MUMBAI
:
India’s real estate market just got a bit more transparent for tax authorities, but this increased scrutiny can change the dynamics of property transactions. A new tax rule, effective from October, will close a loophole that has allowed property sellers to skirt their tax obligations.
Under previous income tax rules, any property sold for more than ₹50 lakh required the buyer to deduct 1% as tax deducted at source (TDS). However, a clever workaround has been in play for years. To avoid the 1% tax deducted at source (TDS) on property sales exceeding ₹50 lakh, sellers and buyers would structure deals to keep individual payments below this threshold.
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For example, a ₹60 lakh property could be sold to a couple with each paying ₹30 lakh, or a couple could sell a property showing each received ₹30 lakh, effectively splitting the total transaction value.
“Some people were of the stand that if they were paying less than ₹50 lakh individually, the 1% TDS was not required,” said Nitesh Buddhadev, a chartered accountant and founder of Nimit Consultancy.
This scheme is about to end, as provisions of Budget 2024 will plug this loophole by considering the total sale consideration, not just individual payments.
As per the new rules, “where there is more than one transferor or transferee in respect of an immovable property, then such consideration shall be the aggregate of the amounts paid or payable by all the transferees to the transferor or all the transferors for the transfer of such immovable property.”
This means that the combined payments of all buyers will determine the TDS liability.
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Key considerations
The move is expected to bolster tax collection and deter evasion in the real estate sector. However, there are nuances.
NRIs and agricultural properties: The 1% TDS rule does not apply to properties bought from non-resident Indians which instead requires a TDS of 12.5% or 30%, for properties held for the long term and short term, respectively. “With the Budget changing the LTCG (long-term capital gains) rate on property to 12.5%, the TDS applicable on properties sold by an NRI will also be 12.5%,” said Ajay R Vaswani, founder of ARAS and Co.
Also read | Budget 2024: What changes in capital gains taxes mean for investors
Residents selling agricultural land are not subject to TDS. The 1% TDS is calculated on either the property sale value or the stamp duty value, whichever is higher.
PAN-Aadhar linkage: In some cases, the IT department demands a 20% TDS if the seller’s PAN is not linked to their Aadhar, a rude shock for some buyers. To avoid this, Prakash Hegde, a Bangalore-based chartered accountant, recommends verifying the seller’s PAN-Aadhar linkage on the income tax website.
Penalty for non-compliance
Failure to pay TDS on property sales within 30 days from the end of the month in which the transaction occurred can result in a penalty of ₹200 per day until paid. For example, if a property transaction occurred on 2 August, the TDS must be paid by 30 September.
Additionally, the income tax department may impose the TDS amount as a penalty.
