What is TDS on the Sale of Property? How and Why It Matters

Real Estate in India has very high stakes. Both buyers and sellers have responsibilities when it comes to transactions. Among the many financial and legal aspects of property deals the TDS or Tax Deducted at Source plays a crucial role.

So what is TDS on the sale of property? It was introduced as a means to ensure compliance with tax laws. TDS on property transactions is a mechanism under the Income Tax Act, designed to ensure tax compliance during high-value transactions, such as real estate sales.

As a real estate investor, you must understand the importance of TDS on the sale of property, whether you are a buyer or seller:

• Buyer: Ensures proper compliance with tax laws, which in turn helps avoid penalties and other legal complications.
• Sellers: If you are selling, TDS will help you adjust your tax payments smoothly, and prevent future disputes with the Income Tax Departments.

There are vast consequences to ignoring the TDS rules: penalties, interest charges and most importantly: difficulty during property registration or resale.

In this blog, we will learn more about the TDS on the sale of property, and answer various doubts, such as ‘how to pay TDS on Sale of Property?,’ claiming TDS credit and filing TDS.

TDS on Sale of Property in India

TDS is a tax deduction mechanism, where the buyer deducts a specific percentage of the amount they pay to the seller and deposits it with the government. This informs the tax authorities about the transaction, allowing them to assess all applicable taxes on the seller’s capital gains.

This mechanism was first introduced under Section 194-IA of the Income Tax Act. 2013 to enhance tax compliance. Earlier, it was only applied to property sales of Rs 50 lakh and above, and aimed to tackle the problem of tax evasion, which was very common in the real estate industry due to the high cash transaction volumes.

How different is TDS from other property-related taxes? Let’s take an in-depth look into it:

Key Changes in TDS Rules

Since its introduction in 2013, there have been several changes in the rules over the years, and the annual financial budget has introduced many of these new amendments:

• Budget 2024: The recently presented 2024 budget increased the focus on TDS compliance, especially for NRI sellers.
• Digital Payments: The TDS is now applicable to digital transactions on property purchases above Rs 50 lakh.
• Threshold Changes: The threshold applicability for joint owners and inherited properties was clarified; Under section 194-IA, TDS for jointly owned properties is only deducted if each owner’s share exceeds Rs 50 lakh. TDS for inherited properties is deducted based on the property’s value, and the threshold of 50 lakh still applies.

The Union Budget of 2024 made the following important announcements regarding the TDS, impacting this tax payment mechanism:

• Digital Integration and PAN linking:

This has been mandated to ensure accuracy in tax deduction and compliance. Under this new rule, the government mandates the use of the PAN (Permanent Account Number) for both buyers and sellers. The TDS is linked to the seller’s PAN, allowing the Income Tax Department to monitor their income from the property’s sale, and ensure proper tax collection.

• A Simplified Filing Process:

Two important TDS files: 26QB (for TDS deposit) and 16B (for TDS certificate issuance), have been digitised, to help streamline the compliance process for the buyers. This change aims to minimise errors and make tracking the transaction easy.

• NRI Updates:

Under Section 195 for property sales by NRIs, TDS will be deducted by 20% or more, depending on whether the capital gains are long-term or short-term. Prevents revenue loss from overseas sellers, who might not otherwise comply with these rules.

• Transparency:

The Budget also introduced policies that countered the undervaluation of properties by aligning the circle rate with the property’s market value.

• Real-Time Monitoring:

TDS filings are to be done with other real-time monitoring systems, such as the Annual Information Statement and the seller’s income tax filings. This will help in making sure that any differences between the reported income and taxes are caught immediately.

• Applicability of TDS on Digital Payments:

TDS rules now apply to digital payment methods for property purchases. This will help make sure that there is tax compliance, because of the rise in cashless payments in recent times.

TDS Rates and Threshold

Threshold for TDS applicability:

• The TDS is applicable if the property value exceeds Rs 50 lakhs.
• The TDS is not applicable for properties whose value is below this threshold.

