TDS on Sale of Property in India: Rules, Rates & Process

Understanding TDS on Property Sale

While purchasing or selling a piece of land in India, one has to understand the tax responsibilities related to it. A very important aspect that a lot of people ignore is TDS (Tax Deducted at Source) which is applicable to the sale of a high-value property. One can definitely become aware of the TDS application and its associated responsibilities to avoid non-compliance problems and financial penalties irrespective of his status as a first-time buyer or a seasoned investor.

Let’s break down what TDS means in real estate and the laws that govern it.

What is TDS and Why is it Deducted on Property Transactions?

Tax Deducted at Source (TDS) serves as a channel through which the government retrieves tax at the time of the transaction itself. In the real estate business (property sales), in case the amount is more than 50 lakh rupees, the buyer has to cut 1% TDS from the total of the sale proceeds and then the same has to be deposited with the Income Tax Department. It is this method, which makes TDS an efficient tool to prevent tax evasion and to also ensure a transparent trail in the high-value real estate transactions.

Legal Basis: Section 194IA & 195 of the Income Tax Act

Section 194IA applies when a resident Indian sells property worth more than ₹50 lakh. For non-resident sellers, Section 195 is applicable and may require a higher TDS rate based on capital gains and DTAA provisions. These sections mandate buyers to deduct and deposit TDS, making it a legal obligation in real estate transactions.

When is TDS Applicable on Property Sales?

Understanding when TDS (Tax Deducted at Source) applies to property sales is essential for both buyers and sellers. The applicability of TDS can differ based on the seller’s residency status and the value of the property. Below, we break it down for clarity.

TDS Applicability for Resident Sellers

Tax Deducted at Source (TDS) from the seller is done under Section 194IA of the Income Tax Act but this is only for sellers who are resident Indians and the sale price of the property is ₹50 lakh or more. In such cases, the buyer must deduct 1% TDS on the total sale amount at the time of payment. The sum deducted should be with Form 26QB deposited within 30 days of the payment of the sale to the Income Tax Department, failing this the buyer may be penalized with the Interest.

TDS on Property Sale by NRIs (Section 195)

Non- resident Indian (NRIs) selling property in India, TDS regulations differ slightly. As per Section 195, the TDS rate is normally more than the 1% deducted in the case of resident sellers. The TDS is generally deducted from capital gains which are considered as 20-30% of the amount (plus the applicable surcharge and cess). Buyers also have to get a Tax Deduction Account Number (TAN), and in some cases, a certificate from the Assessing Officer may be needed to reduce the TDS rate.

Exemptions and Threshold Limits

There are no TDS requirements for properties whose funds are less than ₹50 lakh and are sold by a resident. However, Non-Resident Indians(NRIs) are not considered for this. The TDS is subtracted even if your property is of a lower value. Also, only those agricultural lands that are situated in rural areas and meet other conditions are exempt from TDS under Section 194IA.

TDS Rates and Calculation for Property Transactions

Understanding the TDS rates and how they are calculated is critical for both buyers and sellers. TDS rates vary depending on whether the seller is a resident or a non-resident. Additionally, it’s essential to follow the correct procedure to avoid penalties for non-deduction or late payment of TDS. Let’s explore the details below.

TDS Rate for Residents vs. Non-Residents

Criteria	Resident Sellers	Non-Resident Sellers (NRIs)
TDS Rate	1% of the sale price, if property sale exceeds ₹50 lakh	20% of capital gains (plus surcharge and cess
Applicable When	Sale price of property exceeds ₹50 lakh	Capital gains from the sale of property
Applicable For	Residential, commercial, or any property type	Residential or commercial property
Example Calculation	For ₹70 lakh sale price, TDS = ₹70,000	For ₹40 lakh capital gains, TDS = ₹8 lakh (20%)

How to Calculate TDS on a Property Sale?

To calculate TDS, follow these steps:

Resident Sellers: TDS is calculated at 1% of the sale price.
Example: If the sale price is ₹70 lakh, the TDS would be ₹70,000.
Non-Resident Sellers (NRIs): TDS is calculated on capital gains. This involves subtracting the property's purchase price and allowable expenses from the sale price.
Example: If the sale price is ₹1 crore and the capital gains after deductions come to ₹40 lakh, the TDS would be ₹8 lakh (20% of ₹40 lakh).

Penalty for Non-Deduction or Late Payment of TDS

Non-deduction:
- If TDS is not deducted at the time of payment, the buyer is liable to pay the TDS amount.
- Interest of 1.5% per month is charged on the delay.
Late Payment:
- If TDS is not deposited on time with the government, a penalty ranging from 10% to 100% of the TDS amount can be levied.
- Serious delays can lead to prosecution.

How to Deduct and Pay TDS on Property Purchase?

When purchasing a property, the buyer is responsible for deducting TDS before making the payment to the seller. Here’s a breakdown of how to go about it:

Step-by-Step Process for TDS Deduction

Verify Sale Agreement: Make sure the transaction price of the property is ₹50 lakh or it exceeds that amount, and enquire about the seller, whether he is a tax resident or a non-resident.
Calculate TDS Amount: For resident sellers: 1% of the sale price; for non-resident sellers: 20% of capital gains (after deducting the expenses).
Deduct TDS: Deduct the TDS amount that is known as the payment of the seller; transfer the balance as paid to the seller.
Deposit TDS: Make the payment of the deducted TDS amount to the government through online platforms.
Provide TDS Details: Ensure that the TDS amount is recorded in your payment records of the property.

