Section 194IA of the Income Tax Act

You are liable to pay property tax when you purchase property, such as a piece of land or building. Though the burden of repaying a property loan can be tiresome, the process is fruitful as the repayment of the principal and interest offers tax-saving benefits. The article looks at the TDS applicable under Section 194IA and its aspects.

Section 194IA of the Income Tax Act, 1961 deals with the TDS on the purchase of an immovable property at the time of transaction.  The Finance Act of 2013 introduced this section to process a taxpayer's purchase transaction of immovable property. 

The transferee is required to pay an amount to the transferor against an immovable property transfer and must deduct TDS. Moreover, the sale has to exceed Rs.50 lakhs for TDS to be deducted.

Property tax is applicable to owners of the property by the appropriate authorities like a municipality or municipal corporation. The tax amount is then used for the maintenance and running of local and public amenities.

Property tax is usually applicable on a variety of real estate properties such as residential/commercial buildings, land and property renovations. However, it is not applicable on vacant plots that do not have adjoining properties.

Property tax is calculated based on the value of the land and the property.

The divisions of a property are:

• Land - This is the most secure property with no construction or upgradation.

• Improvements made on a plot- Includes immovable property like godowns and buildings

• Personal property - Includes man-made objects such as cranes, cars, bikes, etc.

• Intangible property

The formula that is used for property tax calculation is:

Property tax = Base value x Area built x Type of construction x age factor x category of use x carpet area of the floor

The transferee is the one who is responsible for TDS deduction. The transferee, here, is the one who purchases the property. Besides, a transferee can be a non-resident as well as a resident. Although, the seller or the transferor has to be a resident. In case the transferor is a non-resident, then TDS u/s 194IA is not levied. In such an instance, TDS has to be deducted u/s 195.

The transferee or the purchaser has to deduct TDS on the following instance, whichever comes first

• When the amount is credited to the seller’s account

• When the payment is made by cash, cheque/draft or any other way

The rate of TDS applicable on the purchase of property is:

• A TDS rate of 1% is levied on the entire transaction amount.

• The deductor cannot add health and education cess and surcharge to the above-mentioned rate. Therefore, the deduction of TDS has to be done at the base rate.

• In case the seller or transferor does not mention the PAN details, then a TDS rate of 20% will be applicable.

The following points have to be kept in mind while claiming TDS u/s 194IA:

• Section 194IA does not apply to agricultural land transfer and compulsory property acquisition.

• The buyer or transferee is required to submit Form 16B as the certificate for TDS. This form is available on TRACES website.

• The transferee has to pay the tax using Form 26QB and compulsorily mention the transferor’s PAN details.

• TDS has to be credited to the Central Government within a month from the month end in which the TDS was deducted.

• The seller and buyer do not require a TAN for the TDS deduction.

• The transferor may have to adjust the deduction of TDS with the tax payable while filing ITR.

• While making a TDS payment, always make sure to enter all the fields, such as assessment year, PAN details, etc., correctly.

Before you make a TDS payment, the following points have to be kept in mind:

• TDS will not be deducted if the property value exceeds Rs.50 lakhs.

• In case Section 194LA is applicable then the provisions of TDS under Section 194IA are not applicable.

• TAN is not compulsory for TDS deduction under this section.

TDS under this section has to be deducted on the value of the transaction, and not on the amount inclusive of applicable taxes.

For example, if a property is sold at Rs.50 lakhs and the GST applicable on the property is Rs.5 lakhs, then the TDS u/s 194IA that would be deducted will be on Rs.55 lakhs and not on Rs.50 lakhs. The rule was ensured to keep a note of the purchase and sale in real estate.

The sub-registrar and registrar office submits the Annual Information Return (AIR) to the IT department. This AIR has information about the sale and purchase of an immovable property and its value. Therefore, if a buyer fails to deduct tax, deposit this tax or deduct TDS at a lower rate, then the IT department can track it. The IT department will issue a notice for such defaults to the buyer.

The interest on TDS deduction, non-payment and penalty applicable will depend on the type of default, 

• The tax amount deducted has to be paid to the government within 7 days of the transaction.

• In case you do not pay TDS, the penalty can go up to Rs.1 lakh according to Section 271H.

• Make sure to pay TDS along with the interest amount and any late fee whenever you receive the tax notice.

• U/s 201, you will be liable to pay a 1% interest each month in case the TDS was previously not deducted.

• An interest of 1.5% has to be paid in case TDS was deducted but was not deposited with the government.

• In case of non-compliance, such as delayed or non-filing of Form 26QB, a certain amount would be charged according to Section 234E.

• The late filing charge that is levied u/s234E is Rs.200 every day.

• If the seller of the property has paid capital gains tax already, then the late filing charges can be reduced considerably.

To avoid such penalties, taxpayers are advised to pay and track all the taxes.