Many taxpayers who have claimed an HRA deduction exceeding ₹5 lakh in their income tax returns have received an email from the Income Tax Department this Sunday requesting them to verify the HRA claims for the past three years because no TDS on rent payments has been made by the assesse u/s 194IB.
Page Contents
Applicability of Section 194IB – TDS on Rent Payments
- Applies to individuals & HUFs not subject to a tax audit under Section 44AB.
- Triggered when rent exceeds ₹50,000 per month (even for part of a month).
- TDS Rate: 5% & w.e.f. October 1, 2024 it’s 2%.
How Tax Department Identifies Assessees who not deducted TDS on Rent?
They have a complete database of individuals who have claimed HRA in their ITR. The selection process for these notices follows a structured approach:
- Identifying High HRA Claims: The system flags cases where HRA deductions exceed ₹5 lakh.
- Verifying TDS Compliance: A cross-check is conducted to determine whether the taxpayer has deducted and deposited TDS on rent payments via Form 26QC.
- Issuing Notices: Emails are sent only to taxpayers who have claimed substantial HRA but have not complied with the TDS provisions.
This shows that the Income Tax Department has become increasingly proactive in closing long-standing loopholes. In this case as well, HRA deductions and TDS on rent have been reflected in the AIS for a long time. However, utilizing this information in a way that clearly identifies non-compliance by assessees is a significant step. This approach serves as an effective method to identify the incorrect claim and ensure compliance.
Steps to Take If You Received Income Tax Notice for non-deduction of TDS on Rent
1. If You Have Incorrectly Claimed HRA Without Paying Rent
In this case, I strongly suggest to revise your claim by filing an updated return and paying a little extra now. If the tax department catches this later, they can levy a penalty up to 200% of the tax amount. That would cost you much more and cause unnecessary stress, as you’d always worry about getting a notice from them.
2. If You Have Genuinely Paid Rent
In this case, you might be thinking that your only options now are either pay TDS on rent or file an updated return, removing the HRA deduction along with interest and penalty. However, the issue is more complex than it seems. It’s not just about paying the tax, interest, and penalty—there are other important factors also to consider. Let’s explore this in detail.
A. Implications of Paying TDS on Rent by Filing Form 26QC with Interest & Penalty:
a. Extra Cash Outflow: You’ll face additional cash outflow due to interest and penalty charges.
b. Difficulty in Recovering TDS from the Landlord: Since you have already paid the full rent without deducting TDS, recovering this amount from your landlord can be challenging, especially if:
i. Your lease has ended.
ii. You have moved to a new premises.
iii. You do not have a good relationship with your landlord.
c. Challenges for the Landlord: Hypothetically, even if your landlord agrees to reimburse the TDS, they won’t be reimbursing the same from their pocket. They would need to claim the TDS credit in their ITR, but they won’t be able to because the due date for filing a revised return must have passed. This makes getting TDS credit a significant challenge for them.
B. Implications of Revising Your HRA Claim by Filing an Updated Return:
a. Extra Cash Outflow: You’ll face additional cash outflow due to interest and penalty charges.
b. Continued Liability as an Assessee in Default: Even if you revise your HRA claim, you are still responsible for deducting and paying TDS if you have actually paid rent. By simply removing the HRA claim does not exempt you from the TDS obligation—you cannot argue that TDS is not required just because HRA was not claimed and the consequences of assessee in default continues.
Avoiding Default Without TDS Deduction: An Alternative Option
Yes, there is a provision in the Income Tax Act that you’ll not be considered as assessee in default even if you have not deducted or paid the TDS. According to the first proviso to Section 201(1), if the landlord:
- Has filed their Income Tax Return (ITR)
- Has included the rental income in their total income, and
- Has paid the required tax on such income,
then the assessee will not be considered as an assessee-in-default, even if TDS was not deducted or paid.
How to Avail This Benefit?
To claim the benefit under this proviso, you’ll have to obtain a CA certificate from your landlord in the prescribed format. This certificate should confirm that the landlord has reported the rental income in their ITR and paid the required tax. Once this certificate is submitted to the department and they verify that sufficient tax has been paid, you will no longer be considered a defaulter. However, you may still have to pay interest under Section 201(1A) for a period of delay from date of deduction to date of payment by landlord.
Conclusion
The recent scrutiny of high HRA claims underscores the Income Tax Department’s increasing focus on compliance and data-driven enforcement. Taxpayers who have received these notices must act swiftly, assessing their situation and choosing the most appropriate response—whether it’s paying TDS with interest, revising their HRA claim, or obtaining a CA certificate to avoid being deemed an assessee-in-default.
Going forward, ensuring proper TDS compliance on rent payments and maintaining accurate documentation will be crucial in avoiding such tax complications. By staying proactive and informed, taxpayers can minimize financial liabilities and prevent unnecessary scrutiny from the tax authorities.
****
I hope this article helps you understand the issue and provides guidance on how to address it effectively. In case of any query, you can reach out to me on sharshil323@gmail.com.
Author Bio
