Paying over ₹50,000 rent per month? Here’s what tenants must do to avoid income tax penalty, interest

Tenants paying more than ₹50,000 in monthly rent must deduct TDS before making the payment to their landlords as failing to comply with this rule can lead to penalty and other such consequences.

TDS data helps the government track high-value rental transactions and collect tax directly at the source. It is the tenant’s responsibility to deduct the amount and deposit it with the government.

This provision falls under Section 194-IB of the Income-tax Act and applies to individuals and Hindu Undivided Families (HUFs) who are not not required to get their accounts audited. This means even salaried taxpayers, who may have no business income, fall under its scope.

Does the landlord actually lose the TDS amount?

If the rent paid to a resident landlord exceeds ₹50,000 per month, the tenant must deduct 2% TDS before making the payment. The rate was reduced from 5% to 2%, with effect from October 1, 2024.

TDS on rent is deducted once a year. It can be either deducted in the last month of the financial year or the last month of the tenancy if the property is vacated during the year, whichever is earlier.

For example, if you pay ₹1 lakh per month as rent for a Mumbai flat for the entire financial year, the total annual rent would be ₹12 lakh. At 2%, the total TDS would be ₹24,000. This amount would be deducted from the rent payable in the final month, with the remaining amount paid to the landlord.

However, the ₹24,000 tax deduction is not a permanent loss for the landlord. It is deposited with the government on the landlord’s behalf. The landlord can claim that TDS amount as a tax credit while filing the income tax return (ITR) for the relevant year, subject to the applicable tax liability.

The provision covers rent paid for the use of land, buildings, factory premises, and other specified assets, such as machinery, furniture, fittings and equipment, under a lease, tenancy or similar arrangement.

What are consequences of missing compliance?

The TDS on rent should be paid within 30 days from the end of the month in which the tax was deducted by the tenant. It shall be accompanied by a challan (cum) statement in Form 26QC. The TDS, so deducted, can be paid to the government electronically through the Reserve Bank of India (RBI), State Bank of India (SBI), or any other authorised bank.

The person deducting the TDS on the rent is also required to furnish Form 16C to the payee (landlord) within 15 days from the due date of furnishing Form 26QC, it consists of details of rent payments and TDS made thereon.

If the tenant does not deduct TDS, interest is charged at 1% per month, or part of a month, from the date the tax should have been deducted until the actual deduction. In cases, where tax has been deducted but not deposited with the government, interest increases to 1.5% per month or part thereof until the payment is made.

Delays in filing Form 26QC attract a late fee of ₹200 per day, but it cannot exceed the applicable TDS amount. If the tenant fails to issue the TDS certificate (Form 16C) to the landlord, a penalty of ₹500 per day shall be levied for each day of delay, according to income tax rules.