Income tax payers claiming House Rent Allowance (HRA) exemptions should take note. The Income Tax Department is issuing notices to individuals who have sought HRA exemptions in their tax filings but have not paid the required Tax Deducted at Source (TDS) on their rental payments.
According to Section 194-I of the IT Act, when tenants pay more than Rs 50,000 monthly rent to a resident Indian landlord, they must deduct 2% TDS from the rent amount (previously 5% until October).
According to an ET report, Tax officials are requesting verification of claims submitted in previous Income Tax Returns (ITR). Taxpayers who need to correct their earlier returns have until March 31 to file an updated ITR to address any discrepancies.
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HRA claims without corresponding TDS payments on rent are deemed invalid. The requirement for TDS is based on the monthly rent value, not the HRA exemption claimed. TDS obligation applies even if rent exceeds Rs 50,000 for just one month.
The landlord’s PAN number must be included in the TDS challan. In cases where PAN is missing or inactive, the TDS rate increases to 20% under Section 206AA. For non-resident Indian landlords, the applicable TDS rate is 30%.
When should TDS be paid?
The TDS payment timeline varies based on tenancy duration. For mid-year vacancy, payment is due within 7 days after the month’s end. For full-year tenancy, payment must be made within 30 days of the financial year’s end, regardless of payment frequency.
- For example, with a July-starting yearly agreement, TDS for nine months until March can be deducted from March rent, payable by April 30th.
- For January vacancy, TDS must be deducted from January rent, payable by February 7th.
- Tenants must submit Form 26QC via the income tax e-filing portal and provide Form 16C to landlords within 15 days of filing deadline.
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What happens if TDS is not deducted?
Non-compliance with TDS obligations carries significant financial implications. Failure to deduct TDS incurs 1% monthly interest on the pending amount from the original due date.
For delayed payment of deducted TDS, 1.5% monthly interest applies from deduction to deposit date. Form 26QC submission delays result in Section 234E penalties of Rs 200 daily, capped at the TDS amount.
What if you get a notice from the Income Tax Department?
- For incorrect HRA claims, submitting an updated ITR before March 31 helps avoid additional penalties.
- For genuine claims with TDS non-payment, full payment including penalties is mandatory.
- Section 201 offers relief if the landlord has declared rental income and paid taxes, reflected in Form 26AS.
- Tenants must obtain a chartered accountant’s certificate in Form 26A to avoid defaulter status.
- When compliance verification is impossible, all applicable taxes and penalties must be paid.