Mistakes to Avoid While Paying TDS on Rent for FY 2024-25

The Union Budget 2024 introduced a significant change in TDS on Rent (Section 194-IB)—reducing the TDS rate from 5% to 2%, effective October 1, 2024. However, this change has led to confusion among taxpayers, particularly regarding the applicable rate for payments made during the transition period.

Why is the Effective Date Important?

The change in TDS rate is crucial for:

• Tenants making rental payments in March 2025
• Cases where the property was vacated mid-year

Given that TDS is deducted at the time of crediting the rent for the last month of the financial year or the last month of tenancy, the question arises—what rate should be applied?

What is the Correct TDS Rate?

• 5% for the entire year?
• 5% for part of the year and 2% for the rest?
• 2% for the entire year?

To understand this, let’s refer to Section 194-IB of the Income Tax Act:

194-IB(2) The income-tax referred to in sub-section (1) shall be deducted on such income at the time of credit of rent, for the last month of the previous year or the last month of tenancy, if the property is vacated during the year, as the case may be, to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier.

Since the new rate of 2% is effective from October 1, 2024, and TDS is deducted at the end of the financial year, the applicable rate should be 2% for the entire year if the rent is paid after October 1, 2024.

Moreover, while filing Form 26QC, the system restricts TDS to 2%, ensuring that even if someone mistakenly deducts 5%, only 2% will reflect in Form 26AS.

What If You Already Paid TDS @ 5%?

Many taxpayers, unaware of the change, may have already deducted and paid TDS at 5% instead of 2%. If you’re one of them, here’s what you need to know:

• Correction Request? Not useful—the system automatically restricts the TDS to 2%.
• Increase Rent Amount to Adjust? Not advisable—it could cause mismatches in the recipient’s ITR.
• Carry Forward the Excess TDS? Not possible—Form 26QC doesn’t allow set-offs like other TDS sections.
• Solution: Apply for a Refund on the TRACES Portal – Keep all necessary documents handy in case the tax officer requests verification.

Conclusion

The reduction in TDS on rent from 5% to 2% is a welcome relief, but it has also led to confusion regarding its applicability. To avoid errors, taxpayers must ensure they deduct TDS @ 2% for the entire financial year when making payments post-October 1, 2024.

If excess TDS has already been paid at 5%, the only solution is to file a refund application on TRACES, as other adjustment options are not available.

For any queries, feel free to reach out at sharshil323@gmail.com.