TDS on rent, confusions? Here are the possible solutions!

Last month, the Income Tax Department raised concerns regarding deductions under section 80G for donations. And yesterday, on Sunday, many individuals received intimations to verify the claim of exemptions for house rent allowance (‘HRA’).

Assessees received SMS and emails flagging that no TDS had been deducted on rental payment as per provisions of section 194-IB of the Income-tax Act, 1961 (‘Act’). This message included details of the amount of HRA claimed in the past few years, followed by a request to verify the claim and rectify the mistake, if any.

First things first!

As per section 194-IB of the Act, any individual or HUF paying rental income to a resident in excess of Rs. 50,000/- a month is required to deduct tax at 2% (the rate was reduced from 5% w.e.f. 1 October 2024) of such rental income.

This tax was required to be deducted in March of every year or last month of tenancy if the property was vacated during the year.

So, if rent has been paid by a salaried or any other taxpayer who paid rent exceeding Rs. 50,000/- without deducting taxes at source, the income tax department has sought to alert them of the lapse through the campaign.

Alright, that’s done now. What are the repercussions? What do I need to do now?

The implications for non-deduction of tax at source are as below:

1. Liability of deduct and pay the tax;

2. Interest on non-deduction of tax at 1%;

3. Treating assessee in default under section 201(1A);

4. Penalty to the tune of amount of tax that the taxpayer failed to deduct;

5. Prosecution for non-deduction of tax under section 276B for a term of 3 months to 7 years;

6. In case the taxpayer has claimed the deduction of rent as a business expense, 30% of the rent payment may be disallowed under section 40(a)(ia) of the Act.

However, the tax on the rental income is already paid by the landlord. So are there any mitigants?

As per provisions of proviso to section 201(1), the taxpayer would not be regarded as assessee-in-default in respect of such tax if –

• the payee (landlord in this case) has furnished his/ her return of income under section 139,
• has taken into account such sum for computing income in such return of income; and
• has paid the tax due on the income declared by him in such return of income.

Hence, if the above conditions are met, the taxpayer is not required to deduct tax and would not be regarded as an assessee-in-default. In other words, apart from not paying TDS, the taxpayer also would be relieved from penalty, disallowance and prosecution provisions. However, the taxpayer will be liable to pay interest as outlined above.

In order to avail this provision, the taxpayer is required to furnish a certificate to the above effect in form 26A. Form 26A is a certificate issued by Chartered Accountant which includes details of interest on delayed deduction, payment, income tax return of deductee, etc. The said form needs to be furnished electronically from the login of the taxpayer and Chartered Accountant of the payee. The CBDT vide notification number 11/2016 dated 2nd December 2016 has provided the procedure for furnishing and verification of Form 26A for removing default of Short Deduction and or Non-Deduction of Tax at source.

Illustration of interest computation

For AY 2023-24, a taxpayer, Mr. T had failed to deduct tax on payment of rent of Rs. 10 lakhs to landlord, Ms. X. However, Ms. X has filed her return within the due date and has paid tax on the rental income of Rs. 10 lakhs on 31 July 2023 and paid tax on rent on 31 July 2024. In such case, the interest of Rs. 2,000 shall be payable under section 201(1) of the Act. Computation as below:

TDS amount – Rs.10 lakhs * 5% = Rs. 50,000

Interest from the period 1 April to 31 July 2024 = Rs. 50,000*1%* 5 months (considering part month of March) = Rs. 2,000/-

But the rate changed from 5% to 2%. So what rate do I apply?

As per provisions of section 194IB(2), the TDS 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. Hence, while the monetary threshold is prescribed on a monthly basis, the liability to deduct tax is allowed on an annual basis and the rate of tax on the date of liability of deduction should be considered. Hence, for property which are vacated before October 2024, rate of 5% should be applied while rate of 2% may be applied for other properties continued to be rented through the entire financial year/ vacated after October 2024.

Cases where tax not paid by landlord

In scenarios where the conditions for obtaining form 26A are not fulfilled or form 26A cannot be obtained practically for some reason, the taxpayer may choose one of the below options:

1. Deduct tax and deposit the same along with interest and penalty implications;

2. Alternatively, forego the HRA exemption and pay tax on the differential taxable salary. The same needs to be updated by filing an updated return.

If you have missed deducting tax on payment of rental amounts, consider the above provisions and take necessary corrective steps within prescribed timelines.