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TDS on Property Purchase

The Budget 2013 brought cheer to a large extent, to the real estate sector and to individual tax payers, especially the middle class. With an enhanced tax benefit on “affordable housing” loans, the real estate sector and the middle class property purchasers and first time purchasers have almost doubled the tax benefits of the housing loans taken (as per Section 80 EE).

 Tax

Proposed TDS Provisions of Budget 2013

However other than the cheer, there was a worry across the sector and across individuals and HNI’s, including NRI’s, because of the proposal for a TDS (Tax Deducted at Source) or a with-holding tax of 1% required to be deducted by every purchaser of an immoveable property (other than agricultural land) in case of the amount of payment is more than Rs 50,00,000, for transactions from 1st June 2013. As most property values nowadays will be beyond the threshold mentioned, this notification is going to affect the public at large going into a property transaction.

The proposed bill does not make a distinction between a ready property and an under construction property, hence as per basic understanding, even while paying to the builder for an under-construction property, the buyer is required to do a TDS of 1%. Hence, for all payments to builders, post 1st June 2013, you may need to do a TDS for all payments.

The person deducting the tax, as a TDs normally required a TAN number which is a Tax Deduction Account Number. Moreover, the TDS deductor will have to deposit the TDS with the Income Tax, provide a TDS certificate to the Seller and also may require to file TDS returns. Moreover, the seller will need to claim this tax benefit on the basis of the TDS certificate issued by the buyer while filing his tax returns.  This proposed process definitely enhances the complication in a Real Estate transaction manifold, wherein an individual may not be well equipped to take care of the complexity of the compliance with limited resources of qualified information and time.

Now what if the buyer of the property from a builder has taken a loan from a bank and the bank is making a disbursement to the builder or to the seller? Then will the bank do a TDS? (as the bank is actually making the payment to the seller on behalf of the buyer).

These complexities and the process are still required to be clarified by the Ministry and we are looking forward and hoping for a friendly process or a total removal of the provision.

One of the primary objectives of this proposed step is to bring into light all large value property transactions which have traditionally been vehicles for parking unaccounted (black) money and hence increase the revenue for the Government which is possibly being evaded and looked over due to lack of resources and data available in an integrated way for the Income Tax Department and the Property Registration Offices of States across the country. With the implementation of this TDS, the IT Department is expected to have information on all property transactions more than Rs 50,00,000 which is of interest for the Government as a source of revenue generation in terms of Capital Gains Tax. Moreover with this provision, property transaction will need PAN Number of the Sellers and hence the Government will be able to track transactions linking them with PAN Numbers.

The difficulty that an individual buyer may face to implement this TDS proposal are as follows:

>  Obtaining TAN number for complying with the provisions;

>  Issuance of TDS certificate to the seller;

>  Filing of TDS return quarterly and mention PAN of the seller;

>  Tax deposit within the specified time limit with the Government; and

>  May be scrutinized by the TDS officer

 

Similar provisions were proposed in the Budget for 2012, corresponding to the Finance Bill 2012, however after much opposition the same was not implemented and was withdrawn, however the Ministry seem to be strongly in favor of this provision this time round.

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Important Note: As per Section 206 AA, there is a possible provision of a TDS of 20%, instead of 1% if the PAN number is not furnished by the Seller.

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Tax Filing 14

It is important and advisable to have a qualified and experienced tax consultant and real estate lawyer to look into and look after your Real Estate transaction from both the Tax angles and also secure you at the Legal end. The cost for appointing the good consultant is more than factored-in, by the benefits that you can receive in the long term for decisions taken and the process adopted while purchasing your property.

A typically standard, qualified and experienced lawyer will cost you anywhere between 1% to 2% of the value of your property transaction, be it a sale or a purchase and hence for a transaction of a property worth Rs 75,00,000, your cost will typically be Rs 75,000, which is going to go a long way in securing the investment of Rs 75,00,000.

There have been cases where in clients have even resisted in spending couple of thousand rupees in getting a title search or putting a notice in newspapers, or drafting agreements through novices, which have resulted in long term litigation and loss of property/money/time in various degrees.

An appointed consultant need not be only transactional based, ie: only for that one particular transaction, but should ideally be maintained on a retainer-ship basis, year on year, so as to enable you to take qualified advise before any high value transaction.

Have a happy and safe transaction. Cheers.

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