TDS on property is 20% if you have not linked PAN with Aadhaar by May 31

While homebuyers received some relief, others face potential tax burdens and confusion.

Taxpayers had until May 31, 2024, to link their PAN with Aadhaar. Failure to do so will result in a higher Tax Deducted at Source (TDS) being levied on their income. This applies to transactions entered into before March 31st, 2024, with the TDS rate doubling for those with unlinked PANs.

"The IT department has given a final deadline for 31st May 2024 for linking PAN with Aadhaar. In case assessee still fail to do so, this will tantamount to PAN being inoperative and will attract section 206AA whereby deduction shall be @ 20%," said Ritika Nayyar, Partner, Singhania & Co.

20% TDS for homebuyers

 

The situation was particularly frustrating for homebuyers who unknowingly purchased property from sellers with unlinked PANs. These buyers faced notices demanding additional tax due to the higher TDS rate. However, a recent CBDT circular provides relief. If the seller links their PAN with Aadhaar by May 31st, the homebuyer will be off the hook for the additional tax.

The income tax department in April 2024  provided relief to many homebuyers who were issued tax deduction at source (TDS) notices because the Permanent Account Numbers (PAN) of the property sellers were inoperative. The circular gave the homebuyers a chance to avoid the tax notices as long as the property sellers link their PAN with Aadhaar by May 31.

This new policy applies to property transactions completed up to March 31, 2024. If the seller links their PAN with Aadhaar by May 31, 2024, the buyer will not be responsible for deducting and paying the higher TDS mandated under Sections 206AA and 206CC of the Income Tax Act. Previously, buyers were required to deduct a higher TDS (Tax Deducted at Source) from the sale consideration if the seller's PAN was not linked with Aadhaar. This could lead to a cash flow crunch for the buyer, as they would need to pay the additional tax upfront even if the seller ultimately rectified the PAN-Aadhaar linkage.

This new measure provides much-needed clarity and eases the burden on homebuyers who might have unknowingly purchased property from sellers with unlinked PANs. It also incentivizes sellers to link their PAN with Aadhaar to avoid impacting future transactions.

What this means for homebuyers: If you purchased a property before March 31, 2024, and deducted the regular TDS rate (as opposed to the higher rate for unlinked PAN-Aadhaar), you won't face any tax liability provided the seller links their PAN with Aadhaar by May 31, 2024.

If you're buying a property in India exceeding Rs 50 lakh, you (the buyer) are responsible for deducting TDS at 1% of the sale price.

This deducted amount is then deposited with the government.

Complications with Inoperative PAN:

The seller's Permanent Account Number (PAN) is a crucial piece of information for tax purposes.

As of July 1st, 2023, a PAN becomes inoperative if it's not linked with Aadhaar (a unique identification number).

If the seller's PAN is unavailable or inoperative (not linked to Aadhaar), the TDS rate for the buyer shoots up to 20%.

The Problem for Homebuyers:

Some homebuyers might not be aware of the PAN linking requirement or might not have verified the seller's PAN status.

These buyers would have deducted TDS at the standard 1% rate, assuming a valid PAN.
 

However, due to the inoperative PAN, they began to receive a TDS short notice from the government demanding an additional 19% payment (20% mandated rate - 1% deducted rate).

Relief: The Central Board of Direct Taxes (CBDT) has now clarified that tax notices won't be issued to homebuyers for this reason. This decision provides relief to homebuyers who were worried about facing penalties for deducting less tax.

Reasoning: The CBDT took this step because inactive PANs cannot be used for filing income tax returns or conducting financial transactions. As a result, it's not possible for sellers with inactive PANs to declare the income from property sales and pay tax on it.

Impact: This clarification from the CBDT brings clarity and relief to homebuyers who were concerned about facing penalties for deducting less tax from sellers with inactive PANs. It also underscores the importance of sellers ensuring that their PANs are active and up-to-date to avoid such issues in the future.

Pallav Pradyumn Narang, Partner, CNK explains this in detail

In India, when you sell property, the buyer is supposed to withhold a part of the payment towards taxes. This withheld amount is deposited with the government on your behalf. To keep track of these taxes, everyone has a unique tax identification number (PAN). 

Recently, the government introduced a new rule (Circular number 3 of 2023 issued by CBDT on March 28th, 2023) that requires linking your PAN with Aadhaar (another unique ID program). This linking helps ensure everyone pays their fair share of taxes.

Here's how it affects property sales: If you're selling property and your PAN isn't linked to Aadhaar, the buyer will have to withhold a larger chunk of money from the sale proceeds. This is because, without the PAN-Aadhaar link, the buyer is required to deduct tax at a higher rate (usually 20%) compared to the normal rate.

Think of it like this, The buyer is holding onto more of your money initially, but they are basically paying the government your taxes upfront. By linking your PAN with Aadhaar, you can avoid this extra tax deduction and ensure a smoother property sale.

Ashish Ahuja,  Senior Partner of Ahuja & Ahuja Chartered Accountants explains what happens if PAN is not linked with Aadhaar

What happens if a deductee’s PAN is not linked with Aadhaar after 1st April 2023?

If a deductee’s PAN is not linked with Aadhaar after 1st April 2023, the deductor is required to deduct TDS at a higher rate of 20% as per Section 206AA and Rule 114AAA(3)(iii). It is essential for deductees to link their PAN with Aadhaar to avoid higher TDS deductions.

How to check if PAN is linked with Aadhaar on TRACES?
 

To check the PAN-Aadhaar linkage status on TRACES, follow these steps:

• Log in to TRACES using the URL https://www.tdscpc.gov.in/app/login.xhtml.
• Access the “Dashboard” after logging in.
• In the “Quick Links” menu, click on “PAN Verification”.
• Verify the PAN-Aadhaar linkage status for each deductee listed.
• What should a deductor do if they deduct TDS at a lower rate due to unawareness of the new rule?
• If a deductor has deducted TDS at a lower rate due to unawareness of the new PAN-Aadhaar linking rule, it is crucial to rectify the situation. The deductor should immediately comply with the requirement and start deducting TDS at the higher rate of 20% for deductees whose PAN is not linked with Aadhaar. It is recommended to consult with a tax professional and rectify any non-compliance issues promptly.

Can a deductee claim a refund if TDS is deducted at a higher rate due to non-linkage of PAN with Aadhaar?

Yes, a deductee can claim a refund if TDS has been deducted at a higher rate due to non-linkage of PAN with Aadhaar. The deductee can file an income tax return and claim the excess TDS deducted as a refund while reconciling their tax liability. It is advisable to consult with a tax professional to ensure the correct procedure for claiming a refund.