Introduction
Tax Deduction at Source (TDS) on rent payments is a significant compliance requirement under the Income Tax Act, 1961. It applies to both individuals and businesses making rental payments to landlords, whether resident or non-resident. The applicable provisions are Section 194-IB for resident landlords and Section 195 for non-resident landlords. Non-compliance may lead to interest, penalties, and disallowance of rent as an expense in the case of businesses. This guide explains the legal provisions, compliance responsibilities, TDS deduction and deposit procedures, due dates, lower deduction certificate (LDC) application process, and penalties for both salaried individuals and businesses.
TDS on Rent Paid to Resident Landlords under Section 194-IB
Legal Provision (Extract from the Income Tax Act, 1961):
Section 194-IB: “Any individual or Hindu Undivided Family (HUF) responsible for paying to a resident any rent exceeding fifty thousand rupees per month shall, at the time of credit or payment, whichever is earlier, deduct income-tax at the rate of five percent (5%).”
Amendment Effective from 1st October 2024: “The rate of deduction shall be two percent (2%) for deductions made on or after this date.”
Applicability and Compliance Responsibilities
This provision applies to individuals and HUFs who are not required to get their books audited under Section 44AB of the Income Tax Act.
Threshold Limit: Rent exceeding ₹50,000 per month.
TAN Not Required: The tenant can deduct TDS using their PAN.
Time of Deduction: TDS should be deducted once in the last month of the financial year (March) or at the time of lease termination, whichever is earlier.
Due Date for Payment & Filing of Form 26QC: The deducted TDS must be deposited with the government within 30 days from the end of the month in which deduction was made.
Compliance Responsibilities of Salaried Individuals and Businesses
For Salaried Individuals (Tenants Paying Rent Above ₹50,000 per Month)
If the landlord is a resident, TDS at 2% (w.e.f. 1st Oct 2024) must be deducted and Form 26QC must be filed.
If the landlord is an NRI, TDS must be deducted at 30% + surcharge & cess, and Form 27Q must be filed.
Failure to deduct and deposit TDS may lead to notices from the Income Tax Department.
For Businesses (Companies & Firms as Tenants)
Businesses paying rent to resident landlords must deduct TDS under Section 194-I, which prescribes 10% on rent for land/building.
For NRI landlords, businesses must deduct TDS under Section 195 at 30% + surcharge & cess, unless an LDC under Section 197 is obtained.
Businesses must obtain a TAN (Tax Deduction and Collection Account Number) and file quarterly TDS returns (Form 26Q for residents, Form 27Q for NRIs).
Penalty for Non-Compliance
Interest on Late Deduction (Sec 201(1A)):
1% per month or part thereof for delay in deduction.
1.5% per month or part thereof for delay in deposit after deduction.
Late Filing Fee (Sec 234E): ₹200 per day of delay, capped at the TDS amount.
Penalty for Non-Filing (Sec 271H): ₹10,000 to ₹1,00,000.
TDS on Rent Paid to Non-Resident Landlords under Section 195
Legal Provision (Extract from the Income Tax Act, 1961):
Section 195(1): “Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in Section 194LB or Section 194LC or Section 194LD) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head ‘Salaries’), shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.”
Applicability and Compliance Responsibilities
This section applies to any person making rental payments to an NRI landlord, regardless of whether the payer is an individual or a business.
No Minimum Threshold: TDS is applicable on any amount of rent paid.
TAN Requirement: The tenant must obtain a TAN before deducting and depositing TDS.
TDS Rate for NRIs:
30% on the rent amount + Surcharge & Cess (if applicable).
If an LDC (Lower Deduction Certificate) under Section 197 is obtained, the reduced rate applies.
Time of Deduction: Deduction must be made at the time of credit or payment, whichever is earlier.
Due Date for Payment & Filing of TDS Returns (Form 27Q):
Q1 (Apr-Jun): 31st July
Q2 (Jul-Sep): 31st October
Q3 (Oct-Dec): 31st January
Q4 (Jan-Mar): 31st May
Lower Deduction Certificate (LDC) under Section 197 for NRIs
NRIs can apply for an LDC through Form 13 to request TDS deduction at a lower rate.
The application is submitted online through TRACES.
If approved, tenants must deduct TDS at the prescribed lower rate instead of 30%.
The LDC must be obtained before rent payment to ensure compliance.
Penalty for Non-Compliance
Interest for Late Deduction & Deposit (Sec 201(1A)):
1% per month for failure to deduct TDS.
1.5% per month for failure to deposit after deduction.
Late Filing Fee (Sec 234E): ₹200 per day.
Penalty for Non-Filing (Sec 271H): ₹10,000 to ₹1,00,000.
Conclusion for Compliance
| Aspect | Resident Landlord (Sec 194-IB) | NRI Landlord (Sec 195) |
|---|---|---|
| TDS Applicability | If rent > ₹50,000/month | No minimum threshold |
| TDS Rate | 2% (from Oct 1, 2024) | 30% + surcharge + cess |
| TAN Requirement | Not Required | Mandatory |
| TDS Deduction Timing | Last month of FY / Lease termination | Every payment (monthly/quarterly) |
| Form for Filing TDS Return | 26QC | 27Q |
| Due Date for Payment | 30 days from deduction | Quarterly |
| Penalty for Late Deduction/Deposit | 1%-1.5% per month | 1%-1.5% per month |
Ensuring timely TDS deduction, deposit, and filing helps tenants avoid legal consequences while allowing landlords to claim credit for the taxes deducted. NRIs can further optimize tax liability by applying for a Lower Deduction Certificate (LDC) under Section 197
