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The Finance (No.2) Act, 2024, has introduced significant clarifications to Section 194-IA of the Income-tax Act, which governs the tax deduction at source (TDS) on the purchase of immovable property. These changes are aimed at ensuring accurate and consistent tax compliance when multiple parties are involved in a property transaction. 

This article focuses on the key amendments and provides practical examples to illustrate their impact.

1. Overview of Section 194-IA

Section 194-IA mandates that any person responsible for paying consideration for the transfer of immovable property must deduct TDS at the rate of 1% of the consideration or the stamp duty value, whichever is higher. However, this is only applicable if the consideration or stamp duty value (any one) is ₹50 lakhs or more.

The immovable property for the purpose of TDS under the above provision, does not include agricultural land, which is not a capital asset in term of section 2(14) of the Income-tax Act.

2. Key Amendment: Aggregate Consideration for Multiple Buyers/Sellers

One of the primary changes introduced by the Finance (No.2) Act, 2024, is a clarification regarding the interpretation of the ₹50 lakh threshold in cases where there are multiple buyers or sellers involved in the transaction.

Before the amendment, some taxpayers misinterpreted the law, believing that if each buyer’s share in the property was less than ₹50 lakh, no TDS was required to be made, even if the total consideration or the stamp duty value of the property exceeded ₹50 lakh. This allowed certain taxpayers to avoid TDS by splitting the payment across multiple parties.

The amendment now clarifies that the ₹50 lakh threshold applies to the total consideration or stamp duty value, not individual shares. In cases where there are multiple buyers or sellers, the consideration or stamp duty value, which ever is applicable, should be aggregated.

Examples

Example 1: Multiple Buyers

Mr. A and Mr. B jointly purchase a property for ₹60 lakh at stamp duty value from Mr. C, with each buyer contributing ₹30 lakh.

• Before the Amendment: Each buyer could argue that since their individual consideration was less than ₹50 lakh, no TDS was required.
• After the Amendment: The total consideration value is ₹60 lakh, which exceeds the ₹50 lakh threshold. Therefore, TDS at 1% of ₹60 lakh (i.e., ₹60,000) must be deducted, even though each buyer is paying less than ₹50 lakh.

Example 2: Multiple Sellers

Mr. X and Mrs. Y jointly own a property that they sell to Mr. Z for ₹70 lakh (stamp duty value is ₹68lakh), with each seller receiving ₹35 lakh.

• Before the Amendment: Mr. Z could argue that since he is paying each seller less than ₹50 lakh, no TDS was required.
• After the Amendment: The total transaction value is ₹70 lakh, which exceeds the ₹50 lakh threshold. Hence, TDS at 1% of ₹70 lakh (i.e., ₹70,000) must be deducted on the total consideration paid to both Mr. X and Mrs. Y.

4. Importance of the Amendment

This amendment ensures that the intent of the legislation is to be followed for TDS based on the total consideration or total stamp duty value, rather than individual contributions or receipts. By addressing this loophole, the government aims to prevent the under-reporting of real estate transactions.

5. Effective Date

The amendment to Section 194-IA will come into effect from October 1, 2024. Buyers and sellers engaging in real estate transactions involving multiple parties should ensure compliance with the updated provisions from this date onward to avoid default of tax deduction under section 201(1) and interest under section 201(1A)

Conclusion:

The amendment to Section 194-IA is a critical step toward enhancing the transparency and fairness of the TDS regime on immovable property transactions. By requiring TDS on the aggregate value in cases involving multiple buyers or sellers, the government has plugged a potential loophole that was being exploited in the real estate sector. Taxpayers involved in property transactions of ₹50 lakh or more should carefully assess their TDS obligations based on the total consideration, irrespective of how it is split among the parties involved.

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Disclaimer:

The information provided in this article is for general informational purposes only and does not constitute legal, tax, or professional advice. Readers are advised to consult with a qualified tax advisor or legal professional for specific advice tailored to their individual circumstances, particularly regarding reassessment proceedings and claiming refunds. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the content of this article.