Explained: Significance of Section 194IA in Real Estate

Most Indians have heard references to the term TDS about income tax. TDS is an acronym that refers to Tax Deducted at Source. The Income Tax Act specifies certain scenarios in which the payments received by a person are made after subtraction of the tax dues. This means the person making the payment must deduct the tax and deposit it with the government. In real estate dealings, too, TDS may be deducted under certain conditions.

Let us take a look at the guidelines specified under Section 194IA concerning TDS during the sale of a real estate property.

TDS on Sale of Property

Given the high emotional and financial value placed on properties, real estate sales and purchases are common in India. In an effort to curb unregulated sales and black money, the government introduced the Finance Bill 2013 to enable TDS on property sales. Section 194IA of the Income Tax Act reflects the scope and requirements for TDS on property sales introduced in June 2013.

Provisions of Section 194IA

• Section 194IA of the Income Tax Act deals with the sale and purchase of immovable property, with the exception of agricultural land. So, it refers to selling and purchasing plots, houses, flats, apartments, independent buildings, villas, etc.
• The buyer or the "transferee" is responsible for deducting TDS equal to 1% of the sale consideration or sale value when paying the seller or "transferor". The buyer should deduct this amount as income tax irrespective of the mode of payment (cash, cheque, draft, etc.).
• TDS must be deducted by the buyer only if the stamp duty value of the property and the sale consideration are more than INR 50 lakhs. If the property value is less than INR 50 lakhs, TDS need not be deducted from the transaction.
• This section only applies when the property seller or the transferor is a resident Indian.
• Section 203A of the Income Tax Act deals with the need for every tax collector or deductor to have a tax deduction and collection account number (TAN). According to Section 194IA, the buyer of the property is exempt from this necessity and can withhold TDS even if he or she does not have a TAN number.

Points to Remember

• Immovable property, as mentioned in Section 194IA of the Income Tax Act, refers to any land, building, or part of a building except agricultural land. This section also defines agricultural land. Any land within 8 kilometres of the municipal limits of cities with a population of more than 10,00,000 people cannot be considered agricultural land.
• The seller or transferee mentioned in this section refers to individuals who are resident Indians but does not include those mentioned in Section 194LA of the IT Act.
• The seller must provide the buyer with a valid PAN number or TDS deductor.
• The sale consideration or stamp duty value of the property should be over INR 50 lakhs.

Responsibility of the buyer

The buyer of the property should deduct 1% of the sale consideration from the payment made to the seller as TDS and deposit this to the central government within 30 days from the end of the month in which this TDS is deducted. This payment can be electronically transferred to the RBI, the State Bank of India, or other authorised banks. TDS on the sale of property can also be made through the TIN NSDL website. The buyer will need to furnish the PAN number of the seller and submit Form 26QB online. The buyer also needs to provide buyer Form 16B as proof of TDS deposit.

Responsibility of the seller

The seller of the property must provide a valid PAN number to the buyer at the time of sale. Under this section of the IT Act, if a seller does not provide the PAN or provides an invalid PAN, the buyer may deduct up to 20% of the sale consideration as TDS. Following the sale, the seller must obtain Form 16B from the buyer within 15 days from the deadline of the TDS deposit and add this to his or her income tax filing for the financial year. The seller may also verify the deposit of TDS through the Online 26AS TRACES website.

Understanding Section 194IA and the TDS component of property sale is important for financial planning and legal compliance. It is important to remember that this section does not deal with NRI sellers who may incur a higher TDS rate. The buyer must also remember that the TDS deduction must be made regardless of the capital gains or loss incurred by the seller of the property.