Section 194IC of the Income Tax Act: TDS on Income from Specified Agreements

Section 194IC of the Income Tax Act, 1961, addresses a specific type of transaction prevalent in the real estate development sector: joint development agreements. Introduced to streamline the taxation of capital gains arising from such agreements, this section mandates Tax Deducted at Source (TDS) on any sum paid by way of consideration, other than consideration in kind, to an individual or HUF landowner under a "specified agreement."

What is a "Specified Agreement"?

As per Section 45(5A) of the Income Tax Act, a "specified agreement" refers to a registered agreement in which an individual or a HUF owning an immovable property (being land or building or both) enters into a joint development arrangement with a developer. Under such an agreement, the landowner allows the developer to develop a real estate project on their land, and in return, the landowner receives a share in the constructed property (flats/units) and/or monetary consideration.

This section specifically targets the monetary consideration paid as part of such an agreement.

Applicability of Section 194IC

Section 194IC applies when:

• Payer (Deductor): Any person (typically the real estate developer or builder) who is responsible for paying any sum by way of consideration, other than consideration in kind, under a specified agreement.
• Payee (Recipient): An individual or a Hindu Undivided Family (HUF) who owns the immovable property and is a resident of India.
• Nature of Payment: The payment must be "any sum" by way of consideration, implying monetary consideration, as opposed to the share of constructed property. The share of constructed property is considered consideration in kind and is not subject to TDS under this section.
• Agreement Type: The payment arises from a "specified agreement" as defined under Section 45(5A).

Important Distinction: This section specifically deals with monetary consideration. The capital gains arising from the transfer of property under a specified agreement are taxable for the landowner under Section 45(5A), and the value of the share of constructed property is also brought to tax as capital gains at the time of completion/issue of completion certificate. Section 194IC only covers the cash component of the consideration.

TDS Rate under Section 194IC

The rate of TDS under Section 194IC is **10%** of the sum paid.

• Higher Rate for Non-PAN: If the payee (landowner individual or HUF) does not furnish a valid Permanent Account Number (PAN), TDS will be deducted at a higher rate of **20%**, as per Section 206AA.
• No Surcharge or Health & Education Cess is applicable on this TDS rate.

Unlike many other TDS sections, there is **no threshold limit** specified under Section 194IC for deduction. Any sum paid by way of monetary consideration under a specified agreement would be subject to TDS at 10%.

Time of Tax Deduction

The deductor must deduct TDS under Section 194IC at the earlier of the following two events:

• At the time of credit of such sum to the account of the payee (landowner).
• At the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode.

Responsibilities of the Deductor (Developer/Builder)

The person responsible for deducting TDS under Section 194IC has standard compliance obligations:

• Obtain TAN: The developer/builder is required to have a Tax Deduction and Collection Account Number (TAN).
• Obtain Payee's PAN: Must obtain the PAN of the landowner.
• Deduction of Tax: Deduct TDS at the correct rate (10% or 20%).
• Deposit of Tax: Deposit the deducted TDS to the credit of the Central Government within the prescribed due dates.
  • For tax deducted in March: By April 30 of the immediately following financial year.
  • For tax deducted in any other month: By the 7th day of the next month.
• Filing of TDS Returns: File quarterly TDS returns in Form 26Q within the specified due dates.
• Issuance of TDS Certificates: Provide a TDS certificate in Form 16A to the landowner within the stipulated time.

Penalties for Non-Compliance: Failure to comply with the provisions of Section 194IC can attract significant penalties and interest, similar to other TDS defaults. These include:

• Interest under Section 201(1A) for delay in deduction (1% per month) or delay in deposit (1.5% per month).
• Penalty equal to the amount of TDS not deducted or paid (Section 271C).
• Disallowance of 30% of the expenditure under Section 40(a)(ia) if TDS is not deducted or deposited.
• Late filing fees for TDS returns (₹200 per day).

Taxability for the Landowner (Payee)

The monetary consideration received by the landowner, even after TDS deduction, remains taxable income. This income is generally treated as part of the total consideration for the transfer of the immovable property and is taxable as Capital Gains under Section 45(5A). The landowner must report the full consideration (monetary and fair market value of the share of constructed property) when filing their Income Tax Return (ITR).

The TDS deducted under Section 194IC can be claimed as a credit against the landowner's final tax liability. The landowner can verify the TDS credit in their Form 26AS and reconcile it with the Form 16A provided by the developer. This credit helps offset the final tax payable or may lead to a tax refund.

Conclusion

Section 194IC serves as a specific TDS mechanism for joint development agreements in real estate, particularly focusing on the monetary component received by individual or HUF landowners. It complements Section 45(5A) by ensuring that tax is collected at the source on the cash portion of the consideration. Both developers/builders and landowners must have a clear understanding of this section to ensure accurate TDS deduction, timely deposit, and proper reporting, thereby maintaining full compliance with the income tax laws and avoiding potential penalties.