If you are new to income tax and considerding property purchase and don't know about TDS, you are at the right place. Let us know more.
Among the several forms of taxes in India, buyers are also obliged to deduct tax at source (TDS) on the purchase of some properties. Section 194IA of the Income Tax Act, 1961 provides for the deduction of TDS on the purchase of immovable property during the period of the transaction.
This section is valid from June 1, 2013. If the immovable property was acquired before 01.06.2013 but any instalment was paid on or after 01.06.2013, TDS will be required to get deducted subject to fulfilment of other conditions.
Section 194IA of income tax act provides for the deduction of TDS on the purchase of immovable property at the time of the transaction. Until the introduction of section 194IA of the Income Tax Act, 1961, it provided for TDS on the sale of immovable property by a non-resident and compulsory acquisition of immovable properties. The Finance Act, 2013 inducted section 194IA to nab the transaction of purchase of immovable property by a resident taxpayer.
From June 1, 2013, when buyers purchase the immovable property (it can be a building or part of buildings or land excluding agricultural land) priced above Rs. 50,00,000, he has to deduct TDS while paying the vendors. It has been mentioned in Section 194IA of income tax act.
Any person who is a transferee liable to pay (other than a person referred to in section 194LA, relating to compensation in case of compulsory acquisition of property) to a resident transferor any sum as consideration for the transfer of any immovable property land (other than agricultural land) or
Provision Illustrated: 194IA of income tax act describes TDS on any amount as consideration for the transfer of any immovable property shall be deducted from the total amount by the transferee in case the value of the property sold is more than Rs.50 Lakhs.
For example, if the property gets sold is worth Rs 90 lakh, TDS will be deducted from Rs 90 lakh and not Rs 40 lakh. TDS on the property in this case @1% would be Rs.90,000. No surcharges or health and education fees are added to the above rates. So the tax will be deducted at the source at the basic rate. The TDS rate will be 20% in all cases unless PAN is mentioned.
While introducing TDS on immovable property, the finance minister said that immovable property transactions are usually under-reported and undervalued. Almost half of the transactions did not even have the PAN number of the parties concerned.
Thus, to prevent undervaluation and under-reporting of transactions in the real estate sector and systematize the tax provisions and ensure early collection of tax, Section 194IA of income tax act was introduced under the Finance Act, 2013.
Before providing TDS u/s 194IA, the following indicators must be properly examined:
The transferee is responsible for deducting TDS. Moreover, the transferee may be a resident or non-resident. However, the transferor or seller must be a resident. If the seller is a tax non-resident, then TDS under section 194IA of income tax act is not applicable. However, in such a case, TDS has to be deducted under section 195.
Explanation: Mr Singh, a non-resident, sold his building at Nakodar, Punjab to Mr Sharma for a total consideration of ?1.35 million. In such a case, Mr Sharma will make payment to Mr Singh after deducting tax of @20% plus Surcharge and Health & Education Cess @ 4% (from LTCG calculation) under Section 195. Section 194-IA shall not apply where the payment is rendered to a non-resident.
The property is partially financed by a bank/lender. In case the property is partially financed by a bank/lender, the transferee will be required to deduct TDS from the entire consideration amount regardless of the amount of financing.
Under section 194IA of income tax act, "every person who is a transferee…" is required to deduct tax at the source. When the bank has availed of any loan, the bank cannot be a beneficiary even if it provides funds to the buyer. Hence, the buyer will deduct the entire TDS from the amount paid to the seller, and the bank will not be liable for deducting TDS on the payment made on behalf of the buyer.
Section 194IA of income tax act states the following parameters:
TDS under section 194IA of income tax act is to be deducted from the transaction value and not from the value inclusive of applicable taxes. Let us assume a property sells for Rs. 60,00,000 and Rs. 6,00,000 is the GST applicable on it. In this case, TDS u/s 194IA would be deducted from Rs. 60,00,000 and not at Rs. 66,00,000.
The TDS rule came into effect to track sale and purchase transactions in real estate. Because it is a highly speculative market where transactions are done on the cash side and partly through roaster channels.
The buyer should deduct TDS in the following cases, whichever occurs first:
Before buying property, you must consider rates of TDS under Sec 194IA of income tax act
When buying real estate, pay attention to the following points:
The registrar and sub-registrar provide AIR (Annual Information Return) to the tax department. AIR maintains information on the sale and purchase of real estate and its transaction value. So, if the buyer deducts TDS at a different rate or has not deducted TDS or deposited TDS, the tax department will record it.
The buyer will receive a notification from the Income Tax Department about such a delay. Based on the type of default, the buyer will be subject to the following:
The registrar and sub-registrar provide Annual Information Return (AIR) to the Income Tax Department. Such AIR shall contain information regarding the purchase and sale of any immovable property along with its value. So if the buyer does not deduct TDS, deposit TDS, or deduct TDS at a lower rate, the income tax department follows it.
The tax authority will send a notice of such delay to the buyer. Depending on the type of delay, interest on non-payment of TDS, interest on non-payment, penalty, and prosecution will be applicable.
The seller cannot claim a TDS deduction when TDS is deducted but not paid by the buyer. It will increase the seller's tax liability. So sellers must understand the tax provisions, and buyers must comply with them.
Section 194IA of the Income Tax Act deals with the payment of TDS. The Finance Act 2013 formulated this provision to track the purchase of immovable property by resident taxpayers. An individual has to go through the various sections of the Income Tax Act to know about the deductions and tax benefits.
Section 194IA of income tax act, 1961 contains various provisions relating to payments of tax deducted at source (TDS). Within this section, two sub-sections, 194IA and 1941B are of utmost importance. These sub-sections include provisions relating to the deduction of TDS on rent in respect of the payer as well as the recipient or owner of the property.