TDS - 194IA or 194M, Income Tax

[Ethirajan Parthasarathy]

To claim capital gain exemption under section 54 or 54F of Income Act, booking of on apartment in an “ongoing project”, it is treated as “construction” and not “purchase” of property.

The developer is also charging GST on construction value since the superstructure is not complete. Invariably the developer also enter into “Construction” agreement.

But for purpose of TDS, I have come across almost everyone is deducting tax of 1% u/s 194IA which came into force with effect from 01-06-2013.

Effective from 01-09-2019 section 194M has come into force which provides for TDS of 5% by Individual and HUF on payments to contractors if the contract value exceed 50 lakhs which is the threshold limit for section 194IA also.

In view of the above, I invite experts’ opinion on the Query whether an Individual paying amount towards apartment under construction should deduct tax at 1% or 5%.

Posts / Replies

[Charu Tyagi]

TDS u/s 194IA is to deduct on transfer of Immovable Property @1% of consideration or SDV if amount of Consideration or SDV is more than ₹ 50 Lakhs.

TDS u/s 194M is to deduct in case work in pursuance of contract, commission/brokerage, Fees for professional service by Individual/HUF @ 5% in case payment exceeds ₹ 50 Lakh - i.e. Personal nature of Works contract.

At the time of purchase of property irrespective of under construction or constructed TDS to be deduct u/s 194IA @ 1%, do not confuse under-construction property meaning with works contract u/s 194M

Yes at the time of buying under-construction property GST is levied and if constructed property purchase no GST liability arise on buyer [For example buying Flat in High-rise society]

[CS Swati Dodhi]

As per my understanding Section 194IA seems to be the relevant section. The reason for the same is that Section 194IA is a specific section i.e., for “immovable property”, and Section 194M is a more general section for “contracts”.

No judicial precedents in the case.

[Charu Tyagi]

Just to Clear Section 194M is not a general section for 'Contracts', General Section for "Contracts' is Section 194C.

Section 194M is special section for Individuals & HUF only where they need to deduct tax @5% on payment made for Work Contract or Fee for professional services or Brokerage/Commission payment in excess of ₹50 Lakh.

[CSSwati Dodhi]

General mentioned here reffers to 'pursuance of a contract' as used in definition as it's more for contract (seems to cover purchase of under construction contract) but afcouse it's for payment under special or certain circumstances.

Part of sec quoted below 👇

Explanation – For the purposes of this section,––

(a) “contract” shall have the meaning assigned to it in clause (iii) of the Explanation to section 194C;

(b) “commission or brokerage” shall have the meaning assigned to it in clause (i) of the Explanation to section 194H;

(c) “professional services” shall have the meaning assigned to it in clause (a) of the Explanation to section 194J;

(d) “work” shall have the meaning assigned to it in clause (iv) of the Explanation to section 194C.]

[Charu Tyagi]

Dear Madam

There's no such correlation between payment for works contract and purchase of under construction contract here,

Secondly it's a section specially for Individual and HUF making payment more than Rs. 50Lakh who do not needs to get his account audited to cover the payments of section 194C, 194J and 194H.

[CSSwati Dodhi]

To understand this more, we need to step back and understand the query again.

While under Section 194M, there is no distinction between an under constructed property and a constructed property, for the purposes of Section 54 (and Section 54F), booking of an apartment in an “ongoing project” is considered as “construction” and thus, assessee is entitled for larger threshold of 3 years (it is 2 years in the case of purchase of property).

With this in the background, the query is whether Section 194M (rate of TDS 5%) is applicable if one books an apartment in an ongoing project (since this treated as construction for the purposes of Section 54 & 54F) or Section 194IA (rate of TDS 1%) would be applicable.

The point I am trying to drive home is that Section 194IA would be a more specific section in the current case. As correctly pointed out, Section 194M is applicable to non-Tax-Audit cases, Section 194C even though a larger section covering works contract would not be a relevant section here for discussion given the facts of the case.

All the sections go hand in hand which surely needs to be read all along, but discusion may include sometimes to read less required sections/topics as law discusion is like a thread weaving which leads to giving final and correct verdict/conclusion finally after stages.

Please excuse if I am unable to guide or understand.

Thanks and regards.

[Charu Tyagi]

On the very first reply to the query, i already mentioned irrespective of constructed or property under construction section 194IA is applicable, this is completely pointless to discuss and streching emphasis on 'works contract or under construction' here.

Moreover, yes section 54 & 54F provides exemption benefit for under construction property for 3 year with one drawback of earlier purchase of 1 year cannot be taken.

Keep well 👍

[Padmanathan Kollengode]

There are different types of transactions taking place to my knowledge, few of them are:-

A. The Undivided share of land (UDSL) is transferred first to buyer and then construction agreement is entered into:

A.1. The payment towards the purchase of UDSL will be liable to TDS u/s 194IA being transfer of immovable property;

A.2. The subsequent construction agreement shall be covered under section 194M as it is covered under works contract.

B. The promoter/builder transfers partly constructed building with UDSL and then enters into agreement for construction (usually when the buyer approaches the builder/promoter when the project is midway);

B.1. Party constructed building along with UDSL shall be transfer of immovable property and 194IA will apply;

B.2. Construction agreement shall be covered under section 194M;

Therefore, in my considerate opinion TDS will depend upon the nature of transaction/contract between the builder/promoter and the buyer.

[Charu Tyagi]

Agree with the scenario you put up sir,

But the query is for liability for deducting tds while booking an apartment

And Developers of apartment never make 2 contracts one for the purchase of land and other for construction

Moreover usually apartments consist of 2 or 3 floors in general so scenario of land and construction cannot be put up separately.

[Padmanathan Kollengode]

Learned Charu ji,

As you maybe well aware, real estate transactions are complicated and the way contracts are structured varies from builder to builder. "booking apartment" cannot be directly equated with "transfer of immovable property" and how the contract is structured has to be seen. The situations I have given are plausible ways builders structure the contracts.

[Charu Tyagi]

Agree with that, still till date I've never seen such a case, but if you have any case or such contract on the same please do share it would be more interesting to learn the facts by seeing originally.

[Padmanathan Kollengode]

Ld Charu Ji,

Please share your e-mail Id, I have copies of documents in both the situations mentioned above.