TDS on Buying a Flat: Section 194-IA for First-Time Buyers

When you buy your first home, most costs are announced to you. The builder sends a demand letter. The sub-registrar quotes stamp duty. The bank tells you its fees. One obligation is announced by nobody, because it is nobody else's job: tax deducted at source (TDS) under section 194-IA of the Income-tax Act, 1961. And it falls on you, the buyer.

This post explains the rule. Filing the form itself, Form 26QB, is covered in a separate post for joint buyers.

Why the buyer deducts

TDS is a way of collecting tax early. Instead of waiting for the seller to declare the income, the law asks the payer to keep back a slice and pay it to the government against the seller's PAN. In a home purchase, the payer is you.

Section 194-IA asks a buyer of immovable property, other than agricultural land, to deduct tax from the amount paid to a resident seller, where the price or the stamp duty value is not below the threshold set in the section. Four phrases matter:

• Buyer: the duty is yours and cannot be shifted to the seller by contract.
• Other than agricultural land: farm land is outside this section.
• Resident seller: if the seller is non-resident, a different section applies.
• Price or stamp duty value: the threshold is tested against two values, which may differ.

Why do so many buyers miss it? Section 194-IA(3) removes the need for a TAN (tax deduction account number). That kindness also removes the one step that would have alerted you. Nothing in the buying process forces you to notice.

The rate and threshold: check them, don't memorise them

Both are in section 194-IA, and both have been changed by Finance Acts since the section arrived in 2013. A blog that prints a figure may be out of date the day after a Budget. Read the current section on the Income Tax Department's website, or ask your chartered accountant. If you deduct too little based on an old number, the shortfall is your problem.

The stamp duty value matters here too. If the government guidance value for your flat is higher than the price you agreed, it can change what you must withhold. Ask a chartered accountant with your actual numbers before paying.

When you deduct

At the time the amount is credited to the seller or paid, whichever is earlier. For an under-construction flat, that means every instalment, not one deduction at the end. Six payments, six deductions.

The deadline to deposit runs from the end of the month of deduction, under rule 30 of the Income-tax Rules, 1962. That period has been amended before, so read the current rule.

Instalments, loans and the threshold

• The duty starts with the first payment after the agreement, not at possession.
• The threshold is tested on the whole deal. Paying in small pieces does not make it exempt.
• If your bank pays the builder directly, it is still your payment. The bank is not deducting for you.

A worked example (illustrative arithmetic)

For the arithmetic only, take a TDS rate of 1%. Confirm the rate actually in force before you use it.

• Your builder raises a demand for ₹10,00,000 at the slab stage.
• TDS at 1% is ₹10,000.
• You pay the builder ₹9,90,000 and deposit ₹10,000 against the builder's PAN through Form 26QB.
• The builder's receipt should acknowledge the full ₹10,00,000: ₹9,90,000 received plus ₹10,000 TDS.

Now say the loan covers part of it, and the bank sends ₹8,00,000 straight to the builder. You still owe TDS on the whole ₹10,00,000 instalment. Many buyers pay the ₹10,000 from their own account and ask the bank to release ₹8,00,000 while they pay ₹1,90,000. Agree the split with your bank before the money moves.

Joint buyers

When two people buy together, each buyer is a payer for their share. Each files a Form 26QB for the amount they pay, against the seller's PAN. If there are two sellers, there is a form for each buyer and seller pair. Write the ownership shares into the agreement so the split is clear from the start.

Step by step on each instalment

1. Receive the demand letter and check the amount and GST shown.
2. Work out the TDS on the amount payable, using the current rate.
3. Pay the builder the balance, by bank transfer to the account in the agreement.
4. File Form 26QB and pay the TDS on the Income Tax Department's portal within the deadline.
5. Download Form 16B once it is available and send it to the builder.
6. File all three together: demand letter, payment proof, Form 26QB and Form 16B.

Common mistakes to avoid

• Assuming the bank or builder will handle TDS.
• Deducting only once, at possession, instead of on each payment.
• Using an old rate or threshold from a blog or a friend.
• Entering the wrong PAN, or the wrong payment date, on the form.
• Forgetting to send Form 16B to the seller.

Form 26QB and Form 16B, briefly

Form 26QB is both the statement and the payment slip. It is filed on the Income Tax Department's portal, using both PANs, once for each buyer-and-seller pair. After it is processed, you download Form 16B, the certificate you must give the seller under section 203 of the Act. This last step is often forgotten, leaving the seller unable to show the credit.

Keep the acknowledgement, the payment proof and Form 16B with your sale deed. A future buyer's lawyer, or your own bank for a top-up loan, may ask to see them years from now.

If the seller is an NRI

Section 194-IA only covers payments to a resident seller. For a non-resident seller, section 195 applies instead, with different mechanics, different forms and a TAN that is genuinely needed. A buyer who applies the familiar rule to an NRI seller can later be asked to make up the shortfall with interest. Residence is a legal status under the Act, not a matter of passport or address, so confirm it before agreeing the payment plan.

When to bring in a chartered accountant

Most buyers of a new flat from a resident builder can do this themselves with care. Get professional help early if any of these apply:

• The seller may be non-resident, or residence is unclear.
• The stamp duty value is higher than your agreed price.
• There are several buyers or sellers with unequal shares.
• You have already missed a deduction and need to put it right.

A short consultation before the first instalment usually costs far less than fixing a default notice later.

What happens if you miss it

A registered deed does not make the issue go away. Under sections 201 and 201(1A), a buyer who fails to deduct or deposit can be treated as an assessee in default, with interest. Section 234E charges a fee for filing the statement late, and section 271H provides a penalty for not filing or filing wrong details.

It usually comes to light later: the seller notices a missing credit, the department sends a notice, or a future buyer's lawyer asks. Doing it right on each instalment is far easier than fixing it years on. Our first home guide shows where this step sits among the other payments.