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Authors - Nikita Kudva & Vijay Pai
The Finance Bill 2012 introduced by the then Finance Minister Pranab Mukherjee had proposed introduction of a host of measures to deter the generation and use of unaccounted money. One of the proposed measures was introduction of TDS on transfer of immovable property. This was however, dropped at the time of introduction of the bill in the Parliament due to administrative hassles.
The Finance Act 2013 has re-introduced the provision. The Finance Minister P Chidambaram, said that the transactions in immovable property are undervalued and underreported and also do not carry the Permanent Account Number (PAN) of the parties. Hence, to improve reporting of such transactions and taxation of capital gains, section 194-IA of the Income-tax Act, 1961 (‘the Act’) was introduced.
In brief, section 194-IA requires that taxes at the rate of 1% be withheld by every transferee / purchaser of an immovable property (other than agricultural land) while crediting or making payment to a resident transferor / seller, if the consideration for such immovable property exceeds Rs 50 lakhs. This provision is applicable with effect from June 1, 2013.
It is important to note that there onerous consequences for failure to comply with the provision. The purchaser who is liable to deduct tax would be exposed to interest and penalty consequences in case of failure to deduct and deposit applicable tax.
In view of the wide reaching applicability of this new section and harsh consequences in case of non – compliance, we have attempted to simplify the provisions of the section in order to educate property buyers and ensure compliance.
Scope and impact of section 194-IA – FAQ’s
We have, in a question – answer format, explained in detail the scope of the newly introduced section 194-IA and its impact on transactions involving the transfer of immovable property.
1. Scope of the term resident transferee / purchaser of immovable property
Who is liable to withhold tax under section 194-IA?
Any person purchasing an immovable property from a resident seller is required to withhold tax under section 194-IA. The scope of the term person is very wide and includes any individual, HUF, firm, company, trust etc who is purchasing an immovable property.
In case of joint – purchase of the immovable property, who is liable to withhold tax under section 194-IA?
In case of a joint purchase of the immovable property, each co – owner is liable to withhold tax in their proportionate share. However, in case appropriate tax is withheld by one of the co – owners, it shall be taken as sufficient compliance by all co – owners. For example, A and B buy a property from C for Rs 60 lakhs. A and B are jointly liable to withhold 1% of sale consideration from the payments made to C.
Is a non – resident purchaser of the immovable property also liable to withhold tax under section 194-IA?
Section 194-IA covers any person purchasing an immovable property and does not make any distinction between a resident and non – resident purchaser. Accordingly, even a non – resident purchaser of the immovable property would be required to comply with section 194-IA.
Does section 194-IA apply to transfer of immovable property between relatives, close family members etc?
Section 194-IA does not make any exemption regarding applicability in case of a transfer between relatives, close family members etc. Accordingly, in case of purchase of immovable property from a relative or close family member, the purchaser will be liable to deduct tax under section 194-IA.
However, a ‘gift’ is not considered as ‘transfer’ under the Act. Hence, in case of a gift of immovable property i.e. transfer of an immovable property without payment of any consideration; section 194-IA should not apply.
Does section 194-IA also apply to minors, housewives, and senior citizens etc who may not have any taxable income?
The requirement to deduct tax under section 194-IA does not depend upon the taxability of the purchaser. The trigger for tax withholding is purchase of an immovable property. Accordingly, in case a minor, housewife or senior citizen purchases an immovable property, section 194-IA will be applicable.
Is it mandatory for the purchaser of the immovable property to have a Permanent Account Number (‘PAN’)?
Yes, it is mandatory for the purchaser of the immovable property to have a PAN.
Is it mandatory for the purchaser of the immovable property to obtain a Tax deduction Account Number (‘TAN’)?
No, it is not mandatory for the purchaser of the immovable property to obtain a TAN. Unlike other TDS provisions, PAN of the purchaser is sufficient to comply with the tax withholding requirement under section 194-IA.
2. Scope of the term resident transferor / seller
What does the term resident transferor / seller mean?
Resident transferor / seller means a person who qualifies as a resident of India for tax purposes (Refer Section 6 of the Act) during a particular financial year (April 1 – March 31).
In case of an individual, does the term resident transferor also include a person who is resident but not ordinarily resident in India?
Yes, in case of an individual, the term resident transferor should also include a person who is resident but not ordinarily resident in India. The reference to resident in section 194-IA does not specifically exclude an individual who is not ordinarily resident in India.
