TDS on Property Purchased in case of Joint Owner

When buying property in India, it's crucial to consider Tax Deducted at Source (TDS), especially for properties purchased jointly. According to the Income Tax Act of 1961, TDS must be deducted on the transfer of specific immovable properties (excluding agricultural land) if the transaction value is over ₹50 lakh. This falls under Section 194-IA of the Act.let us understand in detail the intricacies of this section along with the practical considerations necessary when joint owners purchase a property.

Meaning Of TDS

TDS stands for Tax Deducted at Source, a method used to collect income tax in India as per the Indian Income Tax Act of 1961. This method involves deducting tax at the source of income generation instead of delaying it. This system is created to gather taxes directly from the income source. According to this idea, an individual (deductor) who needs to make a payment of a specific type (like salary, interest, commission, rent, professional fees, etc.) to another individual (deductee) must deduct tax at source and send it to the Central Government's account.

After deducting the tax amount, the deductor provides a TDS certificate to the deductee. This certificate allows the deductee to claim credit for the tax already deducted and paid on their behalf when filing taxes annually.

What Are The Objectives Behind Introduction Of TDS Under The Income Tax Regime

The objectives and benefits of tax deduction from source are many, few of which are underlined below-

1. Ensuring Regular Revenue to the Government:TDS facilitates a steady flow of income to the government throughout the year, aiding in better financial planning and management of public resources.
2. Widening the Tax Base:By mandating the deduction of tax at the source of income, TDS helps in bringing more people into the tax net, thereby widening the tax base. It ensures that taxes are collected from a larger segment of the population, including those who might otherwise evade tax payments.
3. Ease of Tax Payment for the Taxpayer:TDS distributes the tax payment over the year instead of requiring taxpayers to pay a lump sum amount at the end of the financial year. This method eases the financial burden on taxpayers, making it more manageable for them to fulfil their tax obligations.
4. Minimising Tax Evasion: By deducting tax at the source of the income, the possibility of tax evasion is significantly reduced. Since the tax is collected upfront and deposited with the government, it leaves less room for individuals and entities to underreport income or evade taxes.
5. Simplification of the Tax Collection Process: TDS simplifies the tax collection process for the government by collecting tax at the source, reducing the need for direct collection from each taxpayer. This system also simplifies the process for taxpayers, as the tax is automatically deducted and they are credited with having paid it, subject to adjustments at the end of the fiscal year based on their total income and tax liability.
6. Ensuring Timely Collection of Taxes: Since TDS is collected at the time of transaction, it ensures that taxes are collected in a timely manner. This is crucial for the government's budgetary and financial planning.
7. Creating a Trail of Transactions: The TDS mechanism creates a documented trail of financial transactions, which can be useful for auditing and scrutinising purposes. It aids in tracking the flow of money and ensuring that all taxable transactions are recorded and taxed appropriately.

Understanding Section 194-IA Of Income Tax Act-1961

Section 194-IA of the Income Tax Act, 1961, deals with the deduction of Tax Deducted at Source (TDS) on the transfer of specificimmovable property, (excluding agricultural land).

 Here is a analysis of the section:

1. Any individual (transferee) who is accountable for paying the price for transferring immovable property (except agricultural land) to a resident seller must withhold TDS at a rate of 1% of the total amount of consideration.
2. TDS must be deducted either at the time of depositing the consideration amount to the seller's account or at the time of payment, whichever occurs first. This includes payments made in cash, by cheque, draft, or any other method.
3. TDS deduction is not necessary if the payment for the transfer of immovable property is below ₹50 lakh.
4. This provision is not applicable to transactions falling under section 194LA, which pertains to compensation for forcible acquisition of specific immovable property.
5. Individuals or businesses obligated to deduct TDS under this provision are excused from the necessity of acquiring a Tax Deduction and Collection Account Number (TAN), only PAN card is the requirement.
6. This section intends to enforce tax compliance and collect revenue from high-value transactions related to the transfer of immovable property.

Analysis of terminologies

1. Agricultural Land in India refers to land utilised for agricultural activities, excluding designated areas.
2. Immovable Property refers to land (except agricultural land) and structures, or sections of buildings.

Concept Of Co-Owner/Joint owner Under section 26 Of The Income Tax Act

Section 26 of the income tax Act, 1961 illustrates  “Property owned by co-owners.—Where property consisting of buildings or buildings and lands appurtenant thereto is owned by two or more persons and their respective shares are definite and ascertainable, such persons shall not in respect of such property be assessed as an association of persons, but the share of each such person in the income from the property as computed in accordance with sections 22 to 25 shall be included in his total income. 2 [Explanation.—For the purposes of this section, in applying the provisions of sub-section (2) of section 23 for computing the share of each such person as is referred to in this section, such share shall be computed, as if each such person is individually entitled to the relief provided in that sub-section.”

