TDS On Home Rent with Limit & Payment Modes

05 JANUARY, 2023

Tax Deducted at Source (TDS), as per Section 194-I of the Income Tax Act, 1961, is required to be paid by a landlord from the rent they charge a tenant for letting out their property.

The amount of TDS on the rent of the property depends on who is paying the rent. In this article, we will answer all your questions regarding TDS on rent payments so that everything is transparent in the future.

What is TDS on Rent?

In simple terms, TDS is a tax deducted at source. When you pay rent to your landlord, the TDS on Rent on residential property is subtracted from your rent payment by the property owner and deposited with the income tax department. This way, both parties get their share of taxes according to their share in the payment.

However, there are certain exemptions for this rule that are explained below:

If you are a resident of India and your annual income is less than INR 2,50,000, then you don't have to pay TDS on Rent. This exemption is applicable only if the property belongs to your landlord and not a third party.

The TDS on Rent is not applicable if a government agency or a charitable trust owns the property. If you are an NRI (Non-Resident Indian) living in India on a valid visa, you don't have to pay TDS on Rent either.

Why Was TDS on Rent - Section 194I Introduced?

House rent's TDS limit was introduced to ensure that all tenants pay taxes at source. Section 194I of the Income Tax Act, 1961, applies to all residential properties, regardless of whether they are rented out.

This provision requires every tenant (including owner-occupied premises) who pays rent exceeding INR 2 lakhs in a financial year to deduct Tax and deposit it with the government.

Definition of Terms Related to TDS on Rent

TDS on Rent: In simple words, TDS on Rent of property is the amount of Tax deducted at source by a landlord as per the Reserve Bank of India (RBI) guidelines. This applies to all rent earners, including an individual, firm, or partnership firm and artificial juridical person.

TDS on Rent Rules: The taxation rules have been prescribed by the Income Tax Act, 1961, which is applicable from 1st April 2016 onwards. Any person who receives rent should deduct Tax according to the prescribed rates mentioned in section 194J(1) of the Income Tax Act 1961 and deposit it with the government before 31st July every year.

TDS on Rent Calculation: To calculate TDS on the rent of commercial property, we first have to understand gross rent and net rent.

Gross rent = Total payable for a property (including principal amount along with interest & other charges)

Net Rent = Gross Rental minus Repairs & Maintenance Allowance

Now, if you receive monthly rent, multiply the gross rental per month by 12 and get a total annual gross rental.

Who Does TDS Apply To?

TDS applies to the following:

Tenants must pay TDS on rent whether the property is owned fully or in the process of being owned through a home loan EMI. The tenant should deduct TDS at 20% of the total rent paid, including service tax, if any. There are certain conditions under which you can claim a refund of this amount.

Owners have to deduct TDS on Rent by paying it directly to their employees or contractors as per their requirement from their salary or contract money and deposit it with the government within 30 days after such deduction.

The owners should also provide a declaration form to their employees or contractors on the payment date of salary or contract money, stating that they have deducted TDS and deposited it with the government.

When should the TDS be Deducted?

The Tax should be deducted at the time of payment. If you pay your rent in cash, it can be deducted at the time of payment. However, if you pay via cheque, the TDS cannot be deducted then but needs to be done by issuing a separate challan.

If your landlord is deducting TDS from your rent and not depositing it with the government, they are liable to be penalised. If you are paying rent in cash, check if TDS has been deducted from your payment at the end of each year.

TDS on Rent Rules As Per Section 194-I

You Will Not Be Required to Pay Tax on Rent:

As per Section 194-I of the Income Tax Act, 1961, a tenant is not liable to pay Tax on Rent. The landlord needs to deduct Tax at a rate of 3% from the rent amount and deposit it in their bank account, no matter if the property is owned or in the process of being owned through a home loan EMI repayment plan.

Tenants Need Not Worry About TDS:

As per Section 194-I of the Income Tax Act 1961, tenants have nothing to worry about when paying taxes because they are not required by law to do so. Landlords must deduct Tax at source from their tenants' rents and deposit it with the government on behalf of their tenants within ten days after receiving payment from them.

How Does TDS on Rent Calculation Work?

If you are a tenant and rent out your property, the income from renting will be taxable. The profit you make on renting your property is taxable and is treated as business income. You have to pay Tax on this income irrespective of whether it is earned through a long-term or a short-term lease.

If you are an owner who rents out their property, then TDS will be deducted at 2% of the rent amount, which will be deposited into the government's account. You must use Form 16B or 16BH to file your return electronically using the MyTax portal.

Points to Keep in Mind by Tenants for TDS on Rent

You will get a rent deduction form from your landlord. You will have to fill in the details of your landlord, yourself and provide details of all your bank accounts where you have been making deposits for rent payment purposes.

If you need more clarification about how much TDS has to be deducted from your rent, it is best to consult a tax consultant or an accountant before signing any agreement with a new landlord.

Points to Keep in Mind by Owners on TDS on Rent

If a tenant pays you to rent, it is the tenant's responsibility to pay Tax on rental income. The owner should keep a record of the rent paid and deduct TDS at source from it. The owner must deposit the Tax with the government and file returns for TDS on Rent within seven days from the end of every month.

Conclusion

This article should have covered the most important details pertaining to TDS on home rent and you may have realised it’s relatively easy to calculate TDS on rental income. You just need to take out a few minutes to complete all formalities and submit the returns online or offline.