The government through the Union Budget 2017 (applicable to FY 2017/18) had inserted a new Section 194-IB to the Income-Tax Act, 1961 (ITA). Under this Section, individuals and HUF who pay a rent of more than Rs 50,000 per month (or part of month) are required to deduct tax at source at the rate of 5% on rental payments on immoveable property. This provision has been applicable for rental payments made with effect from 01 June 2017.
Here’s all about TDS on rent:
TDS (tax deducted at source) on rent is applicable for both rented-out commercial and residential properties. For the purposes of this Section, ‘rent’ means any payment, under a lease, sub-lease, tenancy or any other agreement or arrangement for the use of any land, building or both.
TDS provisions under Section 194-IB are not applicable to individuals and HUFs whose accounts are subject to tax audit under the ITA. These provisions are also not applicable where the landlord is a non-resident.
Determining the rent amount
For FY 2017-18, the TDS was applicable on rent paid from 1 June 2017 to 31 March 2018. With effect from the current financial year, the total annual rent paid/ credited to the landlord during the year would be subject to tax deduction at source.
Timing for TDS
The TDS is required to be done only once in the Financial Year. The tax will be withheld at the time of payment/ credit of rent for the last month of the tax year or in the month of vacation of premises, or termination of agreement, whichever is earlier.
PAN to be obtained from landlord
The landlord is required to provide the Permanent Account Number (PAN) to the tenant. In the absence of PAN or failure to provide the same, the TDS shall be at the higher rate of 20% (no surcharge and education cess applies on such withholding). However, the TDS in the case of non-furnishing of PAN by the landlord is restricted to the rent payable for the last month of the tax year or tenancy.
We have explained the above situation in the form of an illustration:
Mr. X, an individual (not subjected to tax audit under the ITA), pays a monthly rental of Rs 75,000 to the landlord during the tax year 2017/18 and is liable to withhold taxes as per the aforesaid provision. However, the landlord refuses to furnish the PAN to Mr. X. What will be amount of tax to be withheld as per the provisions of the ITA?
Annual rent paid by Mr. X to landlord = Rs 900,000 (Rs 75,000*12)
Tax required to be withheld on non-furnishing of PAN by landlord = Rs 180,000 (Rs 900,000*20%)
However, the TDS will be restricted to Rs 75,000 (as rent payable for the last month of the tax year)
If the landlord had furnished PAN, the TDS @ 5% would have been = Rs 45,000 (Rs 900,000*5%)
In case Mr X, the individual, is subject to tax audit during the year, the TDS will be triggered under Section 194-I of the ITA. The applicable rate would then be 10% on the entire sum payable, ie Rs 90,000 (Rs 900,000*10%). Also, Mr X would be required to withhold and deposit the taxes with the government treasury on monthly basis.
Is TAN to be obtained by tenant?
Individuals and HUFs are not required to obtain a Tax Deduction and Collection Account Number (TAN) to withhold taxes on rental payments to their landlords.
Procedure for TDS compliance
# Depositing the TDS: The tenant is required to deduct and deposit the taxes through a challan-cum-statement in Form 26QC which can be filled online at TIN-NSDL website (https://onlineservices.tin.egov-nsdl.com/etaxnew/tdsnontds.jsp) or offline by visiting the authorised banks. Form 26QC is required to be filed within 30 days from the end of the month in which taxes were withheld. Therefore, if the TDS was done in March 2018, then Form 26QC was required to be filed by 30 April 2018.
# Issue of TDS certificate: The tenant is required to issue a TDS certificate in Form 16C to the landlord as proof of depositing the TDS against the landlord’s PAN. Form 16C has to be provided within 15 days from the due date for furnishing Form 26QC.
# Compliance in case of jointly-owned property: Form 26QC is to be filed by a tenant with respect to each landlord. Therefore, in case of a property which is jointly owned, the tenant will have to file separate Form 26QC for each tenant-landlord combination for respective share in rent and also issue the Form 16C to each of the landlords.
Consequences of non-compliance
# Interest for non-deduction/ deposit of TDS: The tenant will be required to pay interest at the rate of 1% for every month of delay in deducting the tax. The penalty is higher at 1.5% per month if the taxes were deducted but not deposited.
# Fee for not filing Form 26QC: Failure to file Form 26QC within the due date would result in a fee of Rs 200 per day payable by the tenant.
# Penalty for delay is issuing Form 16C: Delay in issuing Form 16C to the landlord would result in a penalty of Rs 100 per day to be paid by the tenant.
The government’s objective of introducing this provision was aimed at widening the scope of tax withholding provisions and to ensure that rental income is reflected properly in the tax return. The TDS on rent is also reflected in the annual tax statement (Form 26AS) of the landlord for claiming credit of the TDS. It would, therefore, be prudent to be aware of the TDS compliances on payment of rent and to ensure timely compliance with the same.
(The author is National Managing Partner – Growth & Tax, Grant Thornton India LLP. With inputs from CA Sudeep Das)