194IA of Income Tax Act: A Guide For Beginners

194IA of Income Tax Act: A Guide for Beginners

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.

What is Section 194IA of the Income Tax Act?

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

  • any building or part of the building is liable to tax deduction at the rate of 1% at the time such amount is credited to the account of the transferor, or
  • at the time of payment of the such amount in cash or by the issue of check or draft or in any other manner, whichever is earlier.

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.

The objective of deducting TDS on property purchase

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.

What are the requirements for deducting TDS u/s 194IA?

Before providing TDS u/s 194IA, the following indicators must be properly examined:

  • No TDS will be deducted if the total amount of consideration is less than Rs.50 lakhs.
  • TAN is not required to deduct TDS under section 194IA
  • If Section 194LA applies (TDS on payment of compensation on acquisition of immovable property), the provisions of Section 194IA will not apply.

Who is liable to deduct TDS under Section 194IA of the Income Tax Act?

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:

  • Transfer of real estate
  • It includes charges such as deposit fees, maintenance fees, car parking fees, water or electricity fee, club membership fee, etc. It also includes other similar fees that are associated with the transfer of property.
  • Farmland
  • It defines an agricultural region in the Indian subcontinent. This does not include land situated in any area specified in section 2, paragraph (14), paragraph (iii), (a) and (b).

On what amount is TDS deducted on the sale of property covered u/s 194IA?

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.

When is income tax deducted from TDS U/S 194IA?

The buyer should deduct TDS in the following cases, whichever occurs first:

  • When paying in cash or by issuing a draft, check or otherwise
  • While crediting such an amount to the transferor’s account

Rate of TDS under Section 194IA

Before buying property, you must consider rates of TDS under Sec 194IA of income tax act

  • Tax withheld at the source rate when purchasing real estate is 1% of the transaction amount.
  • The deduction should not add education and health fees or any surcharge to the above rate.
  • If the seller is unable to submit his PAN, the TDS rate will be 20%.

Tips before claiming TDS under Section 194IA of Income Tax

When buying real estate, pay attention to the following points:

  • This section does not apply to the transfer of agricultural land and the compulsory acquisition of immovable property.
  • TAN is not required by the seller or buyer for deducting TDS.
  • The TDS should be deposited in favour of the Government of India within thirty days from the end of the month during which the TDS was collected.
  • The buyer should pay the TDS through Form 26QB and mention the seller’s PAN number.
  • He should provide Form 16B as a TDS certificate. Form 16B is accessible on the TRACES portal within 10-15 days.
  • An individual need not file a TDS return for such a transaction.
  • The seller can adjust the TDS deduction against the income tax payable while filing the tax return.
  • Mandatory fields should be filled while paying TDS. The details are assessment year, PAN, payment type (TDS), payment head and TDS amount.

What happens during TDS default?

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:

  • Interest for non-deduction of TDS (no TDS deduction of interest)
  • Prosecution
  • Interest on non-payment of TDS
  • Penalty

Non-payment of TDS

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.

What are the results of defaulting?

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.

  • No TDS deduction, low TDS deduction or non-payment of TDS interest is credited by the Central Government.
  • There is a fine applicable of Rs. 200 every day for not filing Form 26QB u/s 234E of Income Tax.
  • No prosecution, fine or interest against the dealer at the time of non-payment or non-deduction of TDS.

The following conditions apply to section 194IB

  • The rent in such a case should be more than ₹50,000,
  • Rent applies to land, land with factory, equipment, plant, furniture, equipment and building with the factory.
  • The rate of TDS under Section 194IB is 5% if the Carde of beneficiary/Owner is available and 20% if PAN is not available.
  • The buyer must receive and give Form 16C to the owner of the asset/property.
  • If the payment is made on behalf of the government, the TDS must get submitted on the same day. If not, TDS can be deposited within seven days starting from the end of the month in which the TDS was deducted.
  • For payment made in March, TDS must get submitted by 30th April.

Conclusion

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.

FAQs

What is the time limit for paying TDS on the property?

The deadline for payment of TDS on the sale of immovable property is 30 days from the end of the month in which TDS is deducted.

Is TDS refundable on the sale of the house?

Yes, TDS on house is refundable. The buyer deducts TDS from the house and deposits it with the central government while selling the house.

What is the consequence, if TDS is not deducted from the purchase there is a penalty under Section 201 for non-payment of TDS on the immovable property?

The individual will have to pay 1% interest per month if the tax has not been deducted, while 1.5% if the tax has been deducted and not paid to the Government of India.

Is advance TDS applicable on the property?

Yes. TDS advance payment is possible. The purchaser of the property deducts TDS, either on the execution of the conveyance deed or on payment of the advance (in case any advance was paid before the execution of the transfer agreement).

How can I claim TDS under Section 194IA?

You can claim TDS under section 194IA while filing your income tax return. The buyer is responsible for deducting TDS at the time of the transaction of sale of immovable property.