The tax rule to know when you partner with relative to buy property

Sale transactions of less than Rs 50 lakh is not subject to tax deducted at source

The Jodhpur bench of the Income Tax Appellate Tribunal (ITAT) recently ruled that tax deducted at source (TDS) under Section 194IA is applicable only when consideration for the transfer of immovable property is more than Rs 50 lakh.

  

To negate the use of black money in immovable property transactions, the government introduced Section 194IA via the Finance Act 2013.

"Section 194IA mandates that, where any resident transfers any immovable property, (other than agricultural land), whose sale consideration or stamp duty value (SDV) of the immovable property, whichever is higher, is Rs 50 lakh or more, then the transferee is required to withhold tax at the rate of 1 per cent of such consideration or SDV of the immovable property, whichever is higher," says Keshav Singhania, leader, private client, Singhania & Co. LLP.

"The term 'consideration' includes the price paid or payable for the transfer of immovable property as well as other charges such as processing fees, external development charges, etc," says Pallav Pradyumn Narang, partner at CNK.

'Ending ambiguity'

In the case before the Jodhpur bench, there was a transaction of purchase of immovable property for a consideration of Rs 1.20 crore, and it was carried out by four people. For that 1/4th share of the property, the consideration came to Rs .31.50 lakh in the hands of the assessee. The assessing officer (AO) treated the assessee in default by applying the provisions of Section 194IA of the Act by considering the purchase cost of Rs 1.26 crore and making a demand for a fine as a consequence under various applicable Sections of the Income Tax Act. But the bench ruled that in such a case, Section 194IA of the Act cannot be invoked.

"The judgment is a step in the right direction and reinstates the intended view of the legislature that the threshold limit of Rs 50 lakh is to be evaluated by each assessee. The judgment will help put to bed ambiguity in cases of co-owners or joint owners of the property," says Singhania.

For the purpose of Section 194IA, immovable property means any land (other than agricultural land) or any building or part of a building. No tax is deducted if the consideration paid and the stamp duty value of the immovable property are both less than Rs 50 lakh. "The buyer is required to deduct TDS at the rate of 1 per cent of the total consideration and deposit it with the government," says Ankit Jain, Partner, Ved Jain & Associates.

There are certain conditions that apply to Section 194IA. Firstly, the buyer needs to have a valid Permanent Account Number (PAN) to comply with the provisions of this section. "Secondly, the TDS needs to be deducted at the time of making the payment or at the time of giving credit, whichever is earlier," says Maneet Pal Singh, partner, I.P. Pasricha & Co.

The purchase value should exceed Rs 50 lakh, in which case the TDS is to be deducted on the whole amount. "Tax needs to be deducted if the sale price or stamp duty value (whichever is higher) crosses Rs 50 lakh on the entire sum. If the sale price is Rs 45 lakh and SDV is Rs 52 lakh then Rs 52,000 needs to be deducted while making the payment of Rs 45 lakh," says Archit Gupta, founder & chief executive officer (CEO), Clear.

Jain adds, "TDS must be deposited with the government within 30 days from the end of the month in which the TDS was deducted in Form 26QB."

Another condition is that the payee must be a resident transferor of an immovable property. "The payer must be any person, inter alia, including individuals, the Hindu Undivided Family (HUF), companies, firms, an association of persons (AOP) or a body of individuals (BOI), local authorities, and every artificial juridical person," says, Singhania.

  

Multiple buyers

In the event that there are multiple buyers or joint buyers of the property, the TDS liability is to be borne by all the buyers in proportion to their share in the property. Singh says, "Similarly, if the payment is being made in instalments, TDS needs to be deducted at the time of each instalment payment."

In the case of multiple buyers, each buyer must deduct TDS individually. Jain adds, "The TDS rate of 1 per cent applies to each buyer's share in the property. In cases where the total property value is more than Rs 50 lakh but where each buyer's share is less than Rs 50 lakh, no TDS is required to be deducted. "Even where there are multiple sellers and the amount being paid to each seller is less than Rs  50 lakh, TDS won't be applicable.

Note, all buyers need to deduct tax. Gupta says, "However, the total tax deducted should not cross 1 per cent of consideration or stamp duty value." Also, the actual total value of the property needs to be seen to determine tax compliance, not the individual share. Gupta says, "If the property value is Rs 60 lakh and bought by Mr and Mrs X, then each of them shall deduct tax of Rs 30,000, totaling Rs 60,000, i.e., 1 per cent of the value of Rs 60 lakh."

Payment made in installments

If the payment is made in instalments, Jain says, "TDS should be deducted at each instalment, and the buyer should file Form 26QB for each TDS deduction."

Tax deducted is to be claimed by the builder and not the person making the tax deduction. Gupta says, " While making the payment, the buyer needs to give 99% of the consideration to the builder and 1 per cent of the consideration to the government as TDS. Many people give 100% of the consideration to the builder and an additional 1% to the government, which should be avoided."

Narang adds, "Individuals can consider dividing ownership of properties between related persons to ensure that the sale transactions are below the Rs 50 lakh limit and therefore not subject to TDS under this section."

Sometimes the builder offers to comply with the TDS norms for the buyers. Gupta adds, "However, since the tax payment has been migrated to the Income Tax Portal and the NSDL site has been deactivated, the builder may ask for an IT portal login to continue compliance with the TDS norms."

Normally, payment for immovable property transactions is undertaken via instalments, in such cases, TDS should be deducted at the time of each such instalment, irrespective of its quantum. The TDS rate of 1% is applicable only if the seller is a resident. "If the property is sold by a non-resident, the buyer would need to deduct a higher rate of TDS based on the nature of the property," says Jain of Ved Jain & Associates.