Interest and Penalties for Not Following TDS Rules on Property Transactions
When buying a property worth more than ₹50 lakh, it’s not just about making payments to the seller; the buyer has a legal responsibility to deduct Tax Deducted at Source (TDS) and deposit it with the Income Tax Department. If this process is not followed correctly, the buyer may face heavy penalties, interest charges, and fines. The government enforces these penalties to ensure tax compliance and curb tax evasion in real estate transactions. Here’s a detailed breakdown of what happens when TDS is not deducted or deposited on time.
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Interest for Late Deduction or Payment
When a property transaction is made, the buyer must deduct 1% TDS from the total sale amount before transferring the payment to the seller. If the buyer forgets or fails to deduct TDS, they will be charged an interest of 1% per month on the TDS amount. This interest is calculated from the date the TDS should have been deducted until the date it is actually deducted.
Similarly, if the buyer deducts the TDS but does not deposit it with the Income Tax Department, the penalty is even higher. In this case, the government imposes an interest of 1.5% per month from the date of deduction until the TDS is finally deposited. This higher rate ensures that buyers do not hold back tax payments that are meant to go to the government.
Example:
Amit purchases a house from Suresh for ₹80 lakh but forgets to deduct the 1% TDS (₹80,000). After 5 months, he realizes the mistake and finally deducts the TDS. Since the deduction was delayed by 5 months, Amit must pay ₹4,000 (1% of ₹80,000 for 5 months) as an interest penalty.
Now, if Amit further delays depositing the TDS to the government for another 3 months, he will have to pay an additional ₹3,600 (1.5% of ₹80,000 for 3 months) as interest on late payment.
This means Amit, instead of just paying ₹80,000 as TDS, now has to pay an extra ₹7,600 as interest, simply because of the delay.
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Late Fee for Delayed Form 26QB Filing
Once the buyer deducts TDS, they must file Form 26QB and submit it to the Income Tax Department within 30 days of making the payment to the seller. This form is important because it acts as an official declaration that the TDS has been deducted and deposited correctly. If the buyer fails to file Form 26QB within the deadline, they are charged a late fee of ₹200 per day until the form is filed.
While there is no upper limit on the number of days for which this late fee can be charged, the total late fee cannot exceed the TDS amount. This means that if the TDS payable was ₹80,000, the late filing penalty cannot go beyond ₹80,000, but the buyer will still be burdened with a significant additional cost.
Example:
Meera buys a flat for ₹75 lakh and deducts ₹75,000 (1% TDS) but forgets to file Form 26QB for 100 days. She will be charged a late fee of ₹200 × 100 = ₹20,000 just for the delay in filing. If she had delayed filing for 500 days, the fee would be ₹1,00,000, but since it cannot exceed the TDS amount, it would be capped at ₹75,000.
Even though Meera has paid the TDS amount correctly, just failing to submit Form 26QB on time results in a hefty penalty, making timely compliance extremely important.
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Penalty for Non-Payment of TDS
The most serious penalty is when the buyer completely fails to deduct TDS or deducts it but never deposits it with the government. If a buyer does not deduct TDS at all, the Income Tax Officer has the power to impose a penalty equal to the TDS amount. This means that the buyer will have to pay the entire TDS amount from their own pocket, in addition to any interest or late fees.
If the buyer deducts TDS but does not deposit it, the situation becomes even worse. Not only will the buyer have to pay the TDS amount and interest, but they could also face a penalty ranging from ₹10,000 to ₹1,00,000, depending on the severity of the delay. In some cases, if the non-payment is intentional, the tax authorities may even initiate legal proceedings.
Example:
Ravi buys a commercial shop for ₹90 lakh but does not deduct ₹90,000 (1% TDS) before making the payment to the seller. After a tax audit, the Income Tax Department finds this non-compliance and issues a penalty equal to the TDS amount—meaning Ravi now has to pay ₹90,000 from his own funds, in addition to any interest charges.
If Ravi had deducted the TDS but failed to deposit it for a long period, he could face additional penalties ranging from ₹10,000 to ₹1,00,000, which would significantly increase his financial burden.
Ignoring or delaying TDS payments can quickly turn into a costly mistake, and the buyer could end up paying double or triple the original TDS amount due to penalties and interest charges.