Section 195 vs Section 197 — why NRIs are taxed differently in India

Last updated 19 September 2026

Quick Answer

Section 195 requires anyone paying an NRI to deduct tax at source on that payment, generally at a flat rate that ignores the recipient's actual tax position. Section 197 is the escape hatch — it lets the NRI apply, via Form 13, for a certificate fixing the deduction at their real liability instead.

Note: Effective 1 April 2026, Form 13 has been replaced by Form 128, and Section 197 by Section 395, under the Income Tax Act, 2025 (Rule 213, Income Tax Rules 2026). This guide uses the earlier form name since it remains the more widely searched term — the underlying requirement and process are unchanged.

A tenant in Mumbai, an NRI landlord in Sydney

Take a landlord who moved to Sydney years ago and still owns a flat in Mumbai, rented out for ₹40,000 a month. Because the landlord is a non-resident, the tenant is legally required to deduct TDS under Section 195 before paying rent — at the flat rate set for non-residents, regardless of whether the landlord's total Indian income is small enough that this rate massively overshoots their real tax bill. A resident landlord in the same building faces a very different, much lower threshold-based deduction regime under a separate section. That gap is the entire reason Section 197 exists.

What Section 195 actually requires

Section 195 casts a wide net: it applies to 'any person responsible for paying' a non-resident any sum chargeable to tax in India, and requires TDS at the time of payment or credit, whichever is earlier. It doesn't ask the payer to assess the recipient's real tax liability — that's not a reasonable thing to expect from a tenant, a bank, or an ordinary property buyer, so the rates prescribed tend to be conservative (i.e., high) by design. This is the source of the problem for property sales, rent, and NRO interest alike.

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Contrast: how residents are treated

A resident selling property only has 1% TDS deducted under Section 194-IA — a small, fixed figure that isn't meant to approximate the seller's actual capital gains tax. NRIs get no equivalent low fixed rate under Section 195; the deduction is meant to approximate the tax due, which is precisely why it can be so painful when it's computed without knowing the seller's cost of acquisition or exemptions.

Section 197 as the correction mechanism

Section 197 lets the recipient — NRI or resident — apply to the Assessing Officer for a certificate specifying a lower rate, or nil, when the default deduction clearly overshoots the real tax due. It doesn't override Section 195; it operates within it, by giving the payer a document that legally permits them to deduct less. Our property sale guide covers the most common scenario where this comes up in practice, and our documents checklist covers what you'll need to apply.

Frequently Asked Question

Does Section 197 apply to residents too, or only NRIs?

It applies to any taxpayer, resident or non-resident, whose income is subject to TDS at a rate higher than their actual liability. In practice, it's used disproportionately by NRIs because Section 195's default rates for non-residents tend to be higher and less individually calibrated than the deduction rules that apply to residents.

This article is for general information only. For your specific situation, consult a practicing CA.

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