Practical aspects of Section 194 IA and Section 195 of the Act


In this article we will be touching upon the provisions of the Income Tax Act, 1961 relating to TDS in case of purchase of Immovable property. Moving forward, the readers shall consider following practical situation for the effective understanding of the provisions of section 194 IA and 195 of the Act.

Practical Scenario:

Mr. Nipun would like to purchase the property located at Ahmedabad from Mr. Mukund for a consideration of Rs. 90 lakh (where stamp duty valuation is Rs. 98 lakh).

Now, we will be discussing the obligation of Mr. Nipun to deduct tax at source and also find out the amount of TDS under following two alternatives:

  1. Mr. Mukund is resident
  2. Mr. Mukund is non-resident

Additional Information: The indexed cost of acquisition of the said property in the hands of Mukund is Rs. 58 lac.

Alternative (a): Mr. Mukund is resident.

In this alternative, Mr. Mukund is a resident transferor, therefore the provisions of section 194 IA are applicable.

Let's understand the provisions of section 194 IA which are as under:

  1. Person liable to deduct tax at source: Any person, being a transferee responsible for paying (other than the person referred to in section 194LA) to a resident transferor any sum by way of consideration for transfer of any immovable property (other than agricultural land), is liable to deduct tax at source under this section.
  2. Time of deduction: Tax shall be deducted under this section, either at the time of credit to the account of the payee or at the time of payment thereof, whichever is earlier.
  3. Threshold Limit: No tax is deductible where the consideration paid or payable for the transfer of an immovable property is less than Rs.50,00,000.
  4. Tax rate: 1%of consideration

Considering the abovementioned provision, Mr. Nipun is advised to deduct tax at source at 1% of Rs.90 Lakh under section 194 IA of the Act.

It is important to bear in mind that the threshold limit and rate of tax deduction at source are prescribed with reference to the amount of consideration (i.e. Rs. 90 lakh) and not with reference to the stamp duty valuation (i.e. Rs. 98 lakh).

Alternative (b): Mr. Mukund is non-resident.

As discussed earlier that provisions of section 194IA are applicable only when the transferor is resident.

However, in the instant case, Mr. Mukund is a non-resident transferor, therefore the provisions of section 194 IA will not applicable. Instead, Mr. Mukundbeing a non-resident payee, the provisions of section 195 will be relevant for the purpose of tax deduction at source.

In order to apply section, we first need to understand the provisions of section 195which are as under:


Person liable to deduct tax at source

Any person responsible for making payment

Payee

Non-resident or Foreign company

Nature of Payment

a. Any interest (not being interest referred to in section 194LB, 194LC and 194LD)

b. Any other sum chargeable under the provision of this Act (not being income chargeable under the head 'Salaries')

Time of tax deduction

At the time of credit of such income to the account of payee or at the time of payment, whichever is earlier.

Threshold limit

No threshold limit. However, tax shall be deducted on sum chargeable to tax. Therefore, if no sum is chargeable to tax in India, then no tax is required to be deducted.


Rate of tax deduction u/s. 195 while making payment / credit of other sum to a non-resident


Sr. No.

Nature of Income

Rate of Tax

a.

Income of foreign exchange assets payable to an Indian citizen

20% (+ SC + EC)

b.

Income by way of long-term capital gains referred to in section 115E or section 112(1)(c)(iii)

10% (+ SC + EC)

c.

Short-Term Capital Gains u/s 111A

15% (+ SC + EC)

d.

Any other Long-Term Capital Gains [not being covered by section 10(33), 10(36) and 10(38)]

20% (+ SC + EC)

e.

Income by way of interest payable by Government/Indian concern on money borrowed or debt incurred by Government or India concern in foreign currency (not being interest referred to in section 194LB or 194LC)

20% (+ SC + EC)

f.

Royalty/Fees for Technical Services

10% (+ SC + EC)

g.

Any Other Income

30% (+ SC + EC)
40% (+ SC+EC)

if payee is foreign company


Considering the abovementioned provision of section 195, Mr. Nipun is advised to deduct tax at source at 20% (+SC + EC) on sum chargeable to tax in India under section 195 of the Act.

It is important to bear in mind that there is no threshold limit under section 195 of the Act. Instead, tax deduction shall be made on sum chargeable to tax in India.

Therefore, Mr. Nipun is first required to determine capital gain chargeable to tax in India and thereupon tax deduction shall be made on such capital gain under section 195 of the Act.

In this case, the capital gain which shall be chargeable to tax in the hands of Mr. Mukund shall be worked out as under:


Full value of consideration as per section 50C

Rs. 98 lakh

Less: Indexed cost of acquisition

Rs. 58 lakh

Capital Gain chargeable to tax on which TDS to be made

Rs. 40 lakh



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CA Mehul Thakker 
on 11 January 2018
Published in Income Tax
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