The Income Tax Department has recently intensified its scrutiny of deductions and exemptions claimed by taxpayers, particularly focusing on donations under Section 80G and House Rent Allowance (HRA) exemptions under Section 10(13A).
On Sunday, several taxpayers received official communications via SMS and email, highlighting concerns over non-deduction of Tax Deducted at Source (TDS) on rental payments. These alerts are linked to the provisions of Section 194-IB of the Income-tax Act, 1961 ('Act'), which mandates TDS deduction on rental payments that exceed a specified threshold. The tax department has urged taxpayers to verify the legitimacy of their HRA claims and rectify any discrepancies.
Understanding Section 194-IB of the Act
Applicability of Section 194-IB
Under Section 194-IB, individuals and Hindu Undivided Families (HUFs) who are not required to get their accounts audited under Section 44AB must deduct TDS when:
The monthly rent paid to a resident landlord exceeds Rs. 50,000.
TDS must be deducted at the rate of 2% (previously 5%, reduced w.e.f. October 1, 2024).
The tax must be deducted once in a financial year, either in March or in the last month of tenancy if the rental arrangement is terminated earlier.
This means that tenants who paid rent exceeding Rs. 50,000 per month without deducting TDS are now being flagged by the tax department for non-compliance.
Repercussions of Non-Deduction of TDS on Rent
Failing to deduct and deposit TDS on rent as required by Section 194-IB may result in serious consequences:
Liability to deduct and pay the tax retroactively if not deducted earlier.
Interest on non-deduction of tax at 1% per month under Section 201(1A).
Deemed assessee-in-default under Section 201(1).
Penalty equivalent to the amount of tax not deducted, as per Section 271C.
Prosecution risk under Section 276B, leading to imprisonment ranging from 3 months to 7 years.
Disallowance of 30% of rent payments as an expense under Section 40(a)(ia) if claimed as a business deduction.
These stringent provisions highlight the importance of complying with TDS obligations on rental payments.
Relief Provisions Under Section 201(1) of the Act
Taxpayers can seek relief from penalties under the proviso to Section 201(1) if:
The landlord has filed an income tax return under Section 139.
The landlord has included the rental income in their return and paid applicable taxes.
The tenant obtains Form 26A, a Chartered Accountant’s certificate, confirming that the above conditions are met.
By submitting Form 26A electronically, taxpayers can avoid being deemed an assessee-in-default and escape penalties, except for interest on non-deduction.
The CBDT Notification No. 11/2016 dated December 2, 2016, outlines the detailed procedure for furnishing and verifying Form 26A to rectify non-deduction defaults.Computation Illustration
Partial-Year Tenancy (2-3 Months Before Year-End)
Ms. T, a self-employed individual, rented an apartment from January to March 2024 at Rs. 80,000 per month. The total rent paid was Rs. 2,40,000, exceeding the Rs. 50,000 per month threshold but falling below the annual threshold.
Applicability of TDS:
Since the tenancy ended before October 2024, the applicable rate was 5%.
TDS on Rs. 2,40,000 at 5% = Rs. 12,000.
Interest if unpaid until July 2024: Rs. 12,000 × 1% × 5 months = Rs. 600.
For partial-year tenancies, tenants must deduct and deposit TDS in the last month of the tenancy to avoid interest and penalties.
Where Landlord Has Not Paid Tax
If the landlord has not reported the rental income in their tax return, or if Form 26A is not obtainable, the taxpayer has two options:
Deduct and deposit TDS retroactively, along with applicable interest and penalties.
Forego the HRA exemption and pay tax on the differential taxable salary, updating their tax return accordingly.
Taxpayers who failed to deduct TDS on rent payments should act promptly to correct non-compliance before penalties and prosecution become applicable.
Steps to Ensure Compliance:
Verify if rent paid exceeds Rs. 50,000 per month.
Deduct TDS at 2% (or 5% for tenancies ending before October 2024).
File Form 26A if the landlord has already paid tax.
Ensure accurate reporting in tax returns to avoid penalties.
By proactively addressing these obligations, taxpayers can avoid scrutiny, penalties, and potential legal action, ensuring smooth compliance with TDS provisions on rental payments.
