TDS Default by Property Buyers: Penalties, Interest, and How to Cure Them in AY 2026-27
TL;DR
- Three default scenarios: not deducting TDS, deducting but not depositing, and depositing but not filing Form 26QB.
- Interest is 1% per month for non-deduction and 1.5% per month for non-deposit under Section 201(1A).
- Late filing of Form 26QB attracts Rs. 200 per day under Section 234E (capped at TDS amount).
- Section 271H imposes penalty between Rs. 10,000 and Rs. 1 lakh for non-filing or late filing.
- Severe defaults can attract prosecution under Section 276B with imprisonment up to 7 years.
What this means in plain terms
Section 194-IA expects every property buyer above the Rs. 50 lakh threshold to act as a tax deductor. The law treats this seriously: failing to comply does not just mean a missed compliance step, it means you owe the government tax that you did not collect. The buyer becomes the "assessee in default" under Section 201 and remains liable until the situation is cured.
The good news is that most defaults are fixable. The bad news is that the cure costs interest, late fees, and sometimes penalty. Acting early reduces the damage; ignoring a CPC-TDS notice can escalate to prosecution. Understanding what kind of default you have committed and what statutory provision applies is the first step to resolution.
The three default scenarios
Default 1: Did not deduct TDS
This happens when the buyer pays the full sale consideration to the seller without holding back 1%. Either the buyer was unaware of the rule or assumed the seller would handle it.
Default 2: Deducted but did not deposit
The buyer deducted 1% from the seller's payment but did not deposit it via Form 26QB. The money sits with the buyer instead of the government.
Default 3: Deposited but did not file Form 26QB
The buyer paid TDS via challan but did not complete the Form 26QB statement. The deposit is unmatched and the seller does not see the credit in AIS.
Interest, fees, and penalties explained
Interest under Section 201(1A)
For non-deduction: 1% per month on the TDS amount from the date it should have been deducted until the date of actual deduction. For deducted-but-not-deposited: 1.5% per month from deduction date until actual deposit.
Late fee under Section 234E
For late filing of Form 26QB: Rs. 200 per day. The fee accrues from the day after the 30-day deadline until the filing date. Capped at the TDS amount.
Penalty under Section 271H
Range: Rs. 10,000 to Rs. 1,00,000. Levied by the Assessing Officer when Form 26QB is filed beyond one year of the due date, or contains incorrect particulars. Penalty can be waived if there is reasonable cause.
Prosecution under Section 276B
For wilful failure to deposit TDS. Punishable with rigorous imprisonment of 3 months to 7 years and a fine. Rare in property TDS cases but possible in egregious or repeat scenarios.
How to cure each kind of default
Curing non-deduction
If the sale is already done and TDS was not deducted, the buyer must deposit the 1% from their own pocket along with interest at 1% per month. File Form 26QB late. The seller's tax credit gets restored, but the buyer absorbs the interest cost.
Curing non-deposit
Calculate interest at 1.5% per month from the date of deduction. Deposit TDS plus interest using Form 26QB. The system accepts late challans with interest.
Curing late Form 26QB filing
Login to incometax.gov.in, file Form 26QB with current date. The system auto-calculates the Section 234E fee and adds it to the challan. Pay the combined amount via net banking.
Responding to CPC-TDS default notice
If you have already received a notice, login to TRACES, view the demand, and either pay the demand or file an objection if you believe the demand is incorrect. Online "response to demand" is available.
A real example
Divya, 39, Rs. 30L CTC, Mumbai, bought a Rs. 95 lakh flat in Andheri from Pooja on 5 February 2026. She paid the full Rs. 95 lakh without deducting TDS, assuming the seller would handle tax compliance.
On 1 May 2026, Divya gets a default notice from CPC-TDS for non-compliance with Section 194-IA. Here is what she does:
- Computes TDS owed: 1% of Rs. 95,00,000 = Rs. 95,000.
- Interest under Section 201(1A): 1% per month from February to May (4 months) = Rs. 3,800.
- Late fee under Section 234E for missed 30-day Form 26QB deadline: Rs. 200 per day from 31 March to 1 May = approximately Rs. 6,200.
- Total payable: Rs. 95,000 + Rs. 3,800 + Rs. 6,200 = Rs. 1,05,000.
- Files Form 26QB late with corrective challan; CPC-TDS closes the default once challan is processed.
Divya issues Form 16B to Pooja after the late challan is processed. Pooja still gets the TDS credit, just delayed. Divya bears the interest and late fee out of pocket.
What to do this week
- If you bought property above Rs. 50 lakh in the last 12 months, immediately check whether Form 26QB was filed.
- Check your TRACES login for any outstanding default notices under Section 194-IA.
- If TDS was not deducted, deposit immediately along with interest before the notice arrives; this avoids penalty.
- Engage a tax professional if you have received a Section 276B prosecution notice; this is a serious matter.
- Run the 6-step assessment at https://myfinancial.in to see your old-vs-new regime delta, unused deductions, and insurance gap in under 10 minutes.
FAQ
Can the seller pay TDS on behalf of the buyer?
Legally, the obligation is on the buyer. While arrangements can be made where the seller indemnifies the buyer for any default, the income tax department sees only the buyer as responsible.
Does CPC-TDS notify me about defaults?
Yes. Notices are sent via email registered against the buyer's PAN and visible on TRACES login. They are also reflected in the buyer's compliance portal.
Can I claim interest paid as a tax deduction?
No. Interest under Section 201(1A) is not deductible as an expense or claim. It is purely a compliance penalty.
What if I dispute the default amount?
You can respond to the demand on the TRACES portal under "Response to Outstanding Demand". Provide evidence: copy of the sale deed, payment proof, and any prior Form 26QB filing.
Is there a one-time amnesty for property TDS defaults?
There is no general amnesty for Section 194-IA defaults. The Vivad Se Vishwas scheme covered older tax disputes but did not include TDS defaults.
Can the seller refuse to refund my excess deduction?
If you deducted more than 1% by mistake, the excess deposit cannot be reversed unless you file a Form 26QB correction. The seller will claim the higher TDS credit in their ITR and get the excess back as refund.
Are sale deed registration officials supposed to verify TDS?
Many states require proof of TDS deposit at the time of registration. Sub-registrar offices in Maharashtra, Karnataka, and Tamil Nadu commonly ask for Form 26QB challans before completing registration of high-value properties.
Sources
- https://incometax.gov.in
- https://contents.tdscpc.gov.in
- https://www.tin-nsdl.com
- https://finmin.nic.in
This is general information, not personalised advice. For your situation, consult a Certified Financial Planner.
