A recent ruling by the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has underscored the pitfalls that property buyers face under tax deduction at source (TDS) rules, with experts warning that compliance burdens can catch even cautious buyers off guard.
The ITAT Ruling
According to a report by Lubna Kably in Business Today, the case involved a Mumbai resident who jointly purchased a residential flat in Haji Ali worth Rs 1.9 crore with her husband. She held a 15% share in the property (Rs 28.50 lakh) and deducted TDS of Rs 28,500 under Section 194-IA on her share. However, the tax department later raised a demand exceeding Rs 5.8 lakh, alleging short deduction on the ground that the seller's PAN was inoperative and therefore higher TDS under Section 206AA should have applied.
The ITAT deleted the demand, noting that the seller had subsequently linked Aadhaar with PAN and regularised 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 the applicable taxes, making it inappropriate to treat the buyer as an ‘assessee in default’.
TDS Obligations for Resident Sellers
Ketan Vajani, a chartered accountant, told Business Today that buyers must exercise caution when purchasing property from residents. TDS under Section 194-IA is generally deducted at 1%, and there is no provision for lower deduction. Vajani stressed that buyers should ensure TDS is computed on the higher of the transaction value or stamp duty value. Moreover, the deduction must be made on the total amount including all charges such as parking fees, club membership, etc., not merely on the property value.
Non-resident Sellers and Joint Ownership
For purchases from non-resident sellers, the compliance burden is significantly higher, according to Vajani. Buyers will need to compute the seller's taxable capital gains and deduct tax under Section 195 at applicable rates rather than the standard 1% rate applicable to resident sellers.
Ameet Patel, 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 said.
Patel added that disputes can become more complicated in transactions where the property is held jointly. For example, the husband may have funded the property entirely but added his wife’s name to provide security. When such a property is sold, it can be challenging for the buyer to determine the correct allocation of the sale price and the TDS components.
Key Differences in TDS for Resident vs Non-Resident Sellers
| Aspect | Resident Seller | Non-Resident Seller |
|---|---|---|
| TDS Section | Section 194-IA | Section 195 |
| TDS Rate | 1% | Applicable rate based on seller’s capital gains |
| Compliance Complexity | Lower | Higher – buyer must compute seller’s gains |
| Basis of Deduction | Higher of transaction value or stamp duty value, including all charges | Taxable capital gains at applicable rates |
Implications for Property Buyers
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. The ITAT ruling serves as a reminder that even a buyer who deducts TDS correctly can face a demand if the seller’s PAN is inoperative, though relief may be available if the seller regularises within a prescribed timeline. The ruling also highlights the importance of checking the seller’s PAN status before completing the transaction.
Non-linking of PAN with Aadhaar is just one instance where buyers face tax demands, experts caution. With the CBDT circular providing a window for regularisation, buyers should ensure that sellers have linked their PAN and Aadhaar before the transaction closes, or seek appropriate indemnities.
For businesses and high-net-worth individuals frequently involved in property transactions, these TDS rules have direct implications for deal structuring and cash flow. The compliance burden falls squarely on the buyer, and any short deduction can lead to significant demands, interest, and penalties. The ITAT’s decision provides a precedent that relief may be available if the seller rectifies the defect, but the onus remains on the buyer to verify all documentary requirements before payment.
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