For example, if the property is sold at Rs 70 lakhs, then the TDS will be applicable. However, if the property is jointly owned and each owner gets a share of Rs 35 lakhs, then the TDS won’t be applied, as the threshold has not been exceeded.

Special Cases:

1. Gifted Properties: The TDS is not applied if the property was transferred through a gift deed since there was no monetary exchange.
2. Transfer via Will: Exempt from TDS, as it doesn’t qualify as a ‘sale.’

When is TDS Applicable?

Under Section 194-IA of the Income Tax Act, the applicability of TDS is determined by the following key factors:

• Transaction Amount:

• The TDS is applicable in cases where the transaction value is over Rs 50 lakh. It is calculated on the total value of the property and not on the share of individual shares of the seller, in case of joint ownership.
• For Multiple Buyers or Sellers: Each buyer or seller’s share in the property is considered individually to determine applicability. If anyone’s share exceeds Rs 50 lakh, then the TDS on the property purchase is deducted from that share.

• Type of Ownership:

• Single Ownership: If a single owner is selling a property above Rs 50 lakh, the buyer needs to deduct the TDS at 1% of the transactional value.
• Joint Ownership: When there are multiple owners, the TDS is calculated based on each owner’s share in the transaction.

• Seller’s Residency Status:

• Resident Sellers: For resident sellers, the TDS is deducted at 1% as stated under Section 194-IA of the Income Tax Act.
• NRI sellers: For NRIs, the TDS is deducted under Section 195. The rate is higher: 20% for long-term capital gains, and 30% for short-term gain. It also includes the applicable surcharge and cess. However, there is no threshold limit for TDS on transactions involving NRI sellers.

Exceptions and Exemptions:

Not all property transactions are subject to TDS. Here are some cases where you won’t have to pay TDS:

• Properties below Rs 50 lakhs: There is no TDS on property transactions valued at Rs 50 lakh or less, as stated under Section 194-IA. For NRIs, however, this exemption does not apply.

• Sale of Agricultural Land:

• Rural Agricultural Land: Under the Income Tax Act, TDS is not applicable for the sale of agricultural land located in rural areas.
• Urban Agricultural Land: However, this type of land is not exempt from TDS, and it might apply in cases where the sale value exceeds the threshold.

• Inherited or Gifted Properties: If the property is transferred after no monetary exchange, i.e. through a gift deed or inheritance, the TDS is not applicable. However, it will be applied if the property is sold, and follow the threshold rules of Rs 50 lakh.

Transfers made to government entities, through court orders, or properties purchased under affordable housing government schemes are also exempt from paying the TDS, although some conditions may apply to it.

Calculating TDS on Property Transactions

But how is the amount to be paid as the tax is determined? Here is a step-by-step guide on how the TDS on property sale is calculated:

Step 1: Determine the total transaction value.

For example, say a home at L&T Realty 77 Crossroads – Ghatkopar, is being sold for Rs 1 crore.

Step 2: Identify the seller type.

Here, the seller is an Indian resident. Thus the TDS rate of 1% is applicable.

Step 3: Deduct the TDS at the applicable rate.

Thus the TDS cut will be:

1% of 1 crore.

10,000,000 x 1/100

= 1,00,000

Thus, the TDS on the sale of this residential project is Rs 1 lakh.

However, the TDS paid will be different if the home is jointly owned. In this case, the TDS amount will be split based on the ownership proportion. In the case of joint buyers, each buyer will deduct the TDS proportionally.

How to Deduct and Deposit TDS?

Now, once you have used the steps mentioned above to calculate your TDS, you have to make the payment. But first, let’s understand the deduction guidelines:

• Who pays TDS on the sale of the property? It is the buyer’s responsibility to deduct and pay the TDS.
• This deduction has to occur during payment or while crediting the seller.

Process of Depositing TDS:

You can pay the TDS in the following ways:

• Via online portals: Use the Income Tax Departments’ e-payment system, through Challan 26QB.
• Via offline methods: You can go to designated banks to pay the TDS.