Does section 194-IA apply to non – resident transferor / seller of immovable property?
Section 194-IA categorically mentions that it is applicable only in case of transfer of immovable property by a resident seller. Accordingly, it should not be applicable in case of transfer of immovable property by a non – resident transferor / seller. However, where property is sold by a non – resident seller, tax may require to be withheld under the general withholding section applicable to non – residents i.e. section 195.
Does the purchaser have to verify the residential status of the seller before entering into the transaction for transfer of immovable property?
The purchaser should exercise his due diligence regarding the residential status of the transacting seller. For documentation purposes, it is also advisable for the purchaser to obtain a declaration from the seller regarding his residential status or his tax residency certificate issued by the Government of India.
Is it mandatory for the resident seller to have a PAN?
Yes, it is mandatory for the resident seller to have a PAN. In the absence of PAN, the purchaser will be liable to withhold tax at a higher rate.
Does the purchaser have to verify the PAN of the seller before withholding tax under section 194-IA?
Yes, the purchaser should verify the PAN of the seller before withholding tax under section 194-IA. For this purpose, the purchaser should obtain a copy of the PAN card from the seller and also verify the PAN details under the “Know your PAN” link on the income tax e-filing website.
If the resident seller is exempt from tax / has exempt capital gains / incurs loss on sale of immovable property does section 194-IA still apply?
Yes. Section 194-IA does not make any exemption from tax withholding if the resident seller is exempt from tax / has exempt capital gains / incurs loss on sale of immovable property. Accordingly, the purchaser will have to withhold taxes on purchase of an immovable property from a resident seller even if he is exempt from tax / has exempt capital gains / incurs loss on sale of immovable property.
3. Scope of the term immovable property
What is the definition of the term immovable property?
Immovable property is defined to mean land (other than agricultural land) or building or part of building.
What is the meaning of agricultural land which is excluded from the scope of section 194-IA?
Agricultural land which is excluded from the scope of section 194-IA primarily covers rural agricultural land. Details of excluded agricultural land is given in section 2(14)(iii) of the Act.
[Section 2(14)(iii) -
agricultural land in India, not being land situated--
(a) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand ; or
‘(b) in any area within the distance, measured aerially,--
(I) not being more than two kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten thousand but not exceeding one lakh; or
(II) not being more than six kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than one lakh but not exceeding ten lakh; or
(III) not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten lakh.
Explanation.—For the purposes of this sub-clause, “population” means the population according to the last preceding census of which the relevant figures have been published before the first day of the previous year;’
[Source: www.incometaxindia.gov.in] ]
Does section 194-IA cover transactions involving transfer of shares of a co-operative society where immovable property is indirectly transferred?
Any transaction which has the effect of transferring, or enabling the enjoyment of, any immovable property is considered as transfer of immovable property. This could be by way of becoming a member / acquiring shares in a co-operative society / company or other association of persons. Hence such a transaction would also be covered under section 194-IA
Are there any situations where section 194-IA could be triggered even without an outright sale of immovable property?
Under the Act, there are certain situations where even without an outright sale of immovable property, it is considered as ‘transfer of immovable property’. Some of the situations are given below -
a) Long term lease – if a lease agreement is entered into for a period of more than 12 years, the lessee (the person taking the property on lease) is regarded as the owner of the immovable property. This is also regarded as a ‘transfer’ under the Act.
b) Under the Transfer of Property Act, 1882 if a buyer has taken possession of the immovable property pursuant to an agreement and has discharged the consideration or is willing to discharge the consideration in part performance of the contract, the immovable property would be transferred even if the agreement is not registered. Such a transfer is also recognized under the Act.
In these situations, though there is no outright sale of immovable property, it could still be regarded as a transfer of immovable property and 194-IA could apply.
Would 194-IA apply if an owner of a plot enters into an agreement with a developer for development of his land?
Generally, under a development agreement, a developer is given possession of the property by the owner with a Power of Attorney (‘PoA’) to the developer for certain rights like right to sell undivided share of land to prospective buyers. This may not be regarded as the transfer of the owner’s interest in the land. However, depending on the terms of the agreement, even a development agreement could be regarded as a transfer. This could result in section 194-IA being triggered.
4. Timing of tax withholding
When is section 194-IA applicable from?
