Looking understand deduction of TDS on home loans in India? Keep reading to learn all about TDS on home loans.
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In compliance with the law, the buyer is obligated to deduct TDS. However, when it comes to a home loan, the buyer is not directly responsible for making the payment to the seller. Instead, the lender makes the payment on behalf of the buyer, making the deduction of TDS on home loans a complex process. Lets have a look at How To Deduct TDS on Home Loan in India.
This is because, the buyer may choose to deduct the TDS directly or request the lender to do so. This article will simplify this dilemma by delving into all aspects related to TDS deductions on home loans in India.
How Do You Define TDS?
As per the Income Tax Act of 1961, the Indian government utilizes the Tax Deducted at Source (TDS) mechanism to indirectly collect direct taxes from taxpayers. TDS is applicable on various incomes and expenses, including salaries, lottery winnings, bank interest, commissions, rent, freelancer payments, and more.
All payments falling under these categories are subject to a withholding percentage determined by the source of funding. And the entity or individual from whom the deduction is made is referred to as the ‘Deductor,’ and the recipient of the withheld funds is termed the ‘Deductee.’
Positive Aspects Of TDS
- Steady Revenue Stream: Deducting taxes at regular intervals throughout the year ensures a consistent and steady stream of revenue for the government. This helps in better financial planning and management of public funds.
- Safeguard Against Tax Defaulters: TDS serves as a safeguard against tax defaulters. By deducting taxes at the source, the government can minimize the risk of individuals or entities evading their tax obligations.
- Enhanced Tax Collection: With TDS, taxes are withheld at the time of payment rather than after the fact. This mechanism contributes to an expansion of tax collection, ensuring that a broader base of taxpayers fulfills their financial obligations to the government.
- Fraud Prevention: The practice of deducting taxes at the source discourages fraudulent activities related to tax evasion. It acts as a deterrent, as individuals and businesses are less likely to engage in activities that can lead to immediate tax deductions.
Overall, TDS plays a crucial role in maintaining fiscal discipline, preventing tax evasion, and ensuring a consistent flow of revenue for the government.
TDS on a Mortgage Loan: Cash Payment Instead Of TDS Advance
If the bank insists on making a prepayment of TDS, you have the right to request written confirmation of this arrangement. In some cases, banks may require you, as the seller, to pay all applicable taxes, duties, and surcharges in advance before receiving the final payment, especially if you are an NRI seller.
| Since TDS is mandatory only at the point of payment, the bank may not send a written request for an advance TDS payment. |
TDS on a Mortgage Loan: Important Dates and Timelines
The buyer is responsible for paying the TDS no later than the 7th of the month following the deduction month. Even if TDS is being deducted through a home loan (under sections 194IA or 195), the buyer can still deposit the TDS amount by the due date (the 7th of the next month).
TDS on a Mortgage Loan: Best Approach
It is advisable to inquire with the bank about their approach to handling TDS on home loans. For an NRI seller, this consideration is crucial due to the magnitude of the transaction. This is why discussions about this matter should be held directly with the bank, not with DSAs. Regardless of any promises made by a DSA, their word alone is insufficient.
After finalizing the TDS procedure via the home loan, it’s recommended to send a confirmation email to a bank staff member. In this email, you can remind them of the agreed-upon procedure and request them to take the necessary steps once your mortgage application has been approved.
How Can A Purchaser Request That The Lender Withhold Tax At Source (TDS)?
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Submit an Application
Submit an application to the lender requesting TDS deductions after the loan approval and before the first instalment is due. Provide comprehensive details about the bank account where the TDS money should be deposited.
Ensure that all necessary calculations are included in the application. Utilize an online house loan calculator for accurate tax deductions and other computations and most importantly, request confirmation of receipt for your application.
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Inform the Seller
Notify the seller that TDS will be deducted from the loan balance. Ideally, provide details about house loan interest deductions. To prevent future misunderstandings, include TDS details in the Purchase Deed or Agreement.
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Make TDS Payment
Ensure timely payment of TDS before the due date. Furnish a copy of the TDS certificate to the seller or the lender.
Tax Benefits on Mortgage Interest Payments
Individuals often secure mortgage loans for the purpose of buying or constructing a home. It’s crucial to complete the home-building process within the fifth calendar year after the close of the fiscal year in which the loan was acquired to qualify for tax benefits. In India, interest payments on home loans are eligible for deductions up to ₹2 lakhs per fiscal year, as per Section 24 of the Income Tax Act.
This tax benefit applies even to self-occupied homes. However, for a rented property, the declared interest can be as high as actual amount paid. Therefore, if you purchase a property for rental purposes, you can deduct the entire interest amount from your taxable income.
For first-time homebuyers using a loan, an additional deduction of ₹50,000 per year in interest payments is available. This is in addition to the ₹2 lakh exemption provided by Section 24 of the Income Tax Act.
Learn the Deducting Mortgage Interest
Learning how to deduct mortgage interest is essential to maximize tax benefits. Here are the steps you need to take to claim a tax break on your mortgage:
Step 1 – Obtain an Investment Declaration Form from your employer and fill it out, including details about your home loan.
Step 2 – Provide this form along with a signed and stamped home loan statement from an authorized bank representative to your employer.
Step 3 – Your employer will submit the documents to the relevant tax authorities, who will thoroughly review the information before granting the exemption.
If have missed this step, don’t worry. With the help of the experts at Vakilsearch tax credits can be claimed at any time by filing an Income Tax Return (ITR).
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