |
VII. High Court Decision – Summary of Directions
“Revenue is directed to correct the record and reflect the TDS deposited by the buyers to the petitioner’s credit under the return filed in the Form 26QB with effect from the date, the amount was deposited... compute the amount of refund due... All contrary orders stand set aside.”
— Delhi High Court, May 2025
This ruling upholds:
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Taxpayer’s right to credit under Section 199
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Doctrine of fairness and absence of statutory bar on rectification
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Responsibility of the Revenue to uphold substance over procedure
VIII. Future Compliance & Policy Suggestions
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CBDT Clarification Needed: Permit retrospective mapping of Form 26QB to NRI PAN if TDS is deposited with valid PAN.
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Amendment to TRACES & AIS: Allow automatic re-mapping on submission of affidavit + challan copy.
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TDS Correction Portal: Create an interface for correction of form type errors with NRI consent and buyer indemnity.
IX. Conclusion: Legal & Practical Compass for NRIs
This case sets a precedent in tax administration — affirming that technical lapses should not block legitimate TDS credit, especially when tax is fully deducted and paid. It’s a wake-up call for NRIs and buyers to move beyond mere paperwork and enforce legal clarity at the transaction stage.
“In tax, as in law, intent and evidence must triumph over form.”
By internalizing these lessons and setting clear protocols, NRIs can protect themselves from litigation, wrongful tax demands, and financial stress — while the tax ecosystem moves closer to fair, transparent enforcement.