Let us understand this section in detail-

1. When two or more individuals jointly own a property, and their respective ownership shares are clear and definite, they are not taxed as a collective entity for that property's income.
2. Instead, the income from such property is divided among the co-owners based on their specific shares.
3. This income is then included in each co-owner's total income for tax purposes.
4. The calculation of each co-owner share in the property's income is done according to sections 22 to 25 of the Income Tax Act, which deal with the taxation of income from house property.
5. This includes considerations such as the property's annual value, property taxes paid, interest on borrowed capital for acquiring the property, and a standard deduction for repairs and maintenance costs.
6. The Explanation added to the section clarifies that when computing the share of income for each co-owner, the relief provided under subsection (2) of section 23 is applied to each co-owner as if they individually qualify for it. Section 23(2) deals with the conditions under which a property (or part of it) is considered self-occupied for determining its annual value, which can significantly affect the taxable income derived from the property.

Co-Ownership/Joint ownership And Its Implications Within The Income Tax Act, 1961

1. Each co-owner is taxed on their respective share of income from the property, which is typically in proportion to their ownership share in the property. For instance, if two individuals own a property in a 50:50 ratio, each would be taxed on 50% of the income derived from that property.
2. If the property is acquired with the help of borrowed capital, each co-owner can claim a deduction for the interest paid on their share of the loan under Section 24 of the Income Tax Act. The limit for deduction on interest on borrowed capital for a self-occupied property is up to Rs. 2 lakh individually.
3. Each co-owner can avail the benefit of their basic exemption limit against their share of income from the co-owned property. This can lead to tax savings if the total income from the property is divided among the co-owners in such a way that it falls below their respective basic exemption limits.
4. Co-owners can also claim deductions under Section 80C of the Income Tax Act for their share of the principal repayment on the loan taken to purchase the property. The maximum limit under this section is Rs. 1.5 lakh individually.
5. If the jointly owned property is let out, the rental income, after deducting municipal taxes and claiming a 30% standard deduction for maintenance, is taxable in the hands of each co-owner according to their ownership share.
6. It's important for co-owners to clearly document their proportion of ownership and the income derived from the property. Proper documentation and declarations will help in the smooth processing of tax filings and any related queries from the Income Tax Department.
7. Each co-owner must file their income tax returns separately, declaring their share of income from the jointly owned property and claiming eligible deductions and exemptions.

Interrelation Between Section 26 & 194 IA Of Income Tax Act 1961

Section 26 and Section 194-IA of the Income Tax Act, 1961, pertain to distinct elements of property ownership and taxation. Let's see how they are interconnected:

1. Section 26 of the Income Tax Act discusses the idea of joint ownership of property. When many individuals co-own a property, each co-owner is taxed individually based on their portion of the income generated by the property.
2. Section 194-IA requires the deduction of Tax Deducted at Source (TDS) on the sale of specific immovable properties, except agricultural property. The buyer must remove 1% of the total consideration value and send it to the government when buying properties from resident sellers.

Interconnection:

1. If joint owners sell a property covered under Section 194-IA, the buyer is required to deduct TDS at the time of payment to the seller, as per Section 194-IA.
2. The sale consideration for each co-owner is determined according to their ownership proportion, as outlined in Section 26.
3. TDS deduction under Section 194-IA is based on the whole consideration amount paid to the seller, regardless of their ownership stake in the property.
4. When determining the taxable income for each co-owner, only their individual portion of the selling proceeds is taken into account, in accordance with Section 26.
5. Section 26 regulates the taxation of jointly held properties, while Section 194-IA enforces TDS requirements on property buyers.

Illustration Explaining The TDS On Property Purchased By Joint Owners

1. A and B decide to collectively buy a residential property in Mumbai. They discover an appropriate flat and decide to divide the ownership equally, with each person owning 50% of the property.
2. The total amount for the property is ₹1 crore.
3. As per Section 194-IA of the Income Tax Act, when the total consideration is over ₹50 lakh, the buyer (A and B together) must pay TDS at a rate of 1% on the total consideration.
4. Hence, the TDS to be deducted is 1% of ₹1 crore, equaling ₹1,00,000.
5. A and B, as the buyers, need to withhold ₹1,00,000 as TDS from the payment to the seller.
6. Each individual is expected to contribute an equivalent amount of ₹50,000 towards the TDS deduction.
7. They must deposit the TDS money with the government within the specified time period and submit Form 26QB to record the transaction details and TDS deduction.
8. A and B, as co-owners of the property, are jointly responsible for deducting and depositing TDS on the property acquisition in accordance with Section 194-IA.

