Income Tax Department Alerts Assessees on Non-Deduction of Tax on Rent

Income Tax Department Alerts Assessees on Non-Deduction of Tax on Rent under Section 194IB of the Income Tax Act, 1961

The department has recently started sending messages to individuals regarding the non-deduction of tax on rent payments under Section 194IB of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), where they have claimed a deduction under Section 10(13A) while filing their ITR for assessment years 2022-23 to 2024-25. The department mentions that the claim may be verified, and any mistake, if found, may be rectified by filing an updated ITR by 31.03.2025.

Now, let’s understand the applicable provisions, consequences of non-deduction, and how one can safeguard themselves:

Provisions

Interpretation:

Section 194IB of the Act mandates that individuals or Hindu Undivided Families (HUFs) paying rent exceeding ₹50,000 per month or part of a month must deduct tax at source (TDS) at the rate of 2% (reduced from 5% effective October 1, 2024) and deposit it with the government.

When to Deduct:

The tax should be deducted at the time of crediting rent for the last month of the previous year or the last month of tenancy (if the property is vacated during the year), whichever is earlier.

For example, if the property was occupied throughout the year, the deduction should be made in March, and the tax can be paid up to 30.04.XXXX (i.e., the last date to deposit tax for the month of March).

Mode of Rent Payment:

Cash, cheque, draft, or any other mode.

Implications of TAN & PAN:

• TAN Requirement: Section 203A of the Act requires individuals who deduct tax at source to obtain a Tax Deduction and Collection Account Number (TAN). However, Section 194IB specifically exempts individuals from this requirement. This means tenants paying rent exceeding ₹50,000 per month do not need to obtain a TAN to deduct TDS on rent payments.
• PAN Requirement: Section 206AA mandates that if the payee (landlord) does not provide their Permanent Account Number (PAN), the TDS must be deducted at a higher rate of 20%. However, under Section 194IB, the TDS amount cannot exceed the rent payable for the last month of the previous year or the last month of tenancy. This ensures that even if the landlord’s PAN is not available, the tenant is not required to deduct more than the rent amount for the relevant period.

What is Covered Under “Rent”:

Any payment, by whatever name called, under any lease, sub-lease, tenancy, or any other agreement or arrangement for the use of any land or building or both.

Consequences of Non-Deduction

Failing to comply with the provisions of Section 194IB can lead to several repercussions. Let’s discuss them:

• Liability to Deduct and Pay Tax: The individual must deduct and pay the tax due.
• Interest on Non-Deduction/Deducted but Not Paid: Interest at 1% per month (or part thereof) on the amount of tax not deducted, and at 1.5% per month (or part thereof) on the amount of tax deducted but not paid.
• Assessee in Default: The individual may be treated as an assessee in default under Section 201(1A).
• Penalty: A penalty equal to the amount of tax not deducted may be imposed.
• Prosecution: Prosecution under Section 276B, which can result in imprisonment for a term ranging from 3 months to 7 years with a fine.
• Disallowance of Expense: If the rent is claimed as a business expense, 30% of the rent payment may be disallowed under Section 40(a)(ia).

How to Safeguard Yourself:

To avoid these consequences, individuals should take the following steps:

1. Timely Deduction and Payment: Ensure that TDS is deducted and deposited within 30 days from the end of the month in which the deduction is made. Use Form 26QC (challan-cum-statement) for this purpose (Rule 30(2B) & 31A(4B)).

2. Issue TDS Certificate: Provide the landlord with a TDS certificate in Form 16C within 15 days from the due date of furnishing Form 26QC (Rule 31(3B)).

3. Maintain Records: Keep detailed records of rent payments, TDS deductions, and deposits.

4. Verify Landlord’s PAN: Ensure the landlord’s PAN is available to avoid higher TDS rates.

5. File Form 26A: If the landlord has already paid the tax on the rental income, obtain a certificate in Form 26A from a Chartered Accountant to avoid being treated as an assessee in default (Rule 31ACB).

By following these steps, individuals can ensure compliance with Section 194IB and avoid penalties and other legal consequences.