1% Tax on Cars to be Collected at Source from 1st June

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From 1st June 2016, you would be required to pay 1% extra tax to the person from whom the car is being purchased. This tax would be applicable on all cars which are sold for more than 10 Lakhs. This tax would be applicable irrespective of whether you are purchasing a new car from the showroom or purchasing a 2nd hand car.

Tax Collected at Source @ 1% on Cars above 10 Lakhs

This 1% Tax which the buyer would be required to pay to the seller at the time of buying a car will get adjusted with the total tax liability of the buyer. The buyer will get tax credit of this tax which he has paid at the time of purchasing a car.

This can be explained with the help of an example. If you purchase a car worth Rs. 15 Lakhs – you would be required to pay to the seller additional 1% as Tax. This 1% would be levied on the Sale price which in this case would be 1% of 15 Lakhs = 15,000.

At the end of the year, if your tax liability is Rs. 1,00,000 you can claim credit of this Rs. 15,000 and you would be required to pay only Rs. 85,000 (i.e. 1,00,000 – 15,000) as your income tax.

This Tax to be paid @ 1% is referred to as the Tax Collected at Source. The buyer of the car will pay this to the seller who will in turn deposit this amount with the Income Tax Department. After depositing this amount with the Income Tax Department, the seller of car will give the buyer a certificate mentioning the date on which the seller has deposited the Tax with the Govt.

On the basis of this certificate, the buyer would be able to claim credit of this tax against his total income tax liability for the year.

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Things to be kept in mind

  1. The buyer of the Car is required to pay this Tax @ 1% to seller of the car
  2. At the time of filing of the income tax return, the buyer of the car can only claim refund of this 1% Tax and not of the other taxes paid at the time of purchasing of car like Excise Duty, Infrastructure Cess, VAT, Road Tax etc
  3. This tax would be applicable irrespective of whether the car is being purchased from the showroom or the dealer or directly from the seller.
  4. It is applicable on all vehicles irrespective of whether they are used for personal purpose or ambulance or bus or for any other purpose.
  5. This 1% additional tax would be required to be paid irrespective of whether the payment for purchase of car is made in cash or through Cheque/Netbanking or through Loan or through any other means.

Karan is CA by Qualification with the rare distinction of being awarded All India Rank 22. He is also the founder of this website and loves to help people with their Tax Queries.