Key TDS Provisions and Thresholds – Section 194-IA, 195, and Exemptions

17 May Key TDS Provisions and Thresholds – Section 194-IA, 195, and Exemptions

Key TDS Provisions and Thresholds – Section 194-IA, 195, and Exemptions

To summarize the TDS obligations on property sales, here are the key provisions and thresholds under the Income Tax Act:

Section 194-IA – TDS on Purchase of Property from a Resident
This section applies when buying immovable property (land or building) from a resident seller (individual or anyone not an NRI). Key points:

• Who deducts and when: The buyer deducts TDS from the sale consideration at the time of payment to the seller. If there are multiple buyers or sellers, each can be responsible for their portion. No TAN is required for the buyer; they can use their PAN to deposit TDS under this section.
• Rate of TDS: 1% of the sale price or the stamp duty value, whichever is higher. (The inclusion of stamp duty value ensures TDS is not bypassed by undervaluing the agreement.) This 1% rate is flat and does not depend on the seller’s capital gain or income level.
• Threshold – ₹50 lakh exemption limit: TDS under 194-IA is required only if the property’s sale consideration is ₹50,00,000 or more. If a property sells for ₹49 lakh, no TDS is deducted. The ₹50 lakh threshold applies per property transaction. Example: If you buy two adjacent flats from the same seller for ₹30 lakh each (total ₹60 lakh), TDS may still apply because the combined payment exceeds ₹50 lakh (tax authorities typically treat it per property/seller). However, a court tribunal ruled that in a joint purchase, if each buyer’s individual share is below ₹50 lakh, TDS might not be required. It’s safest to assume the ₹50 lakh threshold in total.
• Exceptions – when 1% TDS is not applicable: Agricultural land is excluded from Section 194-IA’s scope. So, if you’re buying a farmland, no TDS even if amount exceeds ₹50 lakh. Other cases where TDS might not apply include transactions with government (e.g., buying from a development authority) or where the sale is by inheritance or gift (since TDS applies only on “purchase” transactions for consideration). Also, if the seller fails to provide a PAN, the law prescribes TDS at 20% instead of 1% – so sellers should always give their PAN to the buyer to avoid a higher deduction.
• Depositing TDS: The buyer must remit the TDS amount to the government, using Form 26QB (an online challan-cum-statement) within 30 days from month-end in which TDS was deducted. After payment, the buyer should provide Form 16B (TDS certificate) to the seller as proof of the deduction. Because 194-IA is meant for one-time property deals by individuals, the buyer does not need a TAN number.

Section 195 – TDS on Purchase of Property from an NRI
Section 195 covers any payment to a Non-Resident Indian, and in property sales it mandates TDS when the seller is an NRI. Key points:

• Who deducts and compliance: Again, the buyer must deduct the tax. Here, the buyer must obtain a TAN (since Form 26QB cannot be used). TDS is deducted at each installment or payment to the NRI. The buyer then deposits it by the 7th of the next month and files a quarterly TDS return (Form 27Q). A Form 16A TDS certificate is given to the NRI seller. Essentially, purchasing from an NRI carries more compliance burden on the buyer to avoid penalties.
• Rate of TDS: There is no fixed percentage like 1% – the rate depends on the nature of income. For property sales, it’s guided by capital gains tax rates:
  • Long-term capital gain on property – TDS at 20% (plus surcharge & cess). With the 2024 change, effectively a 12.5% (no indexation) option exists, but in practice buyers deduct 20% (or 12.5% if instructed) on the entire sale amount to cover the gain. If the sale price is high (over ₹50 lakh/₹1 crore), surcharge applies (e.g., 10% surcharge above ₹50 lakh, 15% above ₹1 crore, etc., which the buyer should factor in).
  • Short-term capital gain (property held <24 months) – TDS at 30% of sale price (plus applicable surcharge/cess), since the short-term gains would be taxed at the NRI’s slab rate up to 30%. The buyer usually withholds at the maximum rate to be safe.
• No minimum threshold: All sale amounts are subject to TDS under Section 195 – there is no ₹50 lakh floor. Even if an NRI sells a property for ₹30 lakh, the buyer must deduct the applicable TDS (unless the income is clearly exempt). The law only excuses TDS if the sum is not chargeable to tax under the Act. For instance, if an NRI is selling rural agricultural land which is not a taxable capital asset, that payment isn’t chargeable to tax – hence no TDS would be required in that specific scenario. In most other cases, some capital gain will arise, so TDS is done.
• Lower or Nil TDS via certificate: If the NRI seller arranges a Section 197/Form 13 certificate for lower TDS, the buyer can deduct at the approved lower rate or amount. For example, a certificate might direct the buyer to deduct only ₹5 lakh instead of 20% of the whole price. Without this, the buyer must assume the highest rate on full consideration.
• Penalties for non-compliance: Buyers should be aware that failing to deduct or deposit TDS correctly can lead to interest and penalties. Interest at 1% per month is charged for late deduction, 1.5% per month for late deposit, and penalties can equal the TDS amount not deducted. The buyer could also be treated as an “assessee in default” by the tax department. So, it’s crucial to follow TDS rules diligently when transacting with an NRI.

When TDS is Not Applicable:
To recap, TDS on property sale is not required in the following scenarios:

• The sale price is below ₹50 lakh and the seller is resident (Section 194-IA threshold not breached). Example: You sell your flat for ₹ Forty Lakhs – the buyer doesn’t deduct TDS due to the transaction being under the limit.
• The property sold is agricultural land (and not just any land – it must qualify as agricultural). Such sales are outside 194-IA, and if rural, they aren’t taxable at all. Example: Sale of a rural farm for ₹1 crore – no TDS, no capital gain tax.
• The income from the sale is explicitly exempt for the seller. For instance, if a seller has a special exemption certificate or the transaction is structured under a tax-exempt transfer (like certain government acquisitions or inheritance, etc.), TDS might not be needed. However, these are less common for typical sales.
• NRI-specific: If the NRI seller obtains a nil tax deduction certificate because their entire gain is offset by exemptions (say they are reinvesting all proceeds in a new house), the tax officer may authorize zero TDS. In this case, the buyer would not deduct TDS as the certificate overrides the general requirement.
• Seller’s PAN not available: Technically TDS is still applicable, but as noted, the rate would be 20% (per Section 206AA) instead of 1% in a resident case. This isn’t an exemption, rather a higher deduction rule – so it’s a reminder that sellers should always provide their PAN. For NRI transactions, absence of PAN also triggers a higher TDS (at least 20% or applicable treaty rate).

Quick Example (TDS scenarios): Ram is buying a property for ₹45 lakh from an Indian resident. Because the price is below ₹50 lakh, Ram does not have to deduct any TDS under Section 194-IA. Now suppose the property price was ₹55 lakh – then Ram must deduct ₹55,000 (1%) as TDS and pay the rest to the seller. Alternatively, if Ram is buying a ₹45 lakh property from an NRI, Section 195 applies and there is no minimum threshold, so he must deduct TDS. If that ₹45 lakh sale is long-term for the NRI, Ram would likely deduct ~20% of ₹45 lakh (₹9 lakh) as TDS, unless a lower TDS certificate is provided. As you can see, thresholds and rates differ greatly for resident vs NRI cases. Always determine the seller’s residency and the property type to figure out the correct TDS obligation and rate.