By CA Surekha S Ahuja
The resident and non-resident families on cross-border inheritance, property taxation and succession planning is a little ticklish. This article reflects the provisions of the Income-tax Act, 2025 applicable from Assessment Year 2026-27. Tax laws may change; readers should verify the latest position from the Income Tax Department’s official portal and consult a qualified tax professional before taking any decision.
Why This Guide Matters
If your family owns property in India and your children are divided between those living in India and those living abroad, you may have a hidden tax planning challenge that many families discover only after the property is sold — when a substantial amount of money gets blocked as TDS.
The Income-tax Act, 2025 (applicable from AY 2026-27) simplified the headline capital gains rate for many property transactions to 12.5%. However, beneath this apparent simplicity lies an important difference:
Resident heirs and NRI heirs are not always taxed in the same manner when they sell inherited or gifted property.
This difference can significantly impact:
- the amount of tax payable,
- cash blocked as TDS,
- ability to reinvest and claim exemption,
- repatriation of sale proceeds,
- and the ultimate wealth transferred to the next generation.
This guide — Part 1 of a two-part series — explains the tax architecture that families must understand before transferring or selling inherited property.
Part 2 will cover the transfer strategy:
- Will vs family settlement vs gift,
- allocating property to one child while compensating another,
- whether joint ownership is beneficial,
- and succession planning strategies for families with resident and NRI heirs.
Who This Guide Is For
This guide is especially relevant for:
- Parents planning transfer of Indian property to children living in India and abroad.
- Families deciding between a Will, gift or family settlement.
- Siblings who have inherited property jointly and are planning a sale.
- NRIs inheriting ancestral or self-acquired property in India.
- Professionals advising families on cross-border inheritance planning.
Quick Answer: How Is NRI Property Sale Taxed in India?
An NRI selling inherited or gifted property in India generally faces:
| Issue | Position |
|---|---|
| Capital gains rate | 12.5% (subject to applicable provisions) |
| Indexation benefit | Not available for NRI sellers under the new framework |
| TDS | Deduction under Section 195 at applicable rates on sale consideration unless lower deduction certificate obtained |
| Lower deduction route | Application through Lower Deduction Certificate process (Form 128 under Income-tax Act, 2025 framework; corresponding to earlier Form 13) |
| DTAA relief | Possible where eligible under the applicable tax treaty |
| Repatriation | Governed separately under FEMA/RBI rules |
The biggest mistake families make is assuming that resident and NRI children will have identical tax consequences merely because they inherit the same property.
They may not.
The Capital Gains Rate Asymmetry: NRIs Do Not Get the Same Choice
For property acquired before 23 July 2024, resident sellers may have a choice between:
- 20% tax with indexation, or
- 12.5% tax without indexation
whichever results in lower tax.
NRI sellers, however, do not enjoy the same flexibility.
| Seller Status | Property Acquired Before 23 July 2024 | Property Acquired On/After 23 July 2024 |
|---|---|---|
| Indian Resident | Choice between 20% with indexation or 12.5% without indexation (whichever is beneficial) | 12.5% without indexation |
| NRI | 12.5% without indexation | 12.5% without indexation |
For older properties, especially properties held for decades where inflation-adjusted cost can substantially reduce taxable gains, indexation can be valuable.
Planning implication:
For resident heirs, the tax rate itself may provide a planning opportunity.
For NRI heirs, the focus shifts to other levers:
- correct determination of cost,
- FMV as on 1 April 2001 where applicable,
- exemption planning,
- DTAA relief,
- and proper TDS management.
The NRI TDS Trap: How Lakhs Can Get Blocked Until Refund
The biggest practical problem for NRI sellers is often not the final tax liability.
It is cash flow blockage due to TDS.
| Seller | Applicable Provision | TDS Position | Practical Impact |
|---|---|---|---|
| Resident seller | Section 194-IA | 1% where applicable (above threshold) | Usually manageable |
| NRI seller | Section 195 | Applicable rate including surcharge and cess, depending on facts | Large amount may be deducted from sale proceeds |
The key difference:
Resident seller TDS is generally linked to sale consideration under the specific property TDS mechanism.
NRI seller TDS under Section 195 applies based on the payment made to the non-resident seller and may require a lower deduction certificate to avoid excessive withholding.
Without a Lower Deduction Certificate, the buyer may deduct tax at the applicable rate on the gross amount payable, even though the actual capital gain may be much lower.
Worked Example: NRI’s Share of Consideration Is ₹90 Lakh
A property inherited by three siblings is sold for:
Total sale consideration: ₹2.70 crore
Each sibling receives:
1/3 share = ₹90 lakh
Assume one sibling is an NRI.
| Scenario | Approximate Tax Deduction |
|---|---|
| Without Lower Deduction Certificate | Around ₹11.7 lakh to ₹13.5 lakh (depending on applicable rate) |
| With Lower Deduction Certificate | Based on estimated actual tax liability |
The difference can result in several lakh rupees remaining blocked until the refund process is completed.
Refunds may take considerable time, affecting:
- investment plans,
- remittance plans,
- and family settlements.
Important Point for Joint Property Sales
In inherited property sales involving multiple heirs:
TDS is calculated separately for each seller based on:
- their residential status,
- amount payable to them,
- and applicable provisions.
A resident sibling selling alongside an NRI sibling does not automatically face NRI TDS treatment.
Each seller must be evaluated separately.
How to Avoid the NRI TDS Trap
An NRI seller should plan the Lower Deduction Certificate process before the sale is completed.
Documents generally required include:
- proposed sale agreement,
- computation of estimated capital gains,
- ownership and inheritance documents,
- passport and foreign address details,
- supporting tax records.
The biggest mistake is applying after the buyer has already deducted the tax.
(Continued in Part 1B: DTAA Relief, Section 54/54F Planning, CGAS Compliance, FMV as on 1 April 2001, FEMA Repatriation, Action Checklist and FAQs.)
