Ritika pays ₹60,000 rent every month for her apartment in Bengaluru. She keeps rent receipts, has a rent agreement, pays via bank transfer, and has shared his landlord’s PAN with her employer to claim HRA. By most standards, her paperwork is in order.
Yet, a tax notice flagged her as non-compliant. The reason was something she wasn’t aware was part of her legal duties as a tenant: she hadn’t deducted tax on the rent she pays.
Under Section 194-IB of the Income Tax Act, tenants paying more than ₹50,000 a month have to mandatorily deduct 2% tax deducted at source (TDS) on the annual rent in March or last month of tenancy. Failing to do so attracts penalties.
What is the law?
There are different rules for TDS on rent when the landlord is a resident versus a non-resident Indian (NRI).
In the first case, the TDS gets triggered only after monthly rent exceeds ₹50,000. It should be deducted once in a year–either in March or at the end of tenancy if the tenancy ends before year end–from the last month’s rent.
The TDS rate is 2%, but it increases to 20% if the landlord refuses to share their PAN details or their PAN is not linked to Aadhaar card. Assuming Ritika has her landlord’s PAN details, she should deduct ₹14,400 (2% of ₹7.2 lakh) from March’s rent and deposit it with the government.
The ₹50,000 limit is applicable per tenant if there are more than one tenants occupying the same property and paying rent, said Himank Singla, partner at S B H S & Associates, Chartered Accountants.
“The reverse is also true when the property has multiple owners. Say, two owners jointly own a property and receive ₹30,000 rent each for it, the tenant is not required to deduct TDS,” he explained.
When the landlord is an NRI, the tenant has to deduct TDS every month and at a higher rate of 31.2%. Also, deduction is mandatory irrespective of the rent amount. In Ritika’s case, if her landlord is an NRI, she must deduct ₹18,720 every month from the rent.
The deducted amount has to be deposited by the tenant using Form 26QC by the seventh of the following month.
Here is how tenants can deposit the TDS:
- Visit the e-filing portal and login into your account
- Go to e-pay Tax option - > New payment
- Select 26 QC (TDS on rent of property) option
- Fill the landlord’s PAN and rent information. Proceed to deposit the tax
- Tax challan will be generated, which should be given to the landlord.
The compliance for tenants increases multifold with an NRI landlord, as they have to deposit the TDS every month within the prescribed timelines. Also, they must get a TAN (tax deduction and collection account number) to be able to deposit the TDS. For resident landlords, the tenant’s PAN is sufficient.
Penalties for non-compliance
There are steep penalties for non-deduction of TDS or failure to deposit it on time.
A penal interest of 1% per month is applicable for non-deduction from the date tax was due to be deducted till it is actually paid. There are separate penalties when you have deducted the TDS but failed to deposit it to the government on time.
A 1.5% per month interest is levied from the date of deduction to the date the TDS is actually deposited. Further, for delay in filing Form 26QC, a daily penalty of ₹200 is levied, capped at the TDS amount.
The tax department has started looking closely into TDS defaulters on rent. Last year, the department sent notices to taxpayers who claimed HRA on the rent they paid but did not deduct TDS. Even if you don’t claim HRA, you are liable to deduct TDS if the conditions for deduction are met.
Ritika is a hypothetical case taken for illustrative purposes.