Property buying just got TeDiouS :: Business Line

The buyer has to deduct tax at 1 per cent of the entire amount paid to the seller, if the payment for the property is Rs 50 lakh or more.

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Buying property for Rs 50 lakh or more? Make sure you deduct tax while paying the seller.

This new rule (Section 194 IA of the Income Tax Act) introduced in the budget this year, is applicable from June 1. Here are answers to some questions you may have.

Who has to deduct the tax and at what rate?

The buyer has to deduct tax at 1 per cent of the entire amount paid to the seller, if the payment for the property is Rs 50 lakh or more.

So, if you buy a property for Rs 55 lakh, you need to deduct tax of Rs 55,000 (at 1 per cent of Rs 55 lakh).

Cess and surcharge is not applicable on the tax deducted.

Tax need not be deducted on registration and other charges which are not paid to the seller, but to the Government.

To whom and what does this apply to?

All persons buying immovable property from a resident Indian have to deduct the tax.

This applies on purchase of all kinds of real estate such as land, building, land along with building, and flat.

It applies to property bought in a resale and also on purchases from builders. The only exception is if you are buying agricultural land.

The seller needs to be a resident of India, and could be either an individual, partnership, company or other person mentioned in the tax laws.

If you are buying immovable property from a non-resident seller, the tax deduction rules are different.

According to M. G. Ramachandran, Associate Director, PwC, payments to non-resident sellers would continue to be governed under provisions of section 195 of the Income-tax Act, 1961 as before.

When should the tax be deducted?

If you maintain books of accounts, the tax should be deducted at the time of paying the seller or crediting his account, whichever is earlier.

If you do not maintain books of accounts (most individual buyers would come in this category), you need to deduct the tax at the time of paying the seller.

By when, and how, should the tax be deposited with the Government?

The buyer needs to deposit the amount within seven days from the end of the month in which tax is deducted.

So, if you deducted tax in July 2013, you need to deposit it with the Government by August 7.

The deposit needs to be done electronically using Form 26QB.

This will have details such as name address and permanent account number (PAN) of the buyer and seller. In case the seller does not furnish his PAN, tax will have to be deducted at 20 per cent.

Does the buyer need to give any certificate to the seller?

Yes, the buyer has to give tax deducted at source (TDS) certificate to the seller within 15 days from the due date for depositing the tax deducted. So, if you deduct tax in July and deposit it by August 7, you need to issue the TDS certificate by August 22.

This should be issued in Form 16B which can be downloaded electronically from the Web site of the Income Tax department.

Should a property buyer get tax deduction account number (TAN)?

Thankfully, no. Maadhav Poddar, Associate Director - Tax & Regulatory services, Ernst & Young, confirms that the rules do away with the requirement of obtaining TAN by the person deducting the taxes.

If a buyer pays for the property in instalments, should he deduct tax with each instalment?

Yes. In such cases, tax has to be deducted at the time of payment of each instalment.

In case a buyer takes a loan from a bank which releases the amount to the seller, how will the rules operate?

Ramachandran of PwC says that these matters have to be practically solved by a buyer.

The buyer can request the bank to make two cheques — one for the tax deducted at source and another for balance amount in the name of seller, as generally banks do not release the funds to buyer.

The buyer will pay the seller after deducting tax. What if the seller is not liable to pay capital gains tax - either due to investing in new property, or due to indexation, or loss on sale?

Unfortunately, the rules do not provide for exemption from the tax deducted at source in such situations. The seller will have to claim refund at the time of filing his tax returns.

Are there grey areas?

Yes. For instance, the rules seem to be unclear on joint ownership of property and its sale.

According to Puja Aggarwal Gulati, Assistant Professor, IMT Ghaziabad, it is unclear whether joint buyers need to deduct tax on their own share of the sale proceeds or one buyer would deduct on behalf of the others. She expects a clarification from the tax department.

Similarly, on how the tax deduction will be applied on sale of jointly owned property, experts reckon it may be best for the authorities to clarify, considering that it is common practice to have joint ownership of property in Indian families.