TDS on Rent Under Section 194-IB: What Rate to Apply – 5% or 2% for the FY 2024-25 ?
Summary: The Union Budget 2024 revised the TDS rate on rent payments under Section 194-IB from 5% to 2%, effective October 1, 2024. This change has led to confusion about which rate applies for the financial year 2024-25, particularly for payments made at the end of the year. Under Section 194-IB, individuals or Hindu Undivided Families (HUFs) paying rent exceeding ₹50,000 per month must deduct TDS at the time of credit or payment, whichever is earlier, for the last month of the financial year or tenancy. If the last month of tenancy is before October 1, 2024 (e.g., September 2024), the applicable rate is 5%. For payments or credits made after this date (e.g., March 2025), the TDS rate is 2%. There is no requirement to split deductions for the same period or pay TDS quarterly. Instead, TDS is deducted and paid once, based on the last month’s rent. This clarification ensures compliance with the revised rates and avoids errors in TDS deductions during the transitional period.
The Union Budget 2024 reduced the TDS rate on rent payments under Section 194-IB from 5% to 2%, effective October 1, 2024. This has created confusion regarding the applicable rate for rent payments, especially for year ending on the March 2025—should TDS be deducted at 5% or 2%?
Understanding the Provision
As per Section 194-IB, individuals or Hindu Undivided Families (HUFs) paying rent exceeding ₹50,000 per month must deduct TDS at the time of:
- Credit of rent OR
- Payment of rent, whichever is earlier
for the last month of the financial year or the last month of tenancy, if the property is vacated during the year.
This means that the applicable TDS rate depends on when the rent is credited or paid for the last month.
Case Scenarios: When to Deduct TDS at 5% or 2%?
Case 1: Last Month is September 2024
Suppose a tenant vacates the property in September 2024, making it their last month of tenancy. The rent for September is credited or paid before October 1, 2024.
In this case TDS should be deducted at 5%, as the applicable before October 1, 2024 is 5%.
Case 2: Last Month is March 2025 (End of Financial Year)
If the tenancy continues till March 2025, then TDS is deducted on the rent for the month of March. As the payment or credit for March rent will happen in March 2025 (after October 1, 2024), the 2% rate applies.
TDS should be deducted at 2%.
Conclusion
- If the last month is before October 1, 2024, the TDS rate is 5%.
- If the last month is falling after October 1, 2024, onwards, the TDS rate is 2%.
- There is no requirement to split the deduction (half at 5% and half at 2%)—the applicable rate is determined based on the timing of payment or credit for the last month.
- There is no such requirement to pay the TDS payment on quarterly or half yearly basis. The TDS needs to be paid one time in the year i.e. the last month of the previous year or last month of the tenancy.
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Disclaimer: This article is solely for educational purposes and cannot be construed as legal and professional opinion. It is based on the interpretation of the author and is not binding on any tax authority. Author is not responsible for any loss occurring to any person acting or refraining from acting as a result of any material in this article. You can reach author at caharshalisalvi@gmail.com
Author is a practicing Chartered Accountant. She is a Associate Member of ICAI, Commerce graduate and also hold Certificate of GST. Founder of Salvi & Associates. Owning professional experience of more than 3years. She use-to write articles on different topics published on professional websites.
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