Filing TDS returns 

Now that you have paid this tax, how to file TDS on the sale of the property? Here are some mandatory forms that need to be filled out:

• Form 26QB: Used for reporting the TDS on property sale
• Form 16B: This is issued by the buyer to the seller as proof of TDS deduction.

Timelines and Deadlines:

• Always deduct the TDS at the time of the payment
• The TDS has to be deposited within 30 days from the end of the month in which the deduction occurs.
• Form 16B has to be issued within 15 days of the TDS deposit.

Common Mistakes to Avoid:

• Incorrect or Incomplete PAN details of the buyer and seller.
• Late filing or payment, could attract problems such as more interest or penalties.
• Failing to issue Form 16B to the seller.

Claiming TDS Credit

Process for Sellers:

How to claim TDS on the sale of property? When the TDS is deducted during a property sale, sellers have to claim the credit for the amount while filing their Income Tax Returns (ITR). By doing this, sellers will ensure that the deducted TDS will be adjusted against the seller’s tax liability. Here are the steps to be followed to file for the ITR claim.

Step 1: Log on to the portal.

https://www.incometax.gov.in/iec/foportal/ and select the e-filing option.

Step 2: Check Form 26AS, where you will find the TDS deducted and deposited.

Step 3: While filing for ITR, enter the details, and claim the TDS return under the ‘taxes paid’ section.

Verification in Form 26AS:

Form 26AS is important since it reflects all the deposited taxes under the seller’s PAN:

• Check the accuracy of the TDS credited by verifying the amount and buyer details.
• Ensure the PAN provided during the transaction matches the records.

Any mistakes in PAN or transaction details may result in incorrect credit allocation.

Resolving Discrepancies in TDS Credit:

In case of errors in credit allocation, such as wrong state or incomplete deposit records, sellers should follow these steps:

• Contact the buyer to correct their filings via Form 26QB.
• Use the TRACES (TDS Reconciliation Analysis and Correction Enabling System)  portal to lodge a discrepancy grievance and upload the supporting documents such as Form 16B and the sale deed.
• Follow up on rectifications to ensure that Form 26AS reflects accurate credit before filing ITR.

TDS on Property Transactions Involving NRIs

Higher TDS Rates for NRI Sellers:

Section 195 of the Income Tax Act is applicable for any property sales involving NRIs. Here are the key aspects of the same:

• Rates:

• Long-Term Capital Gains: 20% TDS + surcharge + cess.
• Short-Term Capital Gains: 30% TDS + surcharge + cess.

• Applicability: Unlike resident transactions, there is no Rs 50 lakh threshold for NRIs. The TDS will apply irrespective of the property’s value.

Obtaining Lower TDS Certificates:

NRIs can, however, reduce their TDS liability by applying for a lower deduction certificate. This can be done by:

• Filing Form 13 on the Income Tax portal and submit the following documents:

• Capital gains calculation
• Sale deed and proof of indexed costs.

• Once approved, the certificate will allow the buyer to deduct TDS at the prescribed lower rate.

Double Taxation Avoidance Agreements (DTAA):

NRIs who live in countries like the USA or the UK, which have a DTAA agreement, can also reap the benefits of reduced TDS rates or relief from double taxation.

• DTAA benefits are different in every country, but reduce the TDS to 10% in case of long-term gains
• To claim DTAA benefits, NRIs have to submit their Tax Residency Certificate issued by their country of residence to claim benefits.

How to Pay TDS on the Sale of Property?

Here is a detailed guide on how you can pay your TDS online:

Step 1: Visit the Income Tax Portal.

https://www.incometax.gov.in/iec/foportal/ 

Step 2: Choose the e-payment option from the list on the left side of your screen.

Step 3: Enter your PAN details and log in with the OTP sent to your registered mobile number.

Step 4: Once you have successfully logged in, you can choose the kind of tax you want to pay. Since you have to pay the TDS, pick the ‘Income Tax’ option, and choose form 26QB.

