Tax Deducted at Source (TDS) on purchase of property: Section 194IA

Section 194IA of the Income Tax Act in India mandates Tax Deducted at Source (TDS) on the purchase of immovable property. This provision ensures that tax is collected upfront during real estate transactions, making it easier for the government to track tax liabilities.

In a property transaction, the buyer is responsible for deducting and depositing TDS from the total purchase price. This applies to all types of immovable properties, except agricultural land. Buyers must comply with this requirement to ensure both parties fulfill their tax obligations.

TDS rate on the purchase of immovable property – Section 194IA

As per the provisions of Section 194IA, the buyer of the immovable property is required to deduct tax at the rate of 1% of the total consideration paid for the property. 

TDS on sale of property applies irrespective of the nature of the property, whether residential or commercial, as long as the property is not agricultural land. It’s also applicable to a flat and vacant plot.

If the purchase price of the property is Rs. 80 lakh, the tax to be deducted as per section 194IA will be Rs 80 lakh x 1% = Rs. 80,000.

If the seller does not provide a Permanent Account Number (PAN), the TDS rate increases to 20%. This higher rate applies regardless of the transaction amount.

If the seller is not resident in India, the TDS rate on sale of property will change.

Threshold Limit for TDS Deduction under section 194IA

Section 194IA of the Income Tax Act, 1961 mandates the deduction of Tax Deducted at Source (TDS) on the purchase of immovable property (other than agricultural land) where the consideration exceeds Rs. 50 lakh.

TDS under Section 194IA is applicable only when the consideration for the transfer of the immovable property exceeds Rs 50 lakh. If the property price is Rs 50 lakh or below, no tax needs to be deducted under section 194IA.

The provisions of Section 194IA apply only to the purchase of immovable property (e.g., land, buildings) that is not agricultural land.

Agricultural land is exempt from the TDS provisions under section 194IA.

When Should TDS be Deducted?

Under section 194IA, the tax must be deducted at the time of payment of the sale consideration or credit to the seller, whichever is earlier.

In other words, tax is to be deducted when the buyer makes the payment to the seller or when the amount is credited to the seller’s account.

According to Section 194IA, tax must be deducted at the time of payment. The date of transfer is not relevant; tax is not deducted at the time of transfer but rather when the payment is made.

Thus, regardless of the transfer date, tax must be deducted at the time of payment. This applies even if an advance payment is made. Additionally, if payments are made in installments to the seller, tax should be deducted at the time of each installment payment.

Tax must be deducted when the installment payment is made to the developer, whether by the buyer or the bank, and not when the EMI is paid to the bank.

If the bank makes a payment to the builder on behalf of the buyer, the responsibility for deducting tax lies with the buyer, not the bank.

What should we do if there are multiple buyers?

If there are multiple buyers and the individual purchase price for each is less than Rs. 50 lakhs, but the total transaction value exceeds Rs. 50 lakhs, Section 194IA will apply. In this case, tax on the property must be deducted and deposited with the government before the due date.

Similarly, if there are multiple sellers and the individual sale price for each is less than Rs. 50 lakhs, but the total transaction value exceeds Rs. 50 lakhs, Section 194IA will apply. In this case, the buyer must deduct tax at the time of payment to each seller.

PAN Requirement

The buyer must ensure that the seller provides a PAN. If the seller does not provide a PAN, tax must be deducted at a higher rate of 20% (instead of the standard 1%).

While the section does not mandate the buyer’s PAN, it is advisable for the buyer to provide their PAN in the TDS return filing for proper credit of the TDS.

Penalty and interest for Non-Deduction or Deposit of tax (TDS) on sale of Property

If tax has not been deducted under section 194IA, the buyer must pay 1% interest per month on the amount not deducted. If tax has been deducted but not paid, an interest rate of 1.5% per month will apply.

The Income Tax Officer may impose a penalty of up to Rs. 1 lakh for the late deposit of TDS on purchase of property.

In the event of late filing of the TDS return, a penalty of Rs. 200 per day will be imposed. However, the total penalty cannot exceed the amount of TDS for which the return was not filed.

Filing of TDS Return and compliance

Once the tax is deducted, the buyer is required to deposit the deducted tax amount with the Income Tax Department within the prescribed time limit.

The payment must be made using Challan 26QB, which is a specific challan for the payment of tax deducted (TDS) on the purchase of immovable property.

The buyer must file a TDS return in Form 26QB within 30 days from the end of the month in which the tax was deducted.

The form needs to be filed for each property transaction, and the buyer must mention the property details, including the PAN of both buyer and seller.

After filing Form 26QB, the buyer must issue a TDS certificate in Form 16B to the seller.

This certificate in Form 16B provides the details of the tax deducted and deposited and serves as proof for the seller that tax has been deducted (TDS) and deposited with the government.

The tax deducted and deposited under Section 194IA will be reflected in the seller’s Form 26AS.

The seller can claim this tax deducted (TDS) as credit against their total tax liability when filing their income tax return. The seller can claim a refund.

The buyer is required to file the TDS return in Form 26QB and issue a TDS certificate in Form 16B to the seller.

Additional Important Points About TDS on Property Sales

When there is more than one buyer or seller, Form 26QB must be filled out separately for each buyer-seller combination. For example, if there is 1 buyer and 2 sellers, 2 forms must be submitted. If there are 2 buyers and 2 sellers, a total of 4 forms should be submitted for their respective property shares.

The PAN of both the seller and the buyer must be mentioned in Form 26QB for reporting TDS on sale of property and the sale transaction. If the seller does not have a PAN, tax will be deducted at 20% of the total transaction value.

Example – Purchase of Property for Rs 60 Lakh

The buyer purchases a property for Rs 60 lakh.

TDS to be deducted: 1% of Rs 60 lakh = Rs 60,000.

The seller provides a valid PAN. Therefore, the TDS will be deducted at 1%.

The buyer makes the payment of Rs 60 lakh to the seller and deducts Rs 60,000 as TDS. The total amount the seller receives is Rs 59,40,000 (after tax deduction).

The buyer deposits Rs 60,000 as TDS using Challan 26QB within the prescribed time limit.

The buyer issues a Form 16B certificate to the seller, reflecting the TDS amount of Rs 60,000.

Example – Purchase of Property for Rs 60 Lakh and Seller Not Providing PAN

The buyer purchases a property for Rs 60 lakh.

The seller does not provide their PAN.

TDS to be deducted at 20% of Rs 60 lakh (since the PAN is not provided).

TDS to be deducted: 20% of Rs 60 lakh = Rs 1,20,000.

The buyer makes the payment of Rs 60 lakh to the seller but deducts Rs 1,20,000 as TDS. The total amount the seller receives is Rs 58,80,000 (after TDS deduction).

The buyer deposits Rs 1,20,000 as tax deducted (TDS) using Challan 26QB.

The buyer issues Form 16B to the seller, showing the TDS amount of Rs 1,20,000.

By understanding and adhering to these regulations, buyers can ensure smooth property transactions and avoid any legal complications related to tax obligations.