To avoid tax evasion, the concerned authorities in India have taken a decision to deduct tax at the source of the transaction. Square Yards is here with an article comprising all the important details about TDS on Rent.
What is TDS?
TDS (Tax deducted at source) is a provision of the Income tax act in India to deduct income tax right at the source. The TDS on rent being deducted shall reflect in the income of the beneficiary. Tenants will need to have a tax deduction account number. The real estate sector now needs to file returns on rents received as a source of income. Even NRI’s will face tax deduction at source on their Indian income as per section 195.
Rentals are a major source of income for house owners and are considered as taxable income by the Income tax department of India. Ever since budget 2017, changes have been made in the TDS on rents to bring the property owners under the tax umbrella.
The concept of tax deducted at source (TDS) was introduced by the Income tax department to ensure all modes of income are tax and that there is no scope for tax evasion. The person whose income the TDS has been deducted can claim a refund on the submission of form 26AS. There are different TDS forms for different types of transactions and each needs to be filled and submitted to claim exemption on Tax deducted at source.
What is the rate of TDS on rent?
Section 1941 0f the Income tax act directs any person paying rent on any property including land, house or building deduct tax at the rate of 10% of the total rent. This is applicable if the total rent for the year is more than Rs 2.4 lakhs.
The limit of Rs 2.4 lakhs is, however, applicable to the person to whom the rent is being paid and is not limited to each item of property.
TDS on rent in 2021
During the delayed Budget of 2020-2021, the finance minister of India announced a reduction in the rates of TDS deduction from 10% to 7.5% in a series of relief measures due to the covid-19 pandemic. Based on this directive, the CBDT (Central Board of Direct taxes) informed taxpayers that the rate cut of TDS on rent for the immovable property would be cut to 7.5% for a limited period until the pandemic ends.
The TDS to be deducted on rent of more than Rs 50000 was also slashed from 5% to 3.75%.
There had been a wide expectation that these rate cuts on TDS would be extended as the Pandemic is still far from over, no announcement on this subject was made in the 2021-22 budget presented on 1 Feb 2021.
Who is liable to deduct TDS on rent?
The entities who are eligible to deduct tax at source are companies, firms, partnerships, or a registered association or group of people engaged in any business.
There are, however, special cases when Individuals are required to deduct TDS on rent. The special case is when the individual is engaged in a business or profession which requires to be audited due to the turnover being more than the declared limit. A Hindu Undivided Family (HUF) engaging in a similar business is also liable to deduct TDS on any rent it pays on property that may or may not is used for their business.
How is TDS on rent calculated?
The Tax deducted at source (TDS) is calculated at the rate of 10% of the total rent when it is more than Rs 2.4 lakhs in a single year.
The TDS is deducted from the income accruing to the owner of the property for which rent is being paid. In case any property is leased and the lessor rents out the property, then the TDS will be deducted from the rent payable to the lessor from the payer who is now the sub-lessee.
TDS will also be deducted from the owner of a property who is a non-resident (NRI) for tax purposes. The TDS is done based on section 195 of the income tax act. Ever since the budget of 2017-18, a flat rate of 31.2% TDS on rent has been imposed on all property owned by an NRI. There are complex rules. The person or firm making the TDS must have a TAN (Tax account number) obtained via the NSDL website. When the NRI receives the rent after deduction of TDS, he or she must fill up a 15CA form and submit it online to the Income tax department.
When is TDS deducted on rent?
TDS is required to be deducted from rent when it is credited to the books of the owner of any property whenever the total rent exceeds Rs 2.4 lakhs in a single year. This rent, however, can be any amount if the payee of the rent is an NRI. The deducted tax is to be paid to the government with a valid TAN (Tax account number) and paid through specific challans as prescribed by the Income tax department.
TDS must also be deducted for rent being paid in advance. There are certain long-term lease agreements where the entire lease is required to be paid in advance and, likewise, the TDS is also required to be deducted at the time of paying the advance.
A question that frequently comes up is whether hotels should deduct TDS from professionals who live in their hotels for official work. The answer is that such a person pays for hotel accommodation as an individual and his or her company merely reimburses the hotel expenditure and so TDS would not apply in this case. There is an exception if the person is required under Section 44AB to get his or her accounts audited by a chartered accountant. Moreover, individual hotel bills seldom exceed Rs 50000 and are not eligible for TDS anyway. The same applies to the property being rented on a short-term basis such as Marriage halls and farms.
There are, however, many companies that rent their offices within a hotel and these would qualify as rent and TDS would be deducted by these companies on the rent they pay to the hotels.
What is a HUF?
