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TDS liability of a tenant & penalty for rent default


Tax related liabilities on rent are not limited to landlords. Income tax (I-T) laws mandate tax deduction at source (TDS) by tenants (applicable to individuals and Hindu undivided families, or HUFs) and deposit it with the I-T department under certain conditions. The amount of TDS to be deducted and the conditions pertaining to this are largely defined under two sections:

Section 194I: It is applicable to individuals and HUFs whose turnover from business or profession exceeds 1 crore (in case of business) or 50 lakh (in case of profession) during the previous financial year and when the landlord is an Indian resident. The threshold limit for TDS in this case is 2.4 lakh per annum. The rate at which TDS is required to be deducted is 10%.

Section 194IB: It is applicable to individuals and HUFs who are not covered under section 194I and when the landlord is resident. The threshold limit here provided is 50,000 per month. The rate at which TDS is required to be deducted is 5%. TDS shall be deducted in the last month of the previous year or the last month of tenancy (in case the property is vacated during the year), whichever is earlier.

In cases where the rent is paid to a non-resident, 30% TDS is to be mandatorily deducted under section 195 without any threshold rules on how much rent is paid and the income of the tenant.

TDS provisions on security deposit

The provision of TDS is applicable only on the amount of rent paid; therefore, it is not applicable on 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 the rented property has co-owners, a separate threshold limit is applicable to each co-owner. For instance, if an assessee is required to deduct TDS under section 194I; and the total rent is 4 lakh to be paid to two co-owners, then separate limits of 2.4 lakh will be available for each of the co-owners.

Let’s understand this with an example: A is an individual 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 stays. The rent paid to B is 18,000 per month and that paid to C is 15,000/- per month. The said rent is paid in cash by A.

In this case, section 194I is applicable as A is engaged in business and his turnover in the previous financial year is more than 1 crore.

TDS will be deducted at 10% if the rent exceeds the threshold of 2.4 lakh per co-owner per year; which is not happening in this case (rent paid to B is 2.16 lakh and to C is 1.8 lakh). Therefore, TDS will not be applicable in this case.

As for the taxability for B and C, the rent received will be taxed under the head ‘income from house property’. However, B is not entitled to receive rent in cash as the amount exceeds 2 lakh, which is in violation of section 269ST of I-TAct, 1961, and penalty under section 271DA can be levied, which is equal to the amount of receipt.

Penalty for not deducting TDS

A person who fails to deduct TDS will be liable to pay interest on a monthly basis at 1% (In case TDS is not deducted or paid) or 1.5% (in case TDS is deducted but not paid). The late fees for not filling TDS return is 200 per day.

In case where the tenant fails to file the statement of TDS within the due date, penalty ranging from 10,000 to 1 lakh can be levied under section 271H.

Jigar Mansatta is proprietor, Jigar Mansatta & Associates.

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