Filing Form 26QB Online

Get the Form: To complete the TDS payment on property transactions, go to the Income Tax Department website and get Form 26QB.
Information Filling: Keepings (PAN, address) and fill in the transaction details of the sale (property details, sale price, TDS amount) will be the next steps.
TDS Payment: After all the information is provided, a link will be displayed on the screen, click on the same, and you will be able to make the payment and choose from the selection of bank transfer or net banking modes of payment.
Generate Acknowledgment: The receipt for your own records of payment will be made available to you for downloading if the payment is successful.

Generating TDS Certificate (Form 16B)

Access Form 16B: After paying TDS via Form 26QB, the buyer can generate Form 16B, a TDS certificate, from the TDS portal.
Download Form 16B: Log in to the TRACES portal (TDS Reconciliation Analysis and Correction Enabling System); download Form 16B after entering the relevant transaction details.
Provide the Certificate to the Seller: The buyer must provide the seller with a copy of Form 16B as proof of TDS deduction; the seller uses this form while filing their tax returns to claim the deducted TDS.

TDS Refund & Exemptions for Property Sellers

When TDS is deducted during a property sale, sellers may find themselves in a position to claim a refund or reduce the amount deducted. This is particularly useful for those whose actual tax liability is lower than the TDS amount deducted.

How Sellers Can Claim a TDS Refund?

File Income Tax Return (ITR): Sellers must file their ITR for the relevant financial year to claim the refund.
Example: If ₹80,000 was deducted as TDS but the seller’s actual tax liability is ₹50,000, they can claim a ₹30,000 refund after filing the ITR.
Submit Proof of TDS Deduction: Attach Form 16B (TDS certificate) along with the ITR. This form is issued by the buyer and shows the TDS deducted on the sale transaction.
Refund Process: After the ITR is processed, the Income Tax Department will assess the refund, which may take several weeks or months.
Example: If ₹80,000 was deducted as TDS but the tax liability is ₹60,000, ₹20,000 will be refunded.

Lower TDS Deduction Certificates (Form 13)

Property sellers who expect to pay less tax than the TDS deducted can apply for a lower TDS deduction certificate. This helps reduce the amount deducted upfront.

How to Apply for Form 13: The sellers can apply for a lower TDS deduction certificate if they anticipate their taxable income to be lower than calculated in the normal TDS calculation.
Example: If a seller expects low capital gains on the property, they can file Form 13 to reduce the TDS rate from 1% to a lower rate.
Eligibility & Submission: Sellers can file Form 13 online on the portal of the Income Tax Department. The department processes the application and issues a certificate indicating the lower TDS rate.
Usage of Form 13: After the certificate is sanctioned, the buyer makes TDS at the lower rate, reducing the seller's upfront tax burden.
Example: A lower TDS rate of 0.5% rather than the usual 1% can cut upfront deductions drastically.

Capital Gains Tax & TDS Interrelation

TDS is deducted on the sale consideration of the property, but the capital gains tax is levied on the profit made (sale consideration minus acquisition cost). The TDS deducted at the sale can be claimed as credit for the liability towards capital gains tax while filing the Income Tax Return (ITR).

Short-Term Capital Gains (STCG): When the property is sold within 2 years, the gains are taxed at 30%.
Long-Term Capital Gains (LTCG): If sold after 2 years, the gains are charged at 20% with indexation advantage.

Common Mistakes and Compliance Issues in TDS Payment

Mistakes in TDS on property transactions can lead to compliance issues, penalties, or delays. It's essential to understand and avoid these errors for a smooth transaction and tax filing process.

Incorrect PAN Entry and Its Consequences

Mistake: Entering the PAN of the buyer or seller incorrectly at the time of TDS payment.
Consequences: This could lead to TDS credit not being accurately credited to the right individual's tax account, resulting in delays in tax processing and potential penalties.
Example: When a buyer incorrectly enters the seller's wrong PAN at the time of TDS payment, the seller will lose the TDS credit, and hence, they will face problems while filing their income tax return (ITR).

Failure to Deposit TDS on Time

Mistake: Delaying the deposit of TDS beyond the due date (7th of the month following the deduction).
Consequences: This attracts penalties and interest under Section 234E of the Income Tax Act, increasing the overall tax burden.
Example: If a buyer fails to deposit TDS on time, they will face a penalty of ₹200 per day until the TDS is paid, along with the interest at 1.5% per month on the delayed amount.

Misinterpretation of TDS Rules for NRIs

Mistake: Incorrectly applying TDS provisions for NRI property sellers, particularly where rates under Section 195 are concerned.
Consequences: This has the potential to result in either an excess deduction of TDS or the complete failure to deduct TDS, which can make the tax filing process for NRIs more complicated.
Example: An NRI seller may take the TDS rate for residential property sale to be the same as for resident buyers. Unless the seller's TDS is deducted at 20% as in the case of LTCG, the buyer may end up paying short and face penalties.

Conclusion

In conclusion, TDS on property transactions is a vital component of property deals in India, which will help in maintaining tax compliance and avoiding tax evasion. Buyers and sellers should be aware of TDS rates, filing requirements, and the consequences of non-compliance. With the right procedures followed, property deals can be executed seamlessly and within the parameters of law, without any untoward tax-related hassles.