Paying Rs 50,000 rent? Better cut 5% TDS

Individuals who are paying a rent of over Rs 50,000 every month  required to deduct TDS at 5%. The related section in the Income Tax Act is  section 194­IB — which was introduced by the Finance Act, 2017 and it has broad scope of withholding tax by making individuals also responsible for tax deduction at source (TDS) on rental payments exceeding the specified sum.

Rents in metros cities are very high and many tenants will have to meet with the obligations of withholding tax, depositing it with the government and also filing the relevant documentation.

The important lining is that compliance formalities have been made easier for individuals who are tenants. The Central Board of Direct Taxes (CBDT) issued on June 8 a notification relating to some compliance requirements.

what to dos and don’ts do are explained below.

Do not revise your rent agreement

According to tax consultants , Modification your tax agreement to just get away of your TDS obligations is not a good idea. Let’s use an illustrative case study: Sharon has been staying as a tenant in a 2BHK flat in the upscale area of Bandstand, Bandra, for the past eight months. Out of the blue, her landlady asked her whether she wanted to revise the three­year lease agreement and split up the monthly rental of Rs 85,000 into Rs 40,000 as rent and the balance of Rs 45,000 as furniture hire.

“Modification of an agreement during the period is bound to catch the wrong attention of the tax authorities and should not be undertaken. Only if an individual is entering into a new agreement and is actually paying for furniture hire could the drawing up of two separate agreements to be in mind .

“There have been instances where people trying to wriggle out of their TDS responsibilities resort to various devices, such as splitting up of the rent agreement. This is clearly done with a view to violate the law and I would never advise anyone to take such a step. Further, several pitfalls are involved.

First, there should be actual assets that have been rented out to justify the payment towards furniture hire.

Second, the agreement should bring out a list of such assets.

Third, the payments towards such assets should be reasonable and justified. Obviously, it is too difficult to prove that
payment towards furniture hire of Rs 45,000 is reasonable if the rent for the flat itself is just Rs 40,000. The TDS authorities would strongly take a view of such an arrangement and take action against the tenant who has paid rent without deducting tax at source.”.

“Tenants should also keep in mind that non­-compliance of the laws attracts penalties. Non ­deduction of tax results in a levy of interest at 1% per month, it is 1.5% per month for non­ payment after deduction. Further, non ­filing of required statement would attract penal fee of Rs 200 per day for the period of delay.”

The government has provided for some compliance ­related concessions. Tenants who are individuals and have to meet TDS obligations are absolved from obtaining a Tax Deduction Account Number (TAN). Further, the tax is not to be deducted each month, but merely once a year.

“TDS required to be deducted at the time of credit or payment (whichever is earlier) of the rent, Since individuals would not be maintaining books of accounts, the tax will be deducted at the time of payment,” .

To continue with our above example as the rent paid by tenant is Rs 85,000 per month for the period June 1, 2017 (being the date the new provision comes into force) up to March 31, 2018 (which is the last month in the financial year 2017­18), the total rent works out to Rs 8.50 lakh. The TDS at 5% is Rs 42,500. tenant will have to deduct this amount from her March rental payment and pay the balance of Rs 42,500 to her landlady.

If the landlady doesn’t have a permanent account number, this means a higher tax of 20% is to be withheld.  The tax deducted is required to be paid within 30 days from the end of the month in which the deduction was made. It can be remitted electronically to the RBI or SBI or any authorized bank and form 26QC (which serves as a challan ­cum­ TDS) is to be filed electronically through the NSDL portal.

The same web portal also provides form 16C, which needs to be downloaded and issued to the landlady. This needs to be done within 15 days from the due date of filing form no 26QC.

Both form 26QC and 16C having details such as the name, address, PAN, contact details of the tenant and the landlady. The duration of tenancy, the amount of rent and details of TDS are also required.

Section 194-IB doesn’t appliy if the rent paid to a non ­resident.Section 195 relates to withholding of tax on payments made to non­ residents and the applicable tax rates would apply.