Understanding Section 194IA of the Income Tax Act: TDS on Property Purchase

Understanding Section 194IA of the Income Tax Act: TDS on Property Purchase

The Indian real estate market thrives on a constant flow of transactions. To ensure transparency and proper tax collection, the Income Tax Act mandates the deduction of Tax Deducted at Source (TDS) on various transactions. Section 194IA specifically focuses on TDS applicable when purchasing immovable property (land and buildings) in India. Introduced in the 2013 Finance Act, this section plays a crucial role in tightening the grip on tax collection and compliance in real estate deals involving resident sellers.

Who Deducts TDS Under Section 194IA?

The responsibility for deducting TDS falls squarely on the shoulders of the buyer (transferee) of the property. This applies whenever they make payments to the seller (transferor) who is a resident taxpayer in India. It's important to note that this only applies to transactions where the total sale consideration, encompassing the entire cost of the property, exceeds Rs. 50 lakhs. Transactions below this threshold are exempt from TDS under Section 194IA.

TDS Rate and Payment Timeline

The current TDS rate under Section 194IA is set at a straightforward 1% of the total sale consideration. The buyer is obligated to deduct this amount at the earliest of two crucial junctures:

• Time of Account Credit: When the sale consideration amount is credited to the seller's account.
• Time of Payment: When the payment is made to the seller, irrespective of the mode (cash, cheque, draft, etc.).

Once deducted, the TDS amount must be deposited with the central government within 30 days from the end of the month in which the deduction occurred. For this deposit, the buyer needs to utilize Form 26QB (Statement-cum-Challan). The payment can be made electronically through authorized banks.

Additional Considerations for TDS Under Section 194IA

• Instalment Payments: If the sale consideration is paid in instalments, TDS needs to be deducted on each instalment amount paid.
• Inclusive Charges: The TDS calculation should include all charges associated with the property purchase, such as club membership fees, car parking fees, maintenance charges, etc., applicable from September 1, 2019, onwards.
• TAN Not Required: The buyer doesn't require a TAN (Tax Deduction and Collection Account Number) for deducting TDS under Section 194IA.
• Seller's PAN: The buyer must obtain the seller's PAN (Permanent Account Number) before making the TDS payment. If the seller's PAN is unavailable, TDS will be deducted at a higher rate of 20%. Having a PAN is mandatory for the buyer as well.
• TDS Certificate: After depositing the TDS with the government, the buyer needs to furnish a TDS certificate (Form 16B) to the seller. This certificate becomes available approximately 10-15 days after the TDS deposit.

Consequences of Section 194IA Non-Compliance

The income tax department gathers information on property transactions through Annual Information Returns (AIR) submitted by registrar and sub-registrar offices. This report includes details like the property's sale and purchase information along with its value. If a buyer fails to deduct TDS, deposit the deducted TDS, or deducts it at a lower rate, the discrepancy will be flagged by the income tax department. The buyer will then receive a notification regarding the non-compliance. Depending on the nature of the default, penalties may include:

• Interest on the unpaid TDS amount
• Penalty for non-deduction of TDS
• Interest on delayed TDS deposit
• Potential prosecution

Conclusion

By understanding Section 194IA of the Income Tax Act, property buyers in India can ensure they comply with TDS regulations. This contributes to a more streamlined tax collection system and reduces the risk of penalties for non-compliance. It's advisable to consult with a tax advisor for specific guidance on your property transaction.