Rent tax liabilities are not limited to landlords. Income Tax (IT) laws mandate tax deduction at source (TDS) by tenants (applicable to individuals and Hindu Undivided Families, or HUFs) and deposit it with the IT department under certain conditions. The amount of TDS to be deducted and the conditions relating thereto are broadly defined under two sections:
Section 194I: This is applicable to individuals and HUFs whose turnover from business or profession is high 1 crore (in case of business) or 50 lakh (in case of profession) during the previous financial year and when the landlord is a resident Indian. TDS limit in this case is 2.4 lakh per annum. The rate at which TDS is required to be deducted is 10%.
Section 194IB: This applies to individuals and HUFs who are not covered under section 194I and when the landlord is a resident. The threshold limit provided here is 50,000 per month. The rate at which TDS is required to be deducted is 5%. TDS will be deducted in the last month of the previous year or the last month of tenancy (in case the property is vacant during the year), whichever is earlier.
In cases where rent is paid to a non-resident, 30% TDS is to be compulsorily deducted under section 195, without any limitation on how much rent is paid and the income of the tenant.
TDS provision on security deposit
The provision of TDS is applicable only on the amount of rent paid; Hence, it does not apply to the refundable security deposit amount that a tenant pays in lump sum to the landlord. However, TDS provisions will be applicable in case of non-refundable deposits which are in the nature of rent. When a rental property has co-owners, a separate limit applies for each co-owner. For example, if an assessee is required to deduct TDS under section 194I; and the total fare is 4 lakhs to be paid to two co-owners, then different limits Rs 2.4 lakh will be available for each co-owner.
Let us understand this with an example: A is a person engaged in business and his turnover in the previous financial year is more than 1 crore. He is paying rent to B and C who are co-owners of the residential property where he lives. The rent paid to B is 18,000 per month and the same is paid to C 15,000/- per month. The said rent is paid by A in cash.
In this case, section 194I is applicable because A is engaged in business and his turnover in the previous financial year exceeds 1 crore.
10% TDS will be deducted if the rent exceeds the prescribed limit. 2.4 lakh per co-owner per annum; which is not happening in this case (the rent paid to B is 2.16 lakhs and c. 1.8 lakh). Hence TDS will not be applicable in this case.
As far as the taxability of B and C is concerned, the rent received will be charged to tax under the head ‘Income from house property’. However, B is not entitled to receive the rent in cash as the amount exceeds 2 lakh, which is a contravention of section 269ST of the I-TAct, 1961, and a penalty equal to the amount of the receipt can be imposed under section 271DA.
Penalty for not deducting TDS
A person who fails to deduct TDS is liable to pay interest on monthly basis at 1% (if TDS is not deducted or paid) or 1.5% (TDS is deducted but not paid) Will happen. Late fee for not filing TDS return 200 per day.
In case where the tenant fails to file the details of TDS within the due date, penalty ranging from from 10,000 1 lakh can be levied under section 271H.
Jigar Mansatta is the Proprietor of Jigar Mansatta & Associates.
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