Failure to deduct tax under Section 194-IA may deem transferee as default

The Income Tax Department has released a new brochure outlining Tax Deducted at Source (TDS) payment responsibilities for individual taxpayers. It specifically highlights TDS obligations related to property purchases, excluding agricultural land, and house rent payments exceeding a specified threshold. These provisions also apply to non-resident taxpayers. Failure to comply with TDS regulations may result in the taxpayer being classified as an ‘assessee in default’ and, in certain cases, as a tax evader.

 

What does the Income Tax Department brochure say? 

Section 194-IA: TDS on transfer of certain immovable property (Excluding Agricultural Land)

  Applicability of TDS under Section 194-IA 

Any individual or entity purchasing an immovable property (excluding agricultural land) from a resident seller is required to deduct TDS (tax deducted at source) under this section.

 

Threshold limit for TDS deduction 

TDS under Section 194-IA is not applicable if both the consideration amount and the stamp duty value of the property are less than Rs 50 lakh.

 

Timing of TDS Deduction

TDS must be deducted at the earlier of the following two events:

  When the payment is credited to the seller's account.

When the payment is made, whether in cash, by cheque, draft, or any other mode.

 

TDS Rate under Section 194-IA

  1 per cent of the purchase consideration or stamp duty value, whichever is higher.

 

20 per cent if the seller does not provide PAN/Aadhaar (as per Section 206AA).

 

From April 1, 2025, the higher TDS rate for non-filers (as per Section 206AB) will not apply under Section 194-IA.

 

If PAN and Aadhaar are not linked, the higher TDS rate under Section 206AA will still be applicable.

 

If the seller is a Non-Resident Indian (NRI), TDS deduction must be done as per Section 195, not Section 194-IA.

 

“Section 195 of the Income Tax Act, 1961, mandates that any person making a payment to a non-resident, which is chargeable to tax in India, must deduct Tax Deducted at Source (TDS) at the time of crediting or making the payment, whichever is earlier. When an Indian resident purchases immovable property from a Non-Resident Indian (NRI), the buyer is obligated to deduct TDS on the entire sale consideration, irrespective of the capital gains arising to the seller. This ensures that the tax liability on the income earned by the NRI from the sale is collected at the source itself,” said Ankit Jain, partner, Ved Jain and Associates.

 

In case the payer is of the view that the payment will not be taxable in the hands of the payee / seller, then in terms of sub-section (2), he may make an application to the Assessing Officer and remit the payment strictly in terms of the order passed by the Assessing Officer. The buyers need to be cautious about withholding as any failure to withhold tax or short deduction of taxes would entail interest and penal consequences under the provisions of the IT Act, said Rashi Khanna, associate partner, DMD Advocates.

 

“The buyer, in case of non-withholding, shall be deemed to be an assessee-in-default under section 201of the I.T. Act. He shall be liable to pay interest under section 201(1A) at rate of 1 per cent per month and may also be made liable to pay penalty under section 271C of the Act. The penalty levied under section 271C shall be equal to the amount of taxes that were liable to be withheld under section 195 of the Act,” Khanna said.

 

“NRIs acquiring property in India must also ensure compliance with the requirements of the income tax act. This includes deduction of withholding taxes at the time of payment of consideration to the sellers. The rate of withholding is generally 1 per cent in the case of resident sellers in case the value of the property exceeds Rs 50 lakh. In the case of transactions between two NRIs, where the seller is also an NRI, no withholding is required,” said Pallav Pradyumn Narang, partner, CNK.