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In order to curb the instances of tax evasion, especially in big-ticket transactions, the authorities in India have mandated the deduction of tax right at the source of the transaction. This means, one party has to deduct the tax amount on behalf of the government, even as the transaction is underway. This tax deduction is better known as tax deduction at source or TDS.
TDS is basically a process under which tax is collected at the source from where an individual’s income is generated. TDS is levied on several incomes, including the rent that a landlord earns from his tenant. Under the income tax laws, different types of incomes attract different TDS rates. Before we proceed, let us first understand what TDS is.
What is TDS?
According to the Income Tax Department, the concept of TDS was introduced with an aim to collect tax from the very source of income. “As per this concept, a person who is liable to make payment of specified nature to any other person shall deduct tax at source and remit the same into the account of the central government. The deductee whose income tax has been deducted at source, would be entitled to get credit of the amount so deducted on the basis of Form 26AS or TDS certificate issued by the deductor,” it says.
What is the rate of TDS on rent?
The existing provisions of Section 194I of the Income Tax Act, casts a duty on the payer of rent to deduct tax at the rate of 10% of the rent on any land or building, if the aggregate of the rent paid or likely to be paid during the year, exceeds Rs 2.40 lakhs.
The limit of Rs 2.40 lakhs is applicable for each payee and not for each of the properties.
So, in case the owner of a property has let-out more than one property to the same lessee and the annual rent whereof, is less than Rs 2.40 lakhs for each property annually but the aggregate of the rent for all the properties taken on rent from the same person is likely to exceed Rs 2.40 lakhs, then, the lessee has to deduct the tax at source.
TDS on rent in 2021
In May 2020, finance minister Nirmala Sitharaman announced a reduction in the rate of TDS for non-salaried payments, following which the Central Board of Direct Taxes (CBDT) notified revised rates that would be applicable from May 14, 2020, to March 31, 2021. Under the new rules, the tax deducted on payment of dividend, insurance policy, rent, professional fees and on the acquisition of immovable property, was cut by 25% for a period up to March 31, 2021. TDS on rent for immovable property was cut to 7.5% from the 10% earlier, for this limited period, keeping in view the financial stress caused by the Coronavirus pandemic.
Also, a tenant would have to deduct the TDS on rent exceeding Rs 50,000 per month at 3.75%, instead of the 5% rate earlier. While tax payers hoped this measure would be given an extension in the Budget for 2021-22, no such announcement was made when finance minister Nirmala Sitharaman presented the Union Budget on February 1, 2021.
Who is liable to deduct TDS on rent?
The present provisions are applicable to all tax payers, including companies, firms, trusts or association of persons, etc.
However, if the payer of rent is an individual or HUF, the provisions will apply if the payer of the rent is engaged in a business or profession and the accounts were required to be audited during the preceding year, due to the turnover being in excess of the prescribed limit.
How is TDS on rent calculated?
The persons covered under this provision, are required to deduct the tax when the payment is being made to a tax payer who is resident in India, for tax purposes and the rent payment exceeds Rs 2.40 lakhs in a year.
If the lessor is a non-resident for income tax purposes, the payer has to deduct tax under the provisions of Section 195 of the Income Tax Act, without there being any threshold limit of Rs 2.40 lakhs per annum.
The payment may be called by any name but the tax is required to be deducted, in case the payment is for use of land, building or land and building.
It is not necessary that the recipient of the rent should be the owner of the property. So, in case a lessee sublets the property taken by him on rent/lease to any other person, then, the sub-lessee has to deduct tax at source.
Likewise, tax is required to be deducted from payments made to hotels, for providing rooms to you in case the rent is likely to exceed the limit during the year.
When is TDS deducted on rent?
The payer of the rent is required to deduct the tax at the time of crediting the rent in its books of accounts, even if the payment is made later. Likewise, you need to deduct the tax at the time of making an advance payment of such rent, either for the year or even in cases where the rent is paid in advance for more than one year. For payment of the TDS to the credit of the government, you need to obtain the tax deduction account number (TAN) and deposit the tax through the prescribed challan.