Section 194-IA is applicable for any payment of consideration in connection with transfer of immovable property made on or after June 1, 2013
When does the transferee / purchaser of the immovable property have to withhold tax?
The transferee / purchaser is required to withhold tax on payment of consideration or credit to the account of transferor / seller, whichever happens earlier.
What does credit to the account of the transferor / seller mean?
Credit to the account of the transferor / seller means the time when the payment is accounted for / accrued in the books of accounts of the purchaser. This event may happen before the actual payment of consideration by the purchaser to the transferor / seller.
In case the agreement of purchase of immovable property is entered into before June 1, 2013 but the consideration is paid after June 1, 2013, will section 194-IA apply?
On reading of the section, it appears that the trigger for tax withholding under section 194-IA is the date of payment of consideration and not the date of entering into the agreement. Accordingly, in case any consideration is paid after June 1, 2013, section 194-IA should apply.
5. Rate of tax withholding
What is the applicable rate of tax withholding under section 194-IA?
The applicable rate of tax withholding under section 194-IA is 1% on the consideration paid for the transfer of immovable property. This rate of 1% is an all inclusive rate and does not need to be increased by surcharge or education cess.
Is it possible for the resident seller to obtain a nil / lower tax withholding certificate under section 197 of the Act?
Presently, it is not possible for the resident seller to obtain a certificate for nil / lower withholding rate in respect of payments covered under section 194-IA.
Can there be a situation where the purchaser is required to withhold tax at a higher rate?
In case the seller does not furnish PAN or furnishes an invalid PAN to the purchaser, the purchaser will be liable to deduct tax at the rate of 20% of the consideration paid.
6. Scope of the term consideration for transfer of immovable property
What would be the implication if the immovable property is transferred at less than the value adopted for stamp duty purposes?
The Act requires that where immovable property is transferred at a value less than the value adopted for stamp duty purposes, the stamp value would be deemed to be sale consideration for such transfer. However, such value is only for computation of capital gains and would not impact withholding tax under section 194-IA. Accordingly, tax under section 194-IA would be required to be withheld on the actual consideration paid.
In case transaction for transfer of immovable property is cancelled, what happens?
Presently, the Act does not specify the procedure to be followed in case the transaction is cancelled. It should, however, be possible for the seller to claim the amount withheld as tax credit at the time of filing his return of income for that particular financial year.
Is tax under Section 194-IA required to be withheld even on the service tax component of the consideration?
In case of purchase of an immovable property from a developer during the construction phase, typically, service tax is charged by the developer on the consideration. With regard to section 194-IA, tax should be withheld even on the service tax component of the consideration.
Is tax withholding under section 194-IA required to be done on any part of the consideration which is paid before June 1, 2013? Suppose for a property of Rs 60 lakh, a purchaser pays 1 installment of Rs 40 lakh in May 2013 and the second installment of Rs 20 lakh in June 2013. Will section 194-IA apply only on Rs 20 lakh paid in June 2013?
On a reading of the section, it appears as if the trigger for section 194-IA is payment or credit of any sum for transfer of immovable property. Section 194-IA will apply where the consideration for transfer of immovable property is more than Rs 50 lakhs. However, tax withholding should be restricted only to any payments made after June 1, 2013. In the above example, the purchaser will be required to withhold tax only on Rs 20 lakhs paid in June 2013 since the total consideration exceeds Rs 50 lakhs.
What would be the implications where property is sold jointly? How would section 194-IA apply?
Take an example –If A buys a property from joint owners B and C for Rs 70 lakhs, he would have to withhold taxes on 1% of the entire sale consideration even though the individual shares of the co – owners may be less than the threshold limit of Rs 50 lakhs.
How would the consideration be determined if the immovable property is transferred in exchange for something other than cash?
In such a case, the market value of the article received in exchange for transfer would be the consideration received for transfer of immovable property.
Procedure to be followed by the purchaser in case of a transaction involving transfer of immovable property
We have summarized below, in tabular form, the broad steps
 For detailed steps on TDS compliance in case of transfer of immovable property, please visit https://www.tin-nsdl.com/TDS/TDS-Introduction.php to be followed by a purchaser in case of a transaction involving transfer of immovable property.
The article is meant for general understanding purposes only. Views expressed by the authors in this article are personal. Readers are advised to consult experts on specific issues.