How The Share Of Each Co-Owner Is Decided

1. If both spouses' names appear on records as purchasers of a property, they may each have distinct ownership stakes in the property. Occasionally, further individuals are added to the agreement to ensure the seamless transfer of the property. Hence, the co-owners' interests in the property will be based on their respective contributions to the property's cost.
2. Contributions may consist of the down payment or their portion of the home loan.
3. This information can be verified by examining the bank statements of the co-owners.
4. If you haven't contributed to the purchase price, you will not be recognised as a co-owner of the property for income tax reasons, even if your name is listed in the agreement as a buyer.

Types Of Co-Ownership

1. Joint Tenancy:In joint tenancy, each co-owner has an undivided interest in the entire property. If one co-owner passes away, their share automatically transfers to the surviving co-owner(s) rather than to their heirs. Joint tenancy often includes a right of survivorship.
2. Tenancy in Common:Tenancy in common allows co-owners to have unequal shares of the property. Each co-owner can sell, mortgage, or transfer their share without the consent of the other co-owners. In the event of a co-owner's death, their share of the property passes to their heirs rather than to the other co-owners.
3. Tenancy by the Entirety:This type of co-ownership is only available to married couples. It functions similarly to joint tenancy but with the additional feature that neither spouse can sell or mortgage their share of the property without the consent of the other spouse.
4. Community Property:Community property is a form of co-ownership recognized in some states, where property acquired during the marriage is considered jointly owned by both spouses, regardless of which spouse acquired it. Each spouse has an equal interest in community property.
5. Partnership:Co-ownership through a partnership occurs when multiple individuals form a legal partnership to own property together. The rights and responsibilities of each partner are typically outlined in a partnership agreement.

What is the Purpose of form 26QB

1. Form 26QB is utilised for remitting TDS (Tax Deducted at Source) on property deals as per Section 194-IA of the Income Tax Act, 1961. Buyers must deduct TDS at a rate of 1% on the entire consideration amount when purchasing immovable property (excluding agricultural land) for ₹50 lakh or more from a resident seller, and deposit it with the government.
2. Form 26QB acts as the challan and statement for TDS payment on property transactions. The buyer utilises it to provide information regarding the property transaction, including the buyer's and seller's PAN (Permanent Account Number), property specifics, consideration amount, deducted TDS amount, etc. The purchaser must complete Form 26QB online using the TIN-NSDL website or authorised banks' online platforms.
3. Upon completing Form 26QB and submitting the TDS payment, the buyer is issued a TDS certificate in Form 16B by the government, which acts as evidence of TDS deduction. The buyer must furnish this certificate to the seller as proof of TDS deduction in the property transaction.
4. Form 26QB assures adherence to TDS regulations and simplifies the process of deducting and transferring tax on property transactions, promoting tax transparency and enhancing revenue collection.

Conclusion

Understanding the intricacies of TDS on property purchases in the case of joint ownership is essential for both buyers and sellers to ensure compliance with tax laws and smooth transaction processes. Co-owners must be aware of their respective obligations regarding TDS deduction, payment, and documentation to avoid potential penalties or legal consequences.

TaxPartner, with its expertise in tax matters and property transactions, can provide valuable assistance to individuals navigating TDS requirements in joint property purchases. Our team of tax professionals can offer guidance on TDS calculation, filing Form 26QB, obtaining TDS certificates, and ensuring compliance with all regulatory requirements. With TaxPartner's support, clients can streamline the TDS process, mitigate risks, and facilitate seamless property transactions while adhering to tax regulations effectively.

FAQ’S

Who is responsible for deducting TDS in the case of joint ownership of property?

The buyer (transferee) is responsible for deducting TDS on the total consideration amount paid to the seller (transferor), regardless of the number of co-owners.

How is the TDS amount calculated in the case of joint ownership?

The TDS amount is calculated at the rate of 1% of the total consideration amount if it exceeds ₹50 lakh. Each co-owner's share of the TDS amount is determined based on their ownership percentage in the property.

What happens if one co-owner has not contributed to the purchase consideration?

If a co-owner has not contributed towards the purchase consideration, they are not considered a co-owner for income tax purposes, even if their name appears in the agreement. Consequently, they are not liable for TDS deduction.

Can TDS be deducted separately by each co-owner in the case of joint ownership?

No, TDS must be deducted collectively by the buyer on behalf of all co-owners at the time of payment to the seller. Each co-owner's share of the TDS amount is determined based on their ownership percentage.

Is there any exemption from TDS for joint owners if the property is sold below ₹50 lakh?

Yes, no TDS deduction is required if the consideration for the transfer of immovable property is less than ₹50 lakh, irrespective of the number of joint owners.

How can co-owners obtain proof of TDS deduction?

Co-owners can obtain a TDS certificate in Form 16B from the government after the TDS payment is made. This certificate serves as proof of TDS deduction and must be provided to the seller during the property transaction.

Where can I file Form 26QB for TDS payment on property transactions?

Form 26QB can be filed online through the TIN-NSDL website or authorised banks' online portals. It is a challan cum statement used for reporting details of the property transaction and making TDS payment.