• Notification Date: 29-01-2024
• Notification No: N/A

Homebuyers are receiving Tax Notices due to TDS Shortfall

Many taxpayers, especially homebuyers, have taken to social media to complain about the TDS (tax deducted at source) shortfall notices that they have received from the income tax (I-T) department. 

Homebuyers are being asked to remit the shortfall, equivalent to approximately 20 percent of the value of the property purchased, along with penal interest. 

According to I-T rules, the homebuyer is required to deduct TDS at the rate of 1 percent of the sale consideration if the property's value is Rs 50 lakh or more. However, in the absence of a PAN or if the PAN is deemed inoperative, the TDS rate increases to 20 percent. Also, effective July 1, 2023, if the PAN is not linked with the Aadhaar card, the PAN becomes inoperative. 

Homebuyers who were unaware or neglected to verify the validity of the PAN and its linkage with Aadhaar, are now receiving notices. Here’s what the TDS rules concerning property purchase entail, and the options available for buyers who have already remitted the 1 percent TDS, paid the remaining 99 percent to the seller, and have got the notice. 

TDS makes tax collection quick and effective, as it ensures that tax is deducted right when the income is generated. The payer deducts the tax and remits it to the government on behalf of the payee. TDS is applicable on several payments such as salary, interest, commissions, brokerage, professional fees, property sale consideration, etc. 

“Section 194 IA of the Income Tax Act, 1961, requires homebuyers to withhold tax at the rate of 1 percent on the payment made to the seller, where the consideration or the stamp duty value of the property exceeds Rs 50 lakh,” said Suresh Surana, Founder, RSM India, a tax consultancy. 

If the property is worth Rs 75 lakh, the homebuyer needs to deduct Rs 75,000 (1 percent of Rs 75 lakh) and pay the remaining Rs 74.25 lakh to the seller. The buyer needs to deposit the amount deducted with the IT department within 30 days. The seller can later adjust this amount against his overall income tax liability when filing his returns. If there is a higher income tax liability due to capital gains, the seller will need to pay the difference. 

TDS in the absence of PAN, or if PAN and Aadhaar are not linked: 

Per TDS rules, in the absence of a PAN, the TDS should be deducted at a higher rate. “Where no PAN is furnished by the seller, or such PAN has become inoperative, homebuyers would be required to withhold tax at a higher rate of 20 percent,” said Surana. 

Further, “in case any person has not linked his/her PAN with Aadhaar by June 30, 2023, then such PAN would have become inoperative w.e.f. 1 July 2023, in accordance with CBDT circular no. 3 of 2023, dated 28th March 2023. In case of such inoperative PAN, the higher rate of withholding tax u/s 206AA would be applicable,” added Surana. Further, this higher TDS rate is also applicable where the seller is a Non-Resident Indian.  

Timing of the notice could also be a worry 

What if the buyer has deducted 1 percent TDS, and already paid the remaining 99 percent to the seller, before a notice is issued? Homebuyers are anxious because they say they were unaware of the rules, and whether the PAN was inoperative or not. They feel they shouldn’t be held responsible and made to pay the penal interest. 

Per TDS rules, non-compliance with TDS regulations can result in penalty and interest charges being slapped on the buyer, not the seller. “The homebuyer is responsible for verifying whether the seller’s PAN is linked to the Aadhar. In case he fails to do the same and deducts TDS at a lower rate, he would be liable,” said Surana. 

“Homebuyers who fail to deduct tax at the higher rate of 20 percent and receive a notice for short deduction would be required to pay the differential amount and file a correction in the TDS return already filed by them in this regard. Additionally, the homebuyer may also be subject to interest @1 percent per month, or part thereof, on the amount of short deduction from the date on which such tax was deductible, to the date on which it is actually paid,’’ added Surana. 

He further mentions that “as it is the homebuyer’s responsibility to confirm the status of seller’s PAN and withhold tax accordingly, the interest liability arising on account of the short deduction will need to be borne by him. However, the homebuyer may collect the additional 19 percent TDS from the deductee, wherever possible, based on their agreement and understanding.” 

According to a former Vice President of the Income Tax Appellate Tribunal (ITAT), who doesn’t want to be named, “The critical question is whether the buyer of the property (the tax deductor) was in a position to verify the PAN details of the seller at the time of making the payment, or not.” 

He says that if the homebuyer can ascertain the correctness of the PAN details, but fails to do so, “he has to suffer the consequences.” 

But, he adds, on occasion, it is possible that the homebuyer genuinely cannot verify such details. For example, when the PAN of the seller gets deactivated after the buyer deducts 1 percent TDS. 

Explaining the interpretation of India’s income tax laws, he said that nobody is expected to perform the “burden of doing the impossible.” If, for instance, the buyer can prove that the seller didn’t share the correct PAN, he can be pardoned. Also, when he feeds the PAN details of the seller online in the challan and the invalid PAN doesn’t get flagged at the time, no additional financial burden can be imposed on the buyer later, especially because the lapse is that of the seller. 

Firstly, you can verify the seller’s PAN online. You need to provide details such as the seller’s PAN, his name, date of birth, and mobile number. An OTP will be sent to the seller for verification. On entering the OTP, the website will indicate whether the PAN is active, and if the details match the PAN. Just ensure that the seller co-operates with you and shares the OTP for the purpose of PAN verification. 

If you, as a homebuyer, have been served an income tax notice for not deducting the correct TDS, and you can prove that you had no way knowing you were required to deduct TDS at a higher rate, then you can appeal to the income tax tribunal.