Tax: Be diligent in depositing TDS on rent

If you live in rented apartment and pay Rs 50k or more a month, deducting TDS has become obligatory

The Budget has proposed that tenants deduct tax at source or TDS for rent paid to their landlords if the monthly rent they pay is over Rs 50,000. This move will bring many house owners into the tax net, especially those who rely on rent as their primary source of income. It will also ensure that employees submit correct housing rent allowance (HRA) receipts to their employers. The provision will come into effect from June 1, 2017.
 
The TDS requirement does exist at present but only for individuals and Hindu Undivided Families (HUFs) who need to get their books of accounts audited under Section 44AB of the Income-Tax (I-T) Act. Such assessees need to deduct tax if the yearly rent is more than Rs 1.8 lakh. But, the majority of business owners and HUFs don’t need to get their books audited. Salaried individuals, too, have no such requirement. Most tenants, therefore, didn’t have to worry about TDS until now.
 
The fine print
 
The Union Budget has ushered in TDS for rent payment by adding a new Section 194-IB to the I-T Act. This brings into the fold even those individuals and HUFs who are not covered by the requirement of tax audit under Section 44AB.
 
The main condition of this provision is that payment of rent needs to be made to a resident during the year. This clause is significant because if the rent is paid to a non-resident Indian, the TDS requirement will not arise.
 
While those who get their books audited need to deduct TDS if the annual rent is over Rs 1.8 lakh, in the new proposal a tenant has to deduct five per cent tax if the rent is over Rs 50,000 a month. The monthly figure is important. Even if you pay a rent of over Rs 50,000 to an individual for just one month, the TDS provision will get triggered. Even if you rent a house for less than a month paying over Rs 50,000, the TDS provision will still be applicable. But for those who get their books audited, the limit is annual.
 
In case the landlord does not have a Permanent Account Number (PAN), then the tax deduction should not exceed the amount of rent payable for the last month of the financial year or the last month of the tenancy, according to the Budget announcements.
 
Deducting TDS would mean there would be a trail which can be easily examined by the tax department. This applies for tenants as well as for the landlords. According to earlier laws, Individuals who claimed the HRA, had to furnish PAN of the landlord if the rent exceeds Rs 1 lakh a year. But it was not proving an effective trail as it could be misused.
 
Compliance is simple
 
The tax has to be deducted at the time of crediting of rent for the last month of the year or the last month of the tenancy in case the property is being vacated during the year. This is entirely different from the usual way in which tax is deducted. Typically, the deduction has to be made each month. But in the new provisions, it has to be done only in the last month when rent is paid. This will lower the compliance burden significantly because it removes the requirement of making multiple deductions and then depositing the amount with the government each month. The deduction has to be made at the time of paying the rent into the bank account of the payee or even if it is paid in cash, cheque, demand draft or by any other mode. This covers all the possible ways in which the payment would be made.
 
Apart from the one-time deduction, there is another way in which the government has reduced the compliance burden on the taxpayer. This has been done by waiving the requirement for the tenant to get a tax deduction account number or TAN. Just like every assessee has to take a permanent account number (PAN) for paying taxes, a similar process has to be followed when a person or an entity has to deduct tax. They need to have TAN, which has to be serviced by filing regular returns and depositing the tax deducted within the specified time.
 
The tax authorities recognise the fact that people who have to deduct tax on rent are common citizens, and not entities which run a business or have a professional set up. They will not have the time and resources to ensure that there is regular compliance. The process, therefore, has been kept simple.
 
Precautions to observe
 
While the matter may be simple, tenants need to be cautious. They need to ensure that the amount to be deducted in the last month is less than the rent to be paid. Sometimes, when tenants are shifting houses, they don’t live in the rented house for the full month, and therefore pay a lower rent. Hence make sure from beforehand that the TDS amount is lower than the rent to be paid.
 
As a tenant, you will provide a security deposit to the landlord upfront. Ensure that you reach an agreement with the house owner on the tax deduction either before taking the property on rent or renewal of the agreement. A five per cent deduction on an annual rent of Rs 6 lakh works out to be Rs 30,000. It is more than half of your monthly rent.
 
While you need to deduct tax, it has to be done just once at the end of the year or the tenancy period. Also, the ease of compliance will ensure that the burden is not excessive on the individual.

Your compliance burden just went up

• Only those who had to get their account books audited had to deduct tax on rent payments until now
• This provision has now been extended to all others
• Any individual or Hindu Undivided Family paying a rent of over Rs 50,000 a month needs to deduct tax at source
• The deduction should be five per cent of the annual rent
• The tax has to be deducted once in the last month of the year or in the last month of the tenancy
• There is no need to obtain a tax deduction account number (TAN)
• Ensure that the rent in the last month is not less than the amount to be deducted

The writer is a certified financial planner