Clerical Error in TDS Form Leads to Rs 46 Lakh Tax Demand for NRI, Delhi High Court Steps In

A non-resident Indian (NRI) based in the United States spent nearly a decade trying to fix a problem that was not his to begin with.

Back in 2015, he sold a property in Pune for Rs 2 crore. The buyer deducted 20 per cent tax at source, Rs 18.68 lakh, as required under Indian tax law for property transactions involving NRIs, and paid the remaining Rs 1.81 crore to the seller. So far, so good.

But the buyer made a small but critical mistake: he deposited the TDS using the wrong form. Instead of using Form 27Q, which is meant for payments made to non-residents, the buyer filed Form 26QB, the form applicable when the seller is an Indian resident.

That one misstep set off a chain of consequences that took years to unravel.

TDS Didn’t Reflect, Tax Credit Denied

Because the form used was incorrect, the Rs 18 lakh deducted at the source did not show up under the NRI’s tax records. Specifically, it wasn’t visible in his Annual Information Statement (AIS) or Form 26AS, which are essential for claiming tax credit.

To make matters worse, the NRI did not file his income tax return that year, assuming the transaction was completed properly. He had even paid Rs 1.91 lakh as advance tax, calculating that amount as the final capital gains tax liability.

Years later, in 2023, the Income Tax Department sent him a notice stating that his income from the sale had escaped assessment. The department claimed he had not paid any tax on the sale and raised a tax demand of Rs 46 lakh, based on the full sale consideration.

Even after the NRI responded, provided his advance tax receipt, and explained the issue, the department proceeded with the assessment and initiated penalty proceedings, arguing that no TDS credit was available under his PAN.

At this point, the buyer was trying to get the error corrected at the bank level, but things were moving slowly. Meanwhile, the NRI was stuck and he could not claim the TDS credit since it was not reflecting, and he was staring at a massive tax demand and penalties on top.

Delhi High Court Weighs In

The NRI finally approached the Delhi High Court, asking for relief. He argued that he had complied with the law, paid the correct tax amount, and that the TDS had indeed been deducted and deposited just not appropriately reflected due to the buyer’s filing error.

In its order dated May 27, 2025, the court sided with the NRI.

It directed the tax officials to update its records to show the TDS amount under the NRI’s PAN, effective from the original date of deposit. The court also asked the department to calculate the correct refund due to the NRI and treat all conflicting notices and orders as set aside.

However, it is also important to understand why did this happen?

According to procedures, when a buyer deducts TDS from a non-resident seller, the form must be submitted using the buyer’s TAN (Tax Deduction Account Number) through Form 27Q. The issue here was that the buyer used Form 26QB, meant for resident transactions, and linked it only to his own PAN. This meant the tax didn’t register under the seller’s account.

Tax officials argued in court that correcting the error was not ‘straightforward’. As per their Standard Operating Procedure (SOP), they needed documentation from the buyer, including an indemnity bond and consent, before making any changes. They also raised concerns that changing the credit might allow the buyer to claim a refund wrongly.

But the court was clear: the TDS was deducted, deposited, and there was no dispute on that front. The issue was procedural, and should not be allowed to override substance.

What can NRIs learn from this case?

Tax experts say this case is a wake-up call for NRIs selling property in India. Even if the money is right and the tax is paid, filing errors can derail everything.

NRIs should ensure that the buyer:

• Uses Form 27Q, not 26QB

• Has a valid TAN (not just PAN) before deducting TDS

• They receive Form 16A, the official TDS certificate

• They monitor their Form 26AS/AIS to check if the TDS reflects correctly

• They file their ITR, even if tax appears to be settled through TDS and advance tax

The tax law does make it clear that once TDS is deducted and deposited, the credit belongs to the recipient. But as this case shows, ‘how it is filed’ also matters.

Had the buyer used the correct form in this case, the entire legal battle, and nearly a decade of stress that NRI went through could have been avoided.

Now, with the court’s order in hand, the NRI will finally get the tax credit he was always entitled to. But for others, the takeaway is simple: in cross-border property deals, the paperwork matters just as much as the payment.