Understanding HRA, TDS, and Income tax notices: Analysis

Introduction

The Income tax department is currently issuing many notices to the taxpayers involved in claiming House Rent Allowance (HRA) exemptions but failed to deduct and deposit Tax Deducted at Source (TDS) on the rent paid, Last year I wrote a detailed article at Taxguru on fake HRA deductions (Link for above article: Tax Department detects HRA Fraud with illegal usage of PANs!) to evade tax. Many individuals are unaware of the rules governing rules relating to the TDS that is applicable on paying rent, leading to penalties and legal issues.

This article aims to explain the tax laws, implications, and solutions in simple terms, so that a person from background who never studied taxation could easily know about it.

 What is House Rent Allowance?

HRA is a component of salary provided by employers to employees to help cover rental expenses. Employees can claim HRA exemption under Section 10(13A) of the Income Tax Act if they pay rent for residential accommodation. However, claiming HRA without adhering to the necessary TDS provisions can result in tax notices.

What is TDS rate which is applicable on paying rent?

Section 194-IB of the Income Tax Act governs the TDS on rental income, in this section it is stated that the individuals or Hindu Undivided Families (HUFs) who are not required to get their accounts audited must deduct TDS on rent exceeding Rs. 50,000 per month, this limit is from current financial year 2025-26, but earlier limit was Rs. 2,40,000 for the year. The applicable TDS rate is 10% of the total amount of rent from November 2023 onwards, but in case the landlord is a non-resident Indian (NRI), then the TDS rate is 30% plus cess and is governed by Section 195 of Income tax act.

Why are taxpayers receiving notices?

The Income Tax Department is reviewing past income tax returns to identify individuals who claimed HRA but did not deduct TDS on rent payments. Yes, payee is obligated to deduct TDS, that’s the reason HRA claimers are receiving tax notices, hence in case any discrepancies are found by the department, notices are sent to such taxpayers to rectify the mistake and deposit the due tax, interest and penalties by filing revised returns through ITR-U which are having very harsh provisions

Example of Notice on HRA

Now, when and how should TDS be deposited?

According to income tax laws TDS is required to be deducted when rent is actually paid, then that TDS which is deducted is required to be deposited within the seven days from the end of the month in which rent is paid, which means if TDS is deducted on 4^th April 2025 then it is required to be deposited maximum by 7^th of May 2025, else penalty(will be discussing again at later part of this article) of 1.5% per month or part of the month will be applicable from May 2025 on payer, and in case he forgets to deduct then penalty will be 1% per month or part of the month.

In case, tenant i.e. person living on rent vacates the property before the end of the financial year, then in that case the TDS for the last payment must be deposited within 30 days from the end of the tenancy, that means in case today i.e. on 4^th April 2025 if tenant left the property, then in that case TDS should be deposited by 3^rd of May 2025

The amount of TDS is required to be deposited using Form 26QC and the tenant must provide Form 16C to the landlord.

Taking one more example, if rent for January is paid on 31^st January 2025, then the TDS for the same must be deposited by 07^th of February 2025 and in case If a tenant vacates that property in March 2025, the final TDS must be deposited by 30th April 2025.

Consequences of not deducting TDS on rent

Failure to deduct or deposit TDS on rent can result in interest penalties which means if TDS is not deducted at all, then the interest at 1% per month is charged from the date rent was paid, and in case if TDS is deducted but not deposited, then the interest at 1.5% per month is charged from the deduction date.

Failure to file Form 26QC within the prescribed time limit attracts a late fee under Section 234E of the Income Tax Act at the rate of ₹200 per day, subject to a maximum of the total amount of TDS deductible.

Even further penalties and even prosecution can be one of the consequence of not deducting TDS, that means as per Section 271C of Income tax act, failing to deduct or deposit TDS can result in a penalty equal to the TDS amount and in the extreme cases, prosecution and imprisonment may also be applicable.

Now, what is to be done if a Tax Notice is received?

If you receive a notice related to HRA and TDS, you are advised to follow these steps:

Step 1: You are required to verify your claim that means, you must check whether the HRA claim in your Income Tax Return was correct or not.

Step 2: You may file a revised return in case you find any error in your tax return as stated in notice, file a revised ITR before December 31 of the relevant assessment year, now only option left is filing an updated return.

Step 3: You should deposit the pending amount of TDS in case TDS was not deducted at all, by calculating the amount and depositing the required amount along with interest and penalties in form 26QC

Step 4: submit the compliance response by replying to the notice through the income tax e-filing portal, providing necessary documents such as rent receipts, Form 16C, and Form 26QC.

What are the important documents that are required in this case?

To avoid future notices and penalties, you are required to maintain the rent agreement, monthly rent receipts, PAN of your landlord’s PAN if applicable i.e. if yearly rent exceeds Rs. 1,00,000 (still it is recommended), Form 26QC (TDS deposit proof), Form 16C (TDS certificate issued to landlord)

How to avoid these issues in future?

Deduct and deposit TDS on time if your rent exceeds Rs. 50,000 per month, ensure landlord’s PAN is valid, otherwise, a higher TDS rate of 20% will apply in case of rent, File form 26QC on time to avoid daily penalty of Rs. 200/-.

 Conclusion

The recent notices from the Income Tax Department serve as a reminder for taxpayers to be diligent with their HRA claims and TDS obligations. Understanding the legal requirements, timely compliance, and accurate tax filing can help individuals avoid unnecessary penalties and legal issues. If you have received a notice, take immediate corrective action to rectify any errors and prevent further complications.

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Author can be contacted at aman.rajput@mail.ca.in