Tax Exemption Under The Income Tax Act, 1961

Query 1) I am a NRI owning a residential house property. I recently sold the said premises to a buyer, who deducted 1 per cent of the purchase price as TDS. The balance was paid to me. I invested the entire sale proceeds in the investment of a new residential house in lieu of the old one and will claim exemption u/s 54 of the Income Tax Act, 1961. Subsequently, the buyer has asked me to return 19 per cent of the sale proceeds as he claims he should have deducted 20 per cent and not 1 per cent as TDS. Having already invested in a new asset, I cannot refund the money to him. Moreover even if I do pay him, the long process of refund will have to be gone through. Please advise me on this one.

- Prakash K.

A resident buyer of a property has to deduct tax at the source rate of 1 per cent of the purchase consideration paid/payable to the seller u/s 194 IA of the Income Tax Act, 1961. In your case as the seller is a non-resident, Section 194 IA is not applicable and the deduction of 1 per cent was wrongly made by the buyer. Under Section 195, income tax is required to be deducted in respect of payments. In case of long term capital gains, the deduction should be at the rate of 20 per cent. In the circumstances, your buyer is correct in demanding the balance 19 per cent, which he should have deducted and paid to the Government treasury.

Since you have invested the consideration in purchase of a residential flat and you are entitled to exemption u/s 54 of the said Act, you ought not to have any tax liability. In the circumstances, you may apply to the concerned Assessing Officer for a certificate for lower deduction or no deduction of tax at source under Section 197 of the said Act [Application to be made in Form No. 13]. If the Assessing Officer issues the certificate, the whole situation may be saved that is to say, the buyer can deduct at 1 per cent, which he has done, you need not pay 19 per cent to ensure due compliance by the buyer and need not wait for refund by investing in TDS as above. 

Query 2) I am the joint holder of a residential house along with my father. The investment in the house was made by my father and my name was added for convenience. Now my father is proposing to sell the flat and invest in a new residential flat. Do I have to become the joint holder in the new flat merely because I was the joint holder in the old flat in order to enable my father to claim exemption under the Income Tax Act, 1961?

- Nitin Khandelwal, Mumbai

The flat is owned by your father and he is the first holder of the property. As he is the beneficial owner of the said flat, he and he alone is liable for capital gains tax liability on the sale of the said flat. So he will be entitled to the exemption u/s 54. He should be the beneficial owner of the new flat with or without you as the joint owner.

Query 3) I have an insurance policy. The premium for the year ended March 31, 2014 is proposed to be paid by my wife. Will she be entitled to deduction under the Income Tax Act, 1961?

- Manish H.

Under Section 80(C) (2) (i) of the Income Tax Act, 1961, any sum paid or deposited in the previous year by the assessee to effect or keep in force an insurance on the life of the assessee, or his/her spouse or any child of the assessee will be eligible for deduction Section 80(C) (1) of the said Act subject to a maximum of Rs. 100,000/-. Thus the payment of the premium by your wife to keep in force insurance of your life, will entitle her to claim deduction under the said section, namely 80(C).