How a small PAN card can cost you 20% TDS

Do you have your dream home in sight? Every document is prepared and only a couple of signatures are pending. Before putting that final sign, recheck your seller’s PAN card and see if it is active. Otherwise, you could be levied an extra 19% of the property value.

When you purchase a property of 50 Lakhs or more, you put aside 1% as the tax deducted at source (TDS). However, if your seller has an inactive PAN card, you as the buyer will be charged 20% TDS (19% extra). People have mistakenly not checked their seller’s PAN details and status and have had to pay the price (literally). 

How do I know if the PAN is active or not?

You must remember the constant news and messages regarding updating the PAN and linking it with the AADHAR card. The cards that are linked are active, while the others are inactive. From July 1, 2023, the norm is deducting 20% TDS from the property buyer, if the PAN card is inactive. Once the cards are linked, you are good to go. If your cards are not connected, check with the required contacts today!!!

What happens if I don't check?

Say you put 1% TDS upon the purchase because you forgot to check your seller’s PAN status. You may not be facing any issues a couple of weeks later; however, you will be informed by the Income Tax Department. You are liable for 20%, though you have only deducted TDS for a lesser percentage. The return payment would be of interest on the owed amount under section 201(1A) and penalties under section 271C. 

The IT department holds the buyer/ the deductor of TDS at liability, so the notices and penalties would be passed on to the buyer. However, you can collect the extra amount deducted from the deductee, i.e., the seller. But the penalties paid would be entirely on the buyer.

When should I check? When I submit the ITR or close the deal?

The check should be done before any related property purchase transaction. The critical thing is that the PAN should be active on the day of the transaction recorded in form 26QB (Form 26QB is the challan/ form submitted for filing the TDS for the sale of the property). Even if the PAN card is linked after the transaction date is mentioned, it won't make any changes. The higher TDS will still be levied. You cannot claim that you were unaware of the TDS or PAN card status information as you are the buyer and hence the one responsible for checking.

What can I do if am served the notice?

You will have to pay the amount mentioned in the notice. The extra TDS, interest, and penalties, will be mentioned. At least, this will ensure no further escalations occur before the time provided.

However,

You can recuperate the TDS amount paid from the to-be-paid amounts to the seller. But this is only applicable to the extra TDS. The buyer has to pay the interest and the penalties imposed on defaulting of the tax. 

But, there is no legal binding on the recovery from the seller. So the seller's participation in this situation depends on the agreement and relations between the parties.

If there is a reasonable justification for non-deduction or under-deduction of TDS, you can apply for more leniency by condoning the delay. This will admit your application or claim even after the specified period. However, note that your application ultimately depends on the Assessing Office’s (AO) decision. Based on the case and the reasons submitted, it is up to AO, who gets the ultimate say in whether the application will be considered. 

The buyer will be “assessee in default” until the TDS amount is recovered.

What is ”assessee in default”?

The assessee in default is a person who has failed to meet his statutory obligations as per the Income Tax Act. Since the TDS has not wholly paid back, the buyer would be considered an assessee in default. However, there are exceptions when the buyer won't be treated as such. 

The exceptions are based on the following conditions:

1. The seller has filed their income tax return under section 139 and has included the property's sale value in their income calculation.
2. They have also paid the applicable taxes on this income as per their tax return.
3. Additionally, the buyer must provide a certificate from an accountant in Form 26A to confirm these details.

So in a single line, check your seller’s PAN card is linked with AADHAR card before you initiate a purchase for property above 50Lakhs. If not, you will be marked for 20% TDS instead of 1%. The IT department consider the PAN status of the seller on the date TDS was deducted. If you face the issue, you can deduct the extra TDS paid, not the penalties and interest, from future payments to the seller. You can also apply for condonation of delay for the under-deduction of TDS for valid reasons. But to accept or not is up to the Assessment Officer. 

So be aware of the nuances, always double-check the documents, and update the agreement to avoid unexpected financial worries!