Property Buyers Beware: ITAT Ruling Highlights TDS Pitfalls
A ruling by the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has underscored the importance of understanding tax deduction at source (TDS) obligations when purchasing property. The case involved a Mumbai resident who had jointly purchased a residential flat in the posh area of Haji Ali, worth Rs 1.9 crore, with her husband. She held a 15% share in the property (Rs. 28.50 lakh) and deducted TDS of Rs 28,500 under Section 194-IA on her share of the purchase price.
However, the tax department later raised a demand exceeding Rs 5.8 lakh, alleging short deduction of tax on the ground that the seller's PAN was inoperative and therefore higher TDS provisions under Section 206AA should have applied. The ITAT deleted the demand, noting that the seller had subsequently linked Aadhaar with PAN and regularized the PAN within the timeline prescribed by a circular issued by the Central Board of Direct Taxes (CBDT) in July 2025. The ITAT also observed that the seller had disclosed the capital gains in his tax return and paid the applicable taxes, making it inappropriate to treat the buyer as an ‘assessee in default’.
Tax experts state that non-linking of PAN with Aadhar is just one instance where buyers have to bear the brunt of tax demands for short deduction of TDS. They caution that property buyers must be aware of their TDS obligations, which become more complicated in cases where the seller is a non-resident or a property held in joint names is being purchased.
Ketan Vajani, a chartered accountant, said buyers must exercise caution when purchasing property from residents as well as non-residents. In the case of resident sellers, TDS under Section 194-IA is generally deducted at 1%. There is no provision for lower deduction. He pointed out that buyers should ensure TDS is computed on the higher of the transaction value or stamp duty value. The buyer must ensure that the deduction is made on the total amount, including all charges such as parking fees, club membership, etc., and not merely on the value of the property.
For purchases from non-resident sellers, the compliance burden is significantly higher. According to Vajani, buyers will need to compute the seller's taxable capital gains and deduct tax under Section 195 at applicable rates rather than the standard 1% rate applicable to resident sellers. Ameet Patel, another chartered accountant, said TDS provisions on property transactions often catch ordinary buyers unaware. ‘While the tax department views TDS as a tool for tracking transactions and ensuring tax compliance by sellers, the compliance burden on homebuyers can be onerous’.
Patel added that disputes can become more complicated in transactions where the property is held jointly. For example, the husband may have funded the property entirely, but has added his wife’s name to provide her a security cushion. When such a property is sold, it can be challenging for the buyer to determine the correct allocation of the sale price and the TDS components. Tax experts point out that many buyers are unaware of their TDS obligations and often require professional assistance to navigate procedures such as obtaining a TAN, filing forms, depositing tax, and obtaining TDS certificates.