Step 5: Provide all the details required:

• Buyer and Seller’s PAN
• Property details and transaction value
• TDS amount (1% if you are a resident, higher if you are an NRI.)

Step 6: Pay using net banking or e-payment facilities.

Step 7: Download and save the acknowledgement slip for all future references.

If you are choosing to pay the TDS offline, then here is a walkthrough on how you can complete the transaction smoothly:

Step 1: Fill out Challan ITNS 281 manually.

Step 2: Visit your bank and submit the challan along with the payment amount.

Step 3: Obtain a stamped copy of the challan as proof of payment.

How to Claim TDS on the Sale of Property?

Seller’s Perspective:

• Use Form 16B provided by the buyer as proof of TDS deduction.
• Verify the TDS amount in Form 26AS before filing ITR to avoid any disputes or potential problems.

Buyer’s Perspective:

• Retain Form 16B as proof of TDS compliance.
• Ensure that the payment acknowledgements for each instalment are available, especially for transactions that involve staggered payments.

How to File TDS on Property Purchase?

Online Filing Via Form 26QB:

Form 26QB plays a role in reporting the TDS on property sales, and you can file TDS while paying for it.

Step 1: Log in to the income tax e-filing portal

Step 2: Choose Form 26QB to file the TDS.

Step 3: Fill in all the details:

• Buyer and Seller’s PAN
• Property Details (Address and Transaction Date)
• If applicable, the payment split for joint ownership.

Step 4: Submit the form and pay the TDS amount.

Step 5: Download the acknowledgement to help keep a record of the transaction.

As the buyer pays the TDS, you also have to give the seller a TDS Issuance certificate.

Download Form 16B from the TRACES portal 5 days after you file the TDS.

https://contents.tdscpc.gov.in/ 

• Once you register and log in on the portal using your PAN, select and download Form 16B.
• Enter all the details related to the property transaction. This includes the assessment year, acknowledgement number and the PAN of the seller. Click on proceed once done.
• Confirm and submit the request to proceed.
• Upon successful submission, you will get a request number. Make a note of this.
• Click on ‘Requested Downloads’ and download the issuance certificate.

In case of mistakes while you file the TDS, follow these steps:

• Log onto the TRACES portal and submit a correction request.
• Update all the incorrect details; it could be the transaction amount or the PAN and revalidate the filing.

Who Pays the TDS on the Sale of Property?

Legal Obligations for Buyers and Sellers:

• Buyers’ Responsibility: Deduct the TDS at the time of payment and deposit it within 30 days.
• Seller’s Responsibility: Provide the correct PAN to the buyer, and make sure that the TDS is deposited correctly.

Consequences of Non-Compliance:

• The penalty for failure to deduct the TDS is 1% interest per month on the deductible amount.
• The penalty for failure to deposit the TDS is 1.5% interest per month until the TDS is paid.

Buyers may also face fines and difficulties during property registration if they forget to pay the TDS.

FAQs on TDS on Property Sale

Here are some answers to some common questions everyone has regarding the TDS:

1. What is the deadline for depositing TDS?

• The TDS has to be deposited within 30 days from the end of the month in which the TDS was deducted.

2. Does the TDS apply to gifts or inherited property?

• No. TDS is only applicable in cases where the property was sold. Since gifted or inherited properties don’t involve any exchange of money, the TDS is not applicable.

3. How is TDS calculated for joint ownership?

• In case the property is jointly owned, each owner’s share is considered separately, and the TDS applies if anyone’s share goes over Rs 50 lakh.

Conclusion:

Understanding the importance of TDS on property transactions is important, whether you are a buyer or seller. If you comply with the deduction, deposit and filing requirements, you minimise the risk of penalties and ensure a better tax assessment.

Stay informed about the latest rules, thresholds and processes, so that all property transactions can be completed hassle-free. As buyers and sellers, maintain proper documentation, and verify the deduction via Form 26AS. In case of confusion or complex cases, such as NRI TDS payment or joint ownership, seek professional advice from the experts.