Due Diligence. All about TDS on rent

An individual or HUF paying rent of more than ₹50,000 a month must withhold taxes at 5 per cent on rental payments. This applies to commercial and residential property.

The objective of this tax deduction at source (TDS) is to ensure that the correct income is disclosed and both the tenant and the landlord file their income tax returns.

To make life easy for tenants, the system is simplified. For instance, tenants do not need a TAN number to cut TDS. Only the PAN numbers of the tenant and the landlord are required. Also, TDS is required to be deducted and deposited only one time in a financial year.

TDS must be paid within 30 days from the end of the month in which the deduction was made.

To pay TDS, Form 26QC (available at www.tin-nsdl.com ) should be used. For non-deduction of tax, the tenant may have to pay a penalty equal to the amount of tax not withheld. If there are delays, the tenant is liable to pay late fee of ₹200 per day of delay. The rates are 1 per cent per month on the amount due, if there was delay in deducting and depositing; 1.5 per cent per month if tax was deducted but not deposited.

The tenant also has to issue Form 16C to the landlord as proof of TDS deposit. This should be given within 45 days from the end of the month in which the tax was deducted. For delay in issuing Form 16C, the penalty is ₹100 per day. Form 16C is available at www.tdscpc.gov.in

The onus is on the tenant to ensure that TDS is deducted and deposited at the right time. For example, if the property is vacated before the end of the year, tax must be deducted from the last month’s rent.

“Where the property is co-owned, the tenant will be liable to withhold taxes at the time of making payment to both the landlords and should technically pay and withhold taxes in proportion to their ownership, even if each owner’s monthly share in the rent is less that ₹50,000,” says Suraj Nangia, Partner, Nangia & Co LLP.

If your rent was less than ₹50,000 but subsequently increased, the obligation to deduct TDS on the rental payment will apply only during the period when the actual rental payment exceeds the specified limit, says Amarpal Chadha, Tax Partner & India Mobility Leader, EY.

Even when rent is prepaid through non-refundable deposit, the obligation to deduct the TDS will be applicable in case the monthly rent/ rent for part of the month is more than ₹50,000. The same applies if the rent is adjusted against refundable deposit when vacating.

The onus of deducting tax lies with the tenant if the owner qualifies as a resident in India as per the income tax provisions, says Amarpal. “In case the landlord’s income is not taxable, he can claim a refund of the tax deducted,” he adds.

However, if the individual qualifies as a non-resident as per the tax laws, TDS requirement under this Section does not apply. The residential status analysis needs to be done every year to determine the applicability of compliance requirements, says Amarpal. But any payment of rent to a non-resident is liable to TDS under another section — Section 195 of the Income Tax Act, explains Suraj.

Owners must note that if they have rented out the premises to more than one tenant and rents from each of them do not exceed ₹50,000, the TDS rule does not apply.

There may be a bit of ambiguity on what components qualify as rent. For example, the agreement may state that the rent is ₹45,000, but there may be additional charges of, say, ₹10,000 for maintenance and utility charges. Amarpal feels that if the rental agreement has a bifurcation of rent and maintenance charges; and the charges are directly paid to the society or association by the tenant, then the threshold for TDS compliance will be based on the rent paid. Otherwise, the combined amount must be considered to determine the TDS applicability.

Suraj however, says that rent has been defined to include any payment by whatever name called for the use of the building and land attached to the building and, hence, includes maintenance charges in respect of the same. “Further, judicial precedents in this regard state that maintenance charges should be included in the rent while computing rental income and hence, this kind of tax planning in not advisable,” he says.

Jaffer Ali, founder & CEO, PropUrban, a rental management service, points to another route being considered to escape tax liability. “Landlords are asking the tenants to make a new rent agreement and split the total amount into two parts — rent and furnishing. However, we strongly suggest that such practices should not be entertained, as these days every single transaction is being tracked,” he advises.

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