What is an HUF?
According to the Hindu law, a Hindu undivided family or HUF, is a family that consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. An HUF arises from status and is neither the creation of law nor of a contract. An HUF is automatically formed when two people get married and start their family. Apart from Hindus, Sikhs, Buddhists, Jains, etc., can also form an HUF.
TDS deduction on rent paid by individuals and HUFs
In order to bring more taxpayers into the tax net, the government has expanded the scope of the tax deduction at source on rent paid. This will cover all individuals and HUF, which are not covered under the existing provisions as explained above. Each individual and HUF will have to deduct tax at source on rent being paid, at the rate of 5% in case the amount of rent for each month or part of the month is more than Rs 50,000.
|Rent payer||TDS rate||Threshold limit|
|Companies, firms, trusts or association of persons, etc. and individuals or HUFs, where the payer is engaged in a business whose accounts were audited.||10% of the rent.||TDS has to be deducted if the aggregate of the rent paid or likely to be paid during the year exceeds Rs 2.40 lakhs.|
|Individuals and HUFs not covered in the above section.||5% of the rent.||TDS has to be deducted if the rent for each month or part of the month is more than Rs 50,000.|
The payer is required to deduct tax only in the last month of the year or during the last month of tenancy in case the property is vacated during the year. However, in case the rent is paid earlier, you are required to deduct tax at the earlier moment.
So, with the new provisions, even the people who are salaried or retired and not carrying on any business or profession but are paying rent above Rs 50,000 per month, will have to deduct tax at source from such rental. This will bring those people into the tax net, who are earning rent by letting out the property to people who are not engaged in any business or profession.
Since the rent for this purpose includes any payment for use of building, this will even cover the rent paid by you to hotels for room bookings, or even to marriage halls, in case the rent for use of such premises exceeds Rs 50,000 even for one day.
TDS on rent paid to NRIs
According to Section 195 of the Income Tax Act, the tenant should deduct TDS at the rate of 30% on rent paid to an NRI landlord for property located in India. For deducting TDS on the rent, the tenant should have a TAN. If the tenant fails to deduct TDS on the rent paid to the NRI, the payer is liable to pay penalty as per the prevailing provisions.
Is TAN mandatory for TDS?
The provisions only cover the recipient of rent who is a resident for income tax purposes, as non-residents are already covered under section 195 of Income Tax Act. Even though the existing provision requires people to obtain the TAN number, the new provision exempts the payers from such requirement.
Form for TDS payment
To pay TDS on rent, log on to www.tin-NSDL.com. On the website, you will find the link to fill Form 26QC. Fill all your details, the details pertaining to your landlord and all the details of the financial transaction. In case you are sharing the accommodation, their details must also be furnished. Similarly, if your landlord co-owns the property with someone else, their details must also be given in the form.
What is Section 194I of the Income Tax Act?
Section 194I of the I-T Act deals with TDS on rent payments. Section 194I covers persons who are not individuals/HUFs, as well as individuals/HUFs who are liable to audit under Section 44AB (a) and (b). Section 194IB covers individuals and HUFs who are not liable to audit. Section 194IC covers joint development agreements.
Where can I pay TDS on rent?
Any individual or organisation that deducts TDS from rent, can deposit the same to the credit of the government, through the portal https://www.tin-nsdl.com/ or through authorised banks.
What is the meaning of 'rent' for TDS on rent?
Rent refers to any payment made for the use of land, building or land and building, or payments made to hotels for providing rooms.
What are the income tax forms for TDS on rent?
A tenant has to fill a challan-cum-statement (Form 26QC) on the TIN website for reporting the TDS on rent transaction.
What is the penalty for not deducting TDS on rent?
If the TDS is not deducted, penalty interest @ 1% shall be applicable per month, till the TDS is deducted.
(The author is chief editor – Apnapaisa and a tax and investment expert, with 35 years’ experience)