A Hindu Undivided Family (HUF) is a family that has descended from a single lineage, a common ancestor. A HUF starts after a couple gets married. Such a family can include wives and children and even unmarried daughters, provided they are all from a common ancestor. The HUF status is also applicable to Buddhists, Sikhs, and Jains. An unmarried daughter is part of the Hindu undivided family until she gets married. After marriage, she becomes a part of her husband’s Hindu Undivided Family.
The Hindu undivided family (HUF) is mentioned and defined as per section 6 (2) of the Income Tax Act 1961. This section stipulates that all self-acquired property of the family is considered joint property of all members of the family. There is a term known as Coparceners which applies to 4 generations up to great-grandsons. Coparceners sometimes come within a Hindu Undivided Family (HUF) and are eligible for partition rights.
A son is part of a Hindu Undivided Family. When the son gets married, he starts a Hindu Undivided Family while continuing to be a part of his father’s HUF. In a recent ruling by the Supreme court, widows are eligible to be beneficiaries in partition shares of properties in their father’s HUF.
One benefit of a HUF is when the tax computable becomes larger and gets divided among family members, especially when a gifted or inherited property is partitioned. Another benefit HUF member avail is to have 2 PAN cards and file 2 separate returns. The demerit of a HUF is when any property becomes part of the family, it cannot be sold unless every member agrees. Moreover, every coparcener has rights to the property, and any attempt to sell mostly results in litigation and disputes.
TDS deduction on rent paid by individuals and HUFs
The previous system of TDS was for TDS to be deducted when the total rent exceeds Rs 2.4 lakhs. The new system requires TDS of 5% of the rent to be deducted for individual rents more than Rs 50000. The objective of this exercise was to bring more people into the tax regime, especially those who are not employed and depend only on renting their property for income.
TDS on rent paid to NRIs
The TDS on rent paid to Non-Resident Indians (NRIs) is 31.2% irrespective of the amount of rent. The NRI will require to fill up a 15CA form and upload it on the Income tax portal.
Is TAN mandatory for TDS?
TAN (Tax account number) is mandatory for TDS (Tax deducted at source). In fact, TDS cannot be submitted unless it is through a Tax Account Number (TAN). The Tax account number must be mentioned on all challans that are prepared for paying TDS. TAN is also required to be mentioned in financial transaction statements and reportable accounts. TAN is also required to be mentioned in case the deducted amounts add up to a lower tax bracket and the owner of the property can claim a refund. In such cases, the TAN numbers reveal the source from where the individual Taxes were deducted.
Form for TDS payment
The form required for TDS payment is 26QC.
In order to access this form, you need to log in to income tax sub portal www.tin-NSDL.com where tin stands for tax information network. On logging, the services menu is to be selected and the “TDS on rent of property” is to be chosen from the choices under e-payment of taxes is to be clicked.
The form 26QC opens. This form is in 4 parts and must be filled. One of the important data to be entered is the PAN numbers of both the tenant and the landlord.
FAQs
- How should I mention my rent earnings in my return?
Your income tax return should mention your rent earnings under the heading “income from other sources” and individually under “Income from house/property”. You should mention the total rent payable and show the TDS under taxes already paid. Here you will need to mention the challan numbers of the deductions. In the new Income tax portal, these challan details will show up (auto-populated) as identified from your PAN mentioned in the challans.
- Can I receive rent in the name of my wife as I am part of a Hindu Undivided Family (HUF)?
You can receive rent in the name of your wife. But TDS will still be deducted by your tenant if the total rent is more than Rs 2.4 lakhs in a single year. You must ensure that the property for which your wife is receiving rent is registered in her name. your wife will need to have a PAN number and she must file IT returns to be eligible for tax refunds.
- Can I get a tax refund on TDS deducted from rent on my mortgaged property?
Even if your property is mortgaged, the title deed must be in your name. TDS on the rent being received by you will still be deducted if the total surpasses the limit of Rs 2.4 lakhs in a single year. You can get a tax refund if the computed tax on your total income is less than the tax deducted from you. You will need to file an IT return and feed in all details accurately to get your refund.
- Why do I have my tax deducted at source on property that I bought with my foreign earnings?
You need not pay taxes on your income from outside India in foreign currency. But the earnings of rent and dividend on mutual funds/ shares are your earnings within India and hence such income is taxable. You can file your IT return every year and if your total earnings within India are less than the total TDS collected from your earnings, you will get a tax refund.
- Will TDS be deducted if I rent out my marriage hall for short periods of time? Yes. The cost of hiring your marriage hall is considered as rent but there will be no individual TDS if each rent is within Rs 50000. You will, however, need to mention all your earnings from the marriage hall in a year as you will be paying GST (Goods and Services Tax) on your rent collections.
