Understanding Tax Deducted at Source (TDS) on Property Transactions in India
India, with its massive population and rapidly expanding economy, is now a focal point for property investment. The Indian real estate market is currently valued at an astounding US$180 billion, and projections estimate an increase to an impressive US$1 trillion by the year 2030. The Government of India mandates taxes on real estate transactions.
Key Provisions of Section 194 IA
According to Section 194 IA of the Income Tax Act of 1961, a Tax Deducted at Source (TDS) applies to property transactions exceeding Rupees 50 lakhs, effective from June 1, 2013. The individual acquiring the property is obligated to deduct 1% of its value as TDS and remit the amount to the Income Tax Department. This must be completed by the 30th of the month following the deduction. Note that buyers are not required to obtain a Tax Deduction and Collection Account Number (TAN). Instead, they can complete Form 26QB, accessible on www.T I N – N S D L.com, and deposit the TDS with the government. Additionally, the buyer must furnish the seller with a TDS certificate, namely Form 16B, as evidence of payment. This regulation applies across the board, with the notable exception of agricultural land.
Essential Points to Remember About TDS
Here are some important considerations regarding TDS:
- TDS is computed on the base amount, excluding Goods and Services Tax (GST).
- In scenarios involving installment payments made by the buyer, 1% TDS should be deducted from each installment.
- When a home loan is involved, deduct TDS at the point of payment to the seller of the property, rather than when the Equated Monthly Installment (EMI) is remitted to the bank.
- In instances with two buyers where the individual purchase price falls short of 50 lakhs, but the combined purchase price exceeds this threshold, TDS will be applicable.
- This TDS is applicable when the buyer is a Non-resident Indian.
- A TDS of 20% will be deducted if the seller does not provide their Permanent Account Number (PAN).
Consequences of Default in Deducting or Submitting TDS
Failure on the buyer's part to remit TDS can lead to the sub-registrar refusing to register your property. Consequently, you will be unable to effect the transfer of the property into your name. TDS is a compulsory requirement and must be presented to the sub-registrar. It is plausible to receive a notice from the tax authorities. In certain scenarios, authorities might impose a penalty reaching up to Rs. 1 lakh.
If you do not deduct TDS, you will have to pay interest at approximately 1% per month.
However, if you deduct the TDS, but do not deposit it, the interest could be around 1.5% per month.
The amount to be deducted will hinge on the residential status of the seller, while the residential status of the buyer will not be taken into account.
TDS Implications Based on Seller Residency
Indian Resident Seller
As previously mentioned, should the seller hold Indian residency, it is essential to deduct TDS at a rate of 1% of the complete sale value and forward this sum to the government.
Non-Resident Indian (NRI) Seller
In this case, the purchase price is irrelevant; TDS must be deducted from all properties. The TDS is based on the capital gains tax, calculated as the sale price minus the purchase price, minus expenses.
| Nature of Capital Gains | Description | TDS Rate on Sale of Property by NRI |
|---|---|---|
| Long-Term Capital Gains | Property held for more than 2 years | 20% |
| Short Term Capital Gains | Property held for less than 2 years | Income Tax Slab Rates of Seller |
Therefore, in the event of a property sale after a span exceeding two years, the buyer will deduct TDS at a rate of 20%. Depending on the property sale price, a surcharge for health and education may also apply. If the property is sold within two years, the capital gains nature will be short-term capital gains, and the TDS will conform to the Income Tax slab for NRIs.
The buyer must complete and submit Form 27Q online accompanied by the TDS payment. The buyer needs to offer evidence of TDS deduction from the seller by issuing Form 16A-NRI. Should TDS remain undeducted or unremitted, the government will take action against the buyer, necessitating immediate deposit.