Mr. Gupta was very excited when he finally hired a builder to construct his dream retirement home. He did not leave any stone unturned while doing research on the vastu, interior, paints, gardening, so on and so forth. One thing, however, he forgot to consider was his liability to deduct tax. His entire excitement vanished the day he was busy in giving a house warming party as he received a default notice the same day.
Why did he receive a notice from the Income Tax Department? Let’s find out.
Tax Deducted at Source, commonly known as TDS, is a system that ensures regular flow of tax revenue to the government. Under this system, income tax is deducted at the point of origination of income whereby payer of the income is required to deduct tax while making certain payments to the payee and, consequently, remit the amount of tax so deducted to the government on behalf of the payee.
Individuals or HUFs, who are not liable for tax audit, are generally not liable to deduct tax at source. However, with a view to widen the scope of the tax deduction at source from certain payments, the liability to deduct tax at source has been imposed even on those individuals and HUFs who are not liable to get their accounts audited. In general, a person who is liable to deduct tax is required to apply and obtain a Tax Deduction and Collection Account Number (TAN). However, individuals or HUFs who are not liable for tax audit can use their PAN instead of TAN for deduction of tax.
Individuals or HUFs who are not liable for tax audit are required to deduct tax in the following transactions:
Buying an immovable property (Section 194-IA)
Every person buying an immovable property (other than agricultural land) from a resident seller is liable to deduct tax at the rate of 1% from the sales consideration. However, the liability to deduct tax shall arise only when the amount of sale consideration is Rs 50 lakh or more.
Sale consideration shall include all charges which are incidental to the transfer of such immovable property, such as club membership fee, car parking fee, electricity or water facility fee, maintenance fee, advance fee or any other charges of similar nature.
The tax so deducted shall be required to be deposited by the buyer to the credit of the Central government through challan-cum-statement in Form 26QB within 30 days from the last day of the month in which tax has been deducted. Further, the buyer of the property shall be required to issue a TDS certificate to the seller in Form No. 16B within 15 days from due date of furnishing of Form 26QB. The certificate in Form 16B shall be generated and downloaded from the TRACES website.
Paying rent (Section 194-IB)
Every Individual and HUF, who is not liable for tax audit, shall deduct tax at the rate of 5% from payment of rent to a resident person. The tax shall be deducted if the rent paid or payable exceeds Rs 50,000 per month or part of the month.
Tax shall be deducted at the time of payment or credit of rent to the account of the payee for the last month of the financial year, whichever happens earlier. However, if the property is vacated during the year, tax shall be deducted at the time of payment or credit of rent to the account of the payee for the last month of tenancy, whichever happens earlier.
Tax deducted at source is required to be deposited to the credit of Central government through challan-cum-statement in Form 26QC within 30 days from the last day of the month in which tax has been deducted. Further, the deductor shall issue a TDS certificate to the assessee in Form No. 16C within 15 days from due date of furnishing of challan-cum-statement in Form 26QC. This certificate shall be generated and downloaded from the TRACES website.
Payment to contractor, broker, commission agent or a professional (Section 194M)
Where an Individual or HUF, not liable to deduct tax under Section 194C, 194H and 194J, is making payment to any resident for carrying out work in pursuance of a contract or by way of commission or brokerage or by way of professional fees, he is required to deduct tax at source at the rate of 5%. Tax shall be deducted at the time of credit of such sum or at the time of payment, whichever is earlier. However, liability to deduct tax shall trigger only when the payment is made to a resident and aggregate of such payments made during the financial year exceeds Rs 50 lakh. This section is inserted under the Income-Tax Act with effect from September 1, 2019. Therefore, tax shall be deducted only from payment made on or after the said date.
Tax deducted at source is required to be deposited to the credit of the Central government within such time as may be notified by the Central government in this behalf.
For example, Mr. A acquired a plot of land on June 1, 2019 for Rs 50 lakh. For construction of building on such land he paid Rs 65 lakh to a contractor Mr X on December 10, 2019, Rs 70 lakh to interior decorator Mr Y on January 2, 2020 and Rs 10 lakh to another contractor Mr. Z for painting on March 15, 2020.
The tax to be deducted by Mr. A has been enumerated in below table.
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