Summary: Section 194-IB of the Income Tax Act mandates individuals and HUFs to deduct TDS at 2% on monthly rent payments exceeding ₹50,000 to a resident, regardless of business or professional status. This provision simplifies compliance by requiring TDS deduction either in the last month of the financial year or tenancy, whichever is earlier. Even individuals claiming HRA must comply if their rent exceeds ₹50,000. Compliance involves filing Form 26QC and issuing Form 16C, ensuring adherence to tax regulations without monthly deductions. The definition of “rent” encompasses all payments under lease agreements. Non-compliance may lead to higher TDS rates under Section 206AA if the landlord lacks a PAN. Understanding these rules ensures smooth tax management for individuals renting high-value properties, emphasizing the importance of early compliance to avoid future complications.
Arjuna (Fictional Character): Krishna, a taxpayer, is paying ₹51,000 per month as rent for his residential flat and is not engaged in any business or profession. Based on these facts, is he required to fulfill any tax deduction obligations (such as TDS) on the rent payments?
Krishna (Fictional Character): Yes Arjuna. Section 194-IB of the Income Tax Act, 1961 which was introduced from 1st June 2017 requires an individual or a Hindu Undivided Family (HUF) to deduct TDS at the rate of 2%, whose total sales or turnover from business doesn’t exceed ₹1 crore, or receipts from profession doesn’t exceed ₹50 lakh, in the previous financial year and is paying monthly rent exceeding ₹50,000 to a resident.
This provision ensures that even high value rent payments by individuals and HUFs who are outside the scope of business and profession are covered under tax compliance.
The good part is that the tenant doesn’t need to deduct the TDS every month. Tax needs to be deducted just once, either in the last month of the financial year or the last month of tenancy, whichever is earlier.
Arjuna (Fictional Character): Can you explain with an example what is meant by “last month of the financial year or tenancy”?
Krishna (Fictional Character): Certainly, Arjuna. In case taxpayer is occupying a rented property from April 2024 to March 2025, and is paying monthly rent of ₹55,000, then Tax is to be deducted in March 2025 the last month of the financial year. But if taxpayer’s tenancy ends earlier, say in November 2024, then Tax must be deducted on the rent till November, as it is the last month of tenancy. This ensures that TDS compliance is fulfilled either at the financial year-end or tenancy-end, whichever happens earlier.
Arjuna (Fictional Character): In case Taxpayer also receives House Rent Allowance (HRA) from his employer, and he submits rent receipts every year. Does he still need to deduct TDS under Section 194IB at the rate 2%?
Krishna (Fictional Character): Yes, Arjuna. Claiming HRA for salary purposes is separate from taxpayer’s compliance with section 194IB. If taxpayer is claiming HRA, and his monthly rent exceeds ₹50,000 even by a single rupee, then he must deduct TDS at the rate of 2%.
The deducted tax must be deposited through Form 26QC, which is a challan-cum-statement. It must be filed within 30 days from the end of the month in which TDS is deducted. After filing Form 26QC, the tenant must also issue Form 16C, which is a TDS certificate, to the landlord.
Arjuna (Fictional Character): How is “rent” defined under this section?
Krishna (Fictional Character): The term “rent” includes any payment, by whatever name called, made under a lease, sub-lease, tenancy, or any other agreement or arrangement, for the use of land, building, or both.
Arjuna (Fictional Character): What if the landlord does not have a PAN?
Krishna (Fictional Character): In such cases, Section 206AA becomes applicable. The tenant must deduct TDS at a higher rate of 20% if the landlord fails to provide a valid PAN. However, the TDS amount should not exceed the rent amount for the month of march or the last month of tenancy.
Arjuna (Fictional Character): Krishna, what one should learn from this?
Krishna (Fictional Character): Not all tax rules are for businessmen. Some apply to common individuals too, especially when the rent is high. The compliance is easy, and it keeps taxpayer safe from issues. It’s easier to follow the rule now than deal with trouble later.
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