New TDS provision related to purchase of property

 This note is being written in response to various calls I have got from clients with respect to the TDS provision on property transactions. Effective from 1 June 2013, taxes are to be deducted at source ('TDS') on payments for the purchase of immovable property (including any land other than agricultural land, or any building or part of a building) @ 1 per cent as per section 1941A. Taxes would be required to be deducted @ 20 per cent should the seller not hold a PAN. Such requirement to deduct taxes is triggered should the purchased property's cost exceed Rs. 5,000,000.  The representations made by the Confederation of Real Estate Developers of India requesting a rollback of the section was not accepted thus dashing the hopes of the industry. As the rules for the same were not notified there was the hope of a possible rollback similar to the one performed last year, when such a proposal was placed in the Finance Bill, 2012 but not enacted into the Finance Act, 2012.

Unfortunately for the industry and persons dealing in real estate, the Government, vide a notification released on May 31, 2013, has notified the relevant rules for deducting such taxes at source. According to the rules, the buyer / purchaser of property has to deposit TDS within seven days by means of Form 26QB, which is challan cum statement. This tax has to be deducted as per the provisions related to all withholding taxes – at the time of payment or credit whichever is earlier. The buyer / purchaser is also required to download a TDS certificate in Form 16B, from a yet to be notified web portal. This certificate needs to be issued to the seller within 22 days from the end of the month in which the tax is to be deducted.

There are certain questions which arise as to the taxability of such transaction. Generally, whenever anyone buys a property from a developer, the payments are normally made in installments over the construction period. Also, installments may be paid before as well as after the agreement is made. Further, the possession of the property is given only after construction is completed and the full payment is made. In such cases, when does the transfer of property take place? On first payment, on agreement or on possession? From which payment should one deduct the tax – first payment, all payments, payment before agreement, payment on agreement, payment before possession or payment on possession? Whether tax is to be deducted where the initial payment and/or the agreement is made before June 1, 2013, for installments payable thereafter. Further, in case of under-construction property purchased from the developer, service tax is also payable. Hence, it can be argued that developer is providing construction service and not transferring property therefore, TDS provision is not applicable. What happens in such cases? All these issues need to clarified otherwise it could lead to unnecessary litigation.

What happens in case someone has taken a home loan? In such cases the first 20% is paid by the buyer and then subsequently the Bank / Institution provides the finance and pays the seller / developer. Does the loan provider have to pay the tax? This can only become clear when the question of point of taxability is decided. If tax is deducted before the loan disbursement starts, loan provider will not be liable. If not, then what happens? Will the loan provider take on this additional administrative burden?

In case the seller does not have a Permanent Account Number, then it would be better to wait for a few days and let the seller obtain a Permanent Account Number so that TDS by the purchaser is done at the rate of 1 percent only as against 20 percent TDS for non-mentioning Permanent Account Number of the seller. This section specifically states that where such Permanent Account Number is not submitted, then the rate of TDS will be at 20 percent. The provisions of this section 206AA will also be applicable in case of TDS by the purchaser of immovable property of Rs. 50 lakhs or above.

It is important to note that generally speaking, whenever the formalities relating to tax deduction at source are to be complied with, there is also a requirement of obtaining TAN No. (Tax Deduction Account Number). But in respect of TDS relating to purchase of immovable properties there is no requirement to obtain TAN. However, what is most important is to obtain the Permanent Account Number of the seller from whom such tax is being deducted at source.

It is pertinent to note that these provisions are not applicable to a NRI seller as he will be governed by the provisions of section 195 of the Income Tax Act, 1961.

Some of the important columns in the new Form No. 26QB which is a challan-cum statement for deduction of tax are as under :-

1. Full name of the transferee/payer/buyer
2. Complete address of the transferee/payer/buyer
3. Full name of the transferor/payee/seller
4. Complete address of the transferor/payee/seller
5. Complete address of the property transferred
6. Date of agreement/booking
7. Total value of Consideration Rupees
8. Payment in installment or lump sum
9. Amount paid/credited
10. Date of payment/credit.
11. Rate at which tax deducted
12. Amount of tax deducted at source
13. Date of deduction
14. Date of payment of tax deducted at source
15. TDS (Income-tax) Credit of tax to the deductee shall be given from this amount.

The columns given above should more be filled up carefully in the challan-cum statement for deduction of tax under section 194IA. Also, once the tax has been deducted at source, the buyer / purchaser should prepare Form No. 16B which will be generated electronically on the Government’s website and send the same to the seller.

All those who are investing in purchase of immovable property other than rural agricultural land of the value of Rs. 50 lakhs or more should carefully understand their obligations for deducting income-tax at the rate of 1 percent from the payment made to the seller in respect of purchase of the properties on or after 1st of June, 2013.

The TDS certificate can be downloaded from TRACES (www.tdscpc.gov.in).