A recent ruling by the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has highlighted the critical importance of understanding tax deduction at source (TDS) obligations when buying property. The case involved a Mumbai resident who jointly purchased a residential flat in the upscale Haji Ali area for Rs 1.9 crore with her husband. She held a 15% share in the property, valued at Rs 28.50 lakh, and deducted TDS of Rs 28,500 under Section 194-IA on her share of the purchase price.
Tax Department's Demand
The tax department later raised a demand exceeding Rs 5.8 lakh, alleging a short deduction of tax. The department argued that since the seller's PAN was inoperative, higher TDS provisions under Section 206AA should have been applied.
ITAT's Decision
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 tribunal also observed that the seller had disclosed the capital gains in his tax return and paid applicable taxes, making it inappropriate to treat the buyer as an 'assessee in default'.
Expert Insights
Tax experts emphasize that non-linking of PAN with Aadhaar is just one instance where buyers face tax demands for short deduction of TDS. They caution that property buyers must be aware of their TDS obligations, which become more complicated when the seller is a non-resident or the property is held in joint names.
Ketan Vajani, a chartered accountant, advised buyers to exercise caution when purchasing property from both residents and non-residents. For resident sellers, TDS under Section 194-IA is generally deducted at 1%, with 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 deduction must be made on the total amount, including all charges such as parking fees and club membership, not merely the property value.
For purchases from non-resident sellers, the compliance burden is significantly higher. According to Vajani, buyers need to compute the seller's taxable capital gains and deduct tax under Section 195 at applicable rates rather than the standard 1% rate for 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,” he stated.
Joint Property Complications
Patel added that disputes can become more complicated in transactions where the property is held jointly. For example, if the husband funded the entire property but added his wife's name for security, the buyer may find it challenging to determine the correct allocation of the sale price and 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.
