From June 1, individuals who pay a rent of over Rs 50,000 per month are required to deduct tax at source at 5%. The relevant section in the Income Tax (I-T) Act — section 194-IB — was introduced by the Finance Act, 2017 and it widened the 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 are sky-high and it's likely that many tenants will have to meet with the obligations of withholding tax, depositing it with the government and also filing the relevant documentation. The silver 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.
The dos and the don'ts are explained below.
Do not revise your rent agreement
According to tax experts, revising your tax agreement to get out of your TDS obligations is not a sound 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 three-year 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. Sharon learnt that some other tenants in the same vicinity were asking for such a split to avoid their TDS obligations.
"Revising an agreement mid-way 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 be considered. Besides, the charges for furniture hire need to be realistic," cautions Amarpal S Chadha, partner (people advisory services) at EY India.
Ameet Patel, tax partner at CA firm Manohar Chowdhry & Associates, says, "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 would be 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 definitely take a strong view of such an arrangement and take action against the tenant who has paid rent without deducting tax at source."
Chadha adds, "Tenants should also keep in mind that non-compliance entails 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."
Comply with TDS norms
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. "The tax is required to be deducted at the time of credit or payment (whichever is earlier) of the rent, in the last month of the financial year, or the last month of tenancy if the flat is to be vacated during the year. Since individuals would not be maintaining books of accounts, the tax would typically be deducted at the time of payment," says Chadha.
To continue with our illustration: As the rent paid by Sharon 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 2017-18), the total rent works out to Rs 8.50 lakh. The TDS at 5% is Rs 42,500. Sharon 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 (PAN), this means a higher tax of 20% is to be withheld. However, in such cases, the deduction is not to exceed the amount of rent payable for the last month of the financial year or the last month of tenancy, as the case may be.
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 authorised 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 typically call for details such as the name, address, PAN, contact details of the tenant and the landlady. The period of tenancy, the amount of rent and details of TDS are also required.
It must be noted that if the rent is being paid to a non-resident, then section 194-IB doesn't apply. Section 195 relates to withholding of tax on payments made to non-residents and the applicable tax rates would apply.
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