TDS On Rent [Check tax slab rates on rent]

We understand and use the term RENT when we let out our property to someone else or we take up a place for our stay.

Similarly, business persons, working professionals and others familiar with income tax know what TDS (Tax Deducted at Source) implies.

But many seek clarity on issues such as, is TDS On Rent applicable to non-income taxpayers? What about small businesses—do they require you to deduct TDS on rent? Is the rent for a manufacturing facility under the TDS purview? Here, we examine the scope of TDS as applicable to rent paid by various categories of taxpayers. View the tax information page of NSDL for more information.

What is TDS?

The Indian Income Tax Act of 1961 requires companies or individuals to deduct a certain tax percentage from the amount payable if the payment exceeds the specified threshold level. This deduction is termed TDS.

The entity (company or individual) deducting the tax is responsible for depositing such amounts to the exchequer.

What does the term ‘rent’ signify?

Rent relates to any payment made under a tenancy or lease agreement. It also covers sub-lease arrangements for the use of either separately or together any of the following:

• Land
• Residential or commercial building
• Factory building
• An industrial plant or a manufacturing facility
• Equipment, computer systems, networks, or other infrastructure as required by a business
• Machinery
• Fittings

Threshold limit for TDS on Rent

TDS is applicable on aggregate annual rent paid in a financial year above Rs. 2,40,000 (revised in the union budget 2019-20, from the earlier Rs. 1,80,000). TDS is applicable even when the rental amount is not actually paid but expected to be paid or credited.

When the monthly rent payable is more than Rs. 50,000, 5% TDS is required to be deducted, applicable to salaried and other individuals or income tax assessees under HUF (Hindu Undivided Family), including those outside the purview of a mandatory tax audit.

Who pays TDS?

A. Businesses and professionals

For businesses and professionals under the mandatory tax audit regulation (annual turnover of more than Rs. 5 crores), TDS is deducted if the rent payable for a fiscal year exceeds Rs. 2.4 lakhs. However, when there is no mandatory requirement of a tax audit, tax deductions are not necessary on the rent payable, irrespective of the amount of rent. This is covered under section 44B of the Income Tax Act (ITA).

B. Non-Individuals

Private companies and HUFs that undergo an audit and make rental payments exceeding Rs. 2.4 lakhs must deduct and deposit TDS. This is as per section 1941 (of the IT Act).

C. Salaried employees and other individuals

Individuals (salaried/non-salaried persons) and HUFs not under the mandatory tax audit requirement must deduct taxes if the monthly rent paid to an Indian resident is more than Rs. 50,000. This is covered under section 1941B.

Liability to deduct:

1. Individuals/HUFs paying a monthly rent of more than Rs. 50,000 are liable for TDS deduction.
2. In the case of a company or a business, the person responsible for paying the rent is liable for deduction.

TDS: Deduction Rate Slabs

** It may be noted that a special concession is applicable on the TDS rate for the period 14/05/20 to 31/03/21. (2% rate becomes 1.75%; 10% to 7.5% and 5 % to  3.75%)

Points to remember:

• A refundable security deposit or advance payment is not treated as income; therefore, TDS is not applicable.
• Advance rent collected by the landlord is subject to tax deductions. However, if the advance rent is credited to a ‘suspense account’ in the case of business accounts, TDS will still be applicable.
• Section 1941 of the ITA, which covers TDS, specifies quarterly payment of tax. So, for a monthly payment of rent, TDS may be deducted and deposited quarterly. You can pay TDS  yearly if the rent payment is also made on yearly terms.
• If rental payments are made to the government (payee), the rule of tax deduction at the source is not applicable.
• It is mandatory to provide the PAN of the landlord as well as a tenant in the online form for furnishing information on rent.
• The tenant is responsible for providing a TDS certificate (in Form 16C) to the landlord/lessor/payee within 15 days of filing the return. You can download the TDS form from the TRACES website.
• If the landlord/lessor/payee is a non-resident, you should deduct TDS under the provisions of Section 195 of the ITA.
• On receiving the statement of deduction (Form 16C) from the tenant, the landlord should crosscheck the same by downloading Form 26AS (of the landlord).

Time limit: Deductions and remittance of TDS

• Monthly deductions for all categories; quarterly returns to be submitted.
• Individuals paying a monthly rent of Rs. 50,000 or more can deduct TDS in the last month of the financial year and submit an annual return. If the tenancy is closed within the financial year, you should take the deduction on the last month (of occupancy).
• The TDS amount typically has to be deposited within seven days from the end of the month when the deduction has been made.
• For year-end deductions (as of 31 March, deposit time is by 30 April)

Penalties for non-compliance

A taxpayer, who has deducted TDS as required but has not deposited the money to the government, is liable to pay interest at 1.5% per month from the date of deduction till the date of deposit.

In the case of non-deduction of TDS, the taxpayer is liable for interest at 1% per month from the due date to the actual deduction date.

Conclusion

TDS on rent is not a complicated issue either for an individual or for business and professional taxpayers. A few simple facts are to be remembered, and timely deductions from the rent payable and subsequent deposit to the nominated bank account are to be done. Bahi khata apps such as OkCredit can be used for the convenient recording of information and timely reminders.

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FAQs

Q. For the small business category, does payment of TDS help in tax saving?

Ans. TDS is not a tax-saving scheme. You are paying your taxes in instalments and are depositing the tax amount as per the statutory requirements.

Q. As a tenant, do I need to register myself for a TAN (Tax deduction account number) for deducting TDS on rent?

Ans. To deposit the TDS amount or submit your return, you need to quote yours and the landlord’s PAN. There is no need for obtaining TAN registration.

Q. I run a retail shop on rented premises. The rent paid by us is more than Rs. 2.4 lakhs in a year. Do I have to pay TDS?

Ans. Your liability to deduct tax at source on rent depends on the business turnover of your shop. If it is less than Rs. 5 crores in a financial year, you are outside the purview of a compulsory tax audit. This implies that you do not require deducting TDS on the rent you pay for your shop.