A Tax Reality check for New House Buyers

by Mr. Amarpal Chadha, Tax Partner, EY. .

The buyer has to deduct tax on payment of sale consideration or credit to account of seller, whichever is earlier.

If you are planning to buy a house or paying for an under-construction property, you should be aware of a very important tax requirement, effective from June 1, 2013 — those buying an immovable property (other than agricultural land or land in specified areas) should deduct tax on payment of sale consideration or credit to the account of the seller, whichever is earlier.

This also applies to individuals not carrying on a business and who are usually not required to deduct tax. The deduction is one per cent of the payment to a resident seller, for immovable property valued at Rs. 50 lakh or more.

 

Amarpal Chadha,
 EY.

The mandate was meant to improve the reporting mechanism of real-estate transactions and tax collection at the first point

A home buyer has to comply with requirements such as depositing the deducted tax, filing returns, issuing tax deduction certificate and so on. The buyer should file an online challan-cum-statement in Form 26QB, available on the TIN website, and provide property-related information like

PAN of buyer and seller;

Personal details (address, mobile number, email id) of buyer and seller;

Address of the property transferred;

Total value and method of payment (lump sum or instalment);

Tax deduction details — amount and date of payment, rate and amount of tax deducted, date of deposit and so on.

As a relaxation, the buyer need not obtain a Tax Deduction Account Number; his/her PAN (Permanent Account Number) is sufficient.

The tax deducted may be paid electronically through the Net banking facility of an authorised bank. Payment of tax deducted and filing of Form 26QB should be completed within seven days from the end of the month in which the consideration is paid. The buyer should issue the seller a certificate for the tax deducted in Form 16B, which may be downloaded from the website of the Centralised Processing Cell of TDS (www.tdscpc.gov.in). Form 16B should be issued within 15 days from the due date for Form 26QB.

As this requirement is a recent one, there are certain aspects to watch out for, including where.

Full payment is made before June 1, 2013 and registration is after June 1, 2013: As the full payment was made before the provision became effective, tax withholding should not apply even though there was registration subsequently.

Buyer has taken a bank loan and the bank directly pays the seller: Here the tax-withholding obligation is on the buyer.

Where the seller is eligible for exemption under Section 54 of Income Tax Act 1961, the entire capital gain may be exempted and, consequently, no tax is payable: The seller, in all probability, would question the tax deduction as he/she would have to claim refund of taxes deducted.

Where there are joint buyers for an immovable property exceeding Rs. 50 lakh in value, with each paying less than Rs 50 lakh: Although the issue is debatable, it would be preferable to deduct tax to avoid any likely penalties.

Should tax be deducted when the property is under construction and the right in the property is sold?

Again there are divergent views, but the law seemingly intends to include all transfers of immovable property, completely constructed or not.

All these issues have to be dealt with caution. However, as the intent of the provision is reporting of transactions, it should be construed accordingly to make it workable.

Buyers face other practical challenges, too, in complying with tax deduction. For instance, where the consideration is disbursed in instalments by the bank, there should be an arrangement with the banker in which each instalment is paid net of taxes to the seller and the tax is deposited to the Government on behalf of the buyer.

Failure to comply with tax withholding provisions will result in recovery of tax, interest and levy of penalty. Non-payment of deducted tax can also attract prosecution.

Compliances are still at a nascent stage. There needs to be awareness about this change in tax law when transferring an immovable property.

The author is Tax Partner, EY. Anand Dhelia, Associate Director, contributed to the article.

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