Wrong TDS form triggers rs 46 lakh tax notice
Updated on IN A non-resident Indian (NRI) based in the US found himself in a difficult situation after selling his Pune property for Rs 2 crore. Despite following all the correct procedures, a technical error on the buyer’s part led to significant complications. The buyer, responsible for the tax deduction at source (TDS), mistakenly used…
A non-resident Indian (NRI) based in the US found himself in a difficult situation after selling his Pune property for Rs 2 crore. Despite following all the correct procedures, a technical error on the buyer’s part led to significant complications. The buyer, responsible for the tax deduction at source (TDS), mistakenly used the wrong form when depositing the 20% TDS on the property sale. This seemingly small oversight triggered a substantial tax notice of Rs 46 lakh from the income tax department.
According to the Delhi HC’s order dated May 27, 2025, the buyer deducted Rs 18.68 lakh, equivalent to 20% TDS, from the proceeds of the property sale and duly deposited it with the relevant tax authorities. However, a crucial error occurred: instead of utilising Form 27Q, which is specifically designated for transactions involving NRI sellers and governed by section 195, the buyer incorrectly used Form 26QB. This form is intended for transactions where both the buyer and seller are resident Indians.
The use of the wrong form had a direct and negative impact on the NRI seller. Because the TDS was filed under Form 26QB instead of Form 27Q, the deducted tax did not appear in the seller’s Annual Information Statement (AIS). This omission prevented the non-resident Indian from claiming the TDS credit when he filed his Income Tax Return (ITR). The discrepancy between the records led the income tax department to issue the hefty tax notice, demanding payment of Rs 46 lakh.
Impact Of The Error
The consequences of filing the TDS form incorrectly were far-reaching for the non-resident Indian. The most immediate impact was the generation of a substantial tax notice for Rs 46 lakh from the income tax department. This demand arose because, according to their records, the NRI had not paid the necessary tax on the property sale. The incorrect filing effectively erased the record of the Rs 18.68 lakh tax deduction at source that had already been paid.
Furthermore, the error created significant administrative burdens for the NRI. He was forced to engage in a lengthy and complex process to rectify the mistake and prove that the tax had indeed been paid. This involved gathering documentation, communicating with the income tax authorities, and potentially seeking professional advice. The stress and inconvenience caused by the wrong form compounded the financial strain of the unexpected tax demand. This also created a negative perception of the tax system, which is detrimental for both resident and non-resident Indian investors.
The Delhi HC order highlighted the potential for such errors to disrupt the tax compliance process for NRIs. Section 195 clearly outlines the procedures for tax deduction at source in transactions involving non-resident Indians, and adherence to these procedures is critical. The buyer’s failure to use the correct TDS form not only impacted the seller but also undermined the integrity of the tax collection system. The case serves as a reminder of the importance of accuracy and diligence in all tax-related matters, especially when dealing with cross-border transactions.
Rectifying The Mistake
Correcting this error requires a multi-pronged approach, starting with the buyer acknowledging the mistake and initiating the rectification process. The initial step involves the buyer filing a correction statement to rectify the wrongly filed Form 26QB. This process entails providing the correct details of the transaction, including the seller’s PAN (Permanent Account Number), the correct form number (Form 27Q), and other relevant information related to the property sale. It is crucial that the buyer undertakes this correction promptly to align the tax records with the actual transaction.
Following the buyer’s correction, the non-resident Indian (NRI) seller needs to actively engage with the income tax department to ensure the corrected TDS information is reflected in their Annual Information Statement (AIS). This may involve submitting supporting documents such as the property sale agreement, bank statements showing the receipt of the sale proceeds (net of TDS), and proof of the TDS deduction. The NRI should also file a grievance with the income tax department, explaining the situation and requesting that the wrongly levied tax notice be withdrawn. Communication with a tax professional is highly recommended to navigate this complex process efficiently.
The Delhi HC order underscores the importance of adhering to Section 195 of the Income Tax Act, which governs tax deduction at source (TDS) for non-resident Indians. The order emphasizes that the responsibility for accurate TDS deduction and remittance lies with the buyer. While the rectification process can resolve the immediate issue, it is essential for the buyer to implement internal controls to prevent similar errors in future property sale transactions. This includes proper training for staff involved in TDS compliance and thorough verification of all relevant details before filing the TDS form.
Preventative Measures
To prevent similar situations from arising, several preventative measures can be implemented by both buyers and sellers involved in property sale transactions, especially those involving non-resident Indians. For buyers, thorough due diligence is paramount. This includes verifying the residency status of the seller and ensuring that the correct TDS form is used for remitting the tax deduction at source. Buyers should consult with tax professionals or utilise resources provided by the income tax department to understand the specific requirements for transactions involving NRIs.
Furthermore, the buyer should establish a robust internal control system to minimize the risk of errors in TDS compliance. This system should include training for staff responsible for TDS deductions and remittances, as well as regular audits to ensure adherence to the correct procedures. Implementing a checklist to verify all relevant details, such as the seller’s PAN, residency status, and the applicable section of the Income Tax Act (particularly section 195), before filing the TDS form can significantly reduce the likelihood of errors. Software solutions designed for TDS management can also automate the process and minimise manual errors.
For non-resident Indian sellers, it is crucial to proactively monitor their Annual Information Statement (AIS) after a property sale to ensure that the TDS has been correctly reflected. If any discrepancies are identified, they should immediately notify the buyer and the income tax department. Maintaining meticulous records of the property sale, including the sale agreement, bank statements, and TDS certificates, is essential for substantiating their tax compliance. Seeking professional advice from a tax consultant specializing in NRI taxation can provide valuable guidance and help navigate the complexities of cross-border transactions. Staying informed about the latest tax regulations and guidelines related to property sales involving NRIs is also vital for ensuring compliance and avoiding unexpected tax notices.