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5% TDS For Tenants Paying Rs 50,000 Rent

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As per the Finance Act, 2017 under the relevant Income Tax (I-T) Act – section 194-IB, it makes the individuals responsible for tax deduction at source (TDS) on rental payments which exceed a certain amount. From 1st June, any person who pays more than Rs 50,000 rent is required to deduct tax at source at 5%.

The rent in the metro cities is excruciatingly high. Most people will now have to without tax and submit it to the government with relevant documents. The good news is that the compliance formalities have been simplified for the tenants. On 8th June, Central Board of Direct Taxes (CBDT) issued a notification related to compliance requirements.

Tax experts are cautioning people against revising their rent agreement in the middle of the tenure just to escape TDS duties. This can turn out to be their loss. In order to avoid tax, many landlords will now like to revise the agreements and split the monthly rent into rent and furniture hire rent. Not only can it catch the authority’s attention, but one will also have to prove the furniture hire is realistic and legal.

Amarpal S Chadha, Partner at EY India said, “Revising an agreement mid-way is bound to catch the wrong attention of the tax authorities and should not be undertaken. Only if an individual is entering into a new agreement and is actually paying for furniture hire could the drawing up of two separate agreements be considered. Besides, the charges for furniture hire need to be realistic.”

“There have been instances where people trying to wriggle out of their TDS responsibilities resort to various devices, such as splitting up of the rent agreement. This is clearly done with a view to violate the law and I would never advise anyone to take such a step. Further, several pitfalls are involved. First, there should be actual assets that have been rented out to justify the payment towards furniture hire. Second, the agreement should bring out a list of such assets. Third, the payments towards such assets should be reasonable and justified. Obviously, it would be difficult to prove that payment towards furniture hire of Rs 45,000 is reasonable if the rent for the flat itself is just Rs 40,000. The TDS authorities would definitely take a strong view of such an arrangement and take action against the tenant who has paid rent without deducting tax at source,” said Ameet Patel, a partner at CA firm Manohar Chowdhry & Associates.

Chadha adds, “Tenants should also keep in mind that non-compliance entails penalties. Non-deduction of tax results in a levy of interest at 1% per month; it is 1.5% per month for non-payment after deduction. Further, non-filing of required statement would attract a penal fee of Rs 200 per day for the period of delay.”

How to comply with the new norms?

Some compliance-related concessions have been announced by the government. Individual tenants who have to meet TDS obligations are absolved from getting the Tax Deduction Account Number (TAN). Also, the tax is to be deducted once a year and not monthly. Chadha says, “The tax is required to be deducted at the time of credit or payment (whichever is earlier) of the rent, in the last month of the financial year, or the last month of the tenancy if the flat is to be vacated during the year. Since individuals would not be maintaining books of accounts, the tax would typically be deducted at the time of payment.”

An example can help understand this better, if Priya has to pay Rs 60,000 rent each month until the financial year end I.E. 31st March 2018. The rent from 1st June to 31st March 2018 comes to 6 lakh rupees. The 5% TDS comes to 30,000. Thus Priya will deduct Rs 30000 and pay the remaining Rs 30000 as rent for the last month to the landlord.

Some other important rules:

1. The deducted tax needs to be paid within 30 days from the end of the month in which it was deducted.

2. This can be wired to the RBI or SBI or any authorized bank. Form 26QC (which serves as a challan-cum-TDS) is to be filed electronically through the NSDL portal.

3. The NSDL portal will also give form 16C, which is to be downloaded and given to the landlord. The landlord should get this within 15 days from the due date of filing form no 26QC.

4. Both form 26QC and 16C ask for details like name, address, PAN, contact details of the tenant and the landlord. Besides that, other crucial information like period of tenancy, rent amount and TDS details are also needed.

It is also worth knowing that if rent is being paid to a non-resident, then section 194-IB doesn’t apply. Withholding tax payments to non-residents fall under Section 195 and applicable tax rates apply.

Also Read:  Useful Tips While Buying A New Home – Part 1

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