An individual or HUF paying rent of more than INR 50,000 per month is required to deduct tax at source (TDS). The government introduced section 194IB in the Income-tax Act making it mandatory for a tenant to withhold taxes @ 5% on rental payments, over and above Rs. 50,000 per month and to deposit it within the prescribed time.
Before 1st June 2017, only individuals and HUFs who were required to have their accounts audited under the Income Tax 1961, were required to deduct tax on rental payments on immovable property. However, with the introduction of this new section, all individuals and HUFs who are paying rent over and above Rs. 50,000 per month, would be compulsorily required to deduct tax.
The good news is that the government has tried to keep the process as simple as possible.
1. TDS only once annually For instance, the tenant is required to deduct and deposit the taxes only once in a financial year, through a challan-cum-statement (Form 26QC) unless the tenancy ends during the course of the financial year.
2. Easy accessibility of TDS certificate, challans, forms
The tenant would also be required to issue a tax withholding certificate (Form 16C) to the landlord, as a proof that taxes have been deposited in his name.
3. Tenants do not need TAN Also, to keep it simple, lawmakers have done away with the requirement to obtain a tax deduction account number (TAN) for such transactions.
There are also interest and penalties prescribed for non- compliance of the newly-inserted law. Therefore, if a tenant fails to deduct tax at source he may be liable to pay interest and penalties as prescribed under the law.
The government's objective of introducing this section appears to be primarily to ensure that correct income is disclosed and both, tenant and landlord file their income tax returns to reflect true disclosures. With the quoting of the PAN for both landlord and the tenant, the Revenue department can easily track correct disclosures of rent in tax returns. Also, such taxes are likely to get reflected in the 26AS form of the landlord for claiming credit of the TDS.
Here are some common questions answered regarding TDS on Rent above Rs 50,000 (as mandated under Section 194IB):
Who are covered under this section: Individuals and HUFs whose accounts are not required to be audited under the Indian tax laws.
What do they need to do: Withhold tax/deduct tax at source from rent paid to resident landlords.
Income threshold: Rent paid in excess of Rs. 50,000 per month or part of the month.
Property covered: Commercial and residential property - i.e. land, building, shops, homes etc.
Tax rate applicable: 5%
Amount on which tax needs to be withheld: Total annual rent paid to resident landlord
Is the landlord required to provide his PAN to the tenant? Yes. In the absence of PAN or failure to provide the same, tax shall be withheld/deducted @20%. However, the overall tax in such a scenario shall be restricted to the rent payable for the last month of the financial year or tenancy whichever is earlier.
Whether taxes need to be deducted every month No. Tax needs to be withheld/deducted once in the financial year only. However, where the property is vacated during the year, the tax needs to be deducted on the last day of the tenancy.
Whether the tenant needs to obtain Tax deduction number No
How can the tenant deposit the taxes? The tenant should fill a Form 26QC which is a challan-cum-statement.
When should the tax withheld be deposited? Within 30 days from the end of the month in which the deduction was made.
Whether the tenant needs to give any proof of TDS/taxes withheld to the landlord? Tenant needs to issue a TDS/ tax paid certificate (Form 16C) to the landlord as proof of taxes deducted. It is to be issued within 45 days from the end of the month in which the tax was deducted.
Where would the Forms (26QC and 16C) be available? • On the TIN NSDL website of the Income tax department. • Form 16C is available on the TRACES website of the Income tax department.
What is the penalty for non-deduction of tax or delay in deposit of taxes withheld? • For, non-deduction of tax, the tenant may be required to pay a penalty equal to amount of taxes not withheld. • If the tenant delays in deposit of taxes withheld, he may be liable to pay penal interest at the rate of 1% where there is delay in deducting and depositing the tax or 1.5% per month where tax is deducted but there is delay in depositing the same.
Whether there is any penalty for delay in filing of Form 26QC and issuing Form 16C? • Delay in filing of Form 26QC may attract a late fees of Rs. 200 per day. • Also there maybe consequential penalties for non- filing. • For delay in issuing Form 16C, the penalty is Rs. 100 per day.