Liability to deduct TDS depends on 3 factors
Tax experts say that three factors determine whether TDS is required to be deducted from rent paid or not as per Income Tax law. They are: (i) residential status of the landlord, (ii) value of rent payment per month and, (iii) the legal wordings of the rent agreement.
“It is important to note that, if the rent is being paid to a non-resident landlord, then TDS would be required to be deducted, irrespective of the amount of rent,” says Amarpal Chadha, Partner and India Mobility Leader, EY India.
TDS aspects in case of multiple tenants paying rent for shared flat
When TDS is not required to be deducted Let us take the case where a flat and its rent is being shared among a group of people i.e., one flat has multiple tenants. There could be multiple scenarios in this case:
According to Naveen Wadhwa, VP, Taxmann, a Delhi– based company which publishes tax and other books, in case of multiple tenants the threshold limit of Rs 50,000 will apply on each tenant individually. “If both the tenants are paying rent for their respective share (of the flat), the tax shall not be deducted if their respective share of (total rent) payment does not cross the threshold limit of Rs 50,000,” he says.
Let us understand this with an example,
Suppose Venkata and Dhiraj are sharing a 2BHK flat whose monthly rent is Rs 55,000 and jointly sign a single rent agreement with the landlord and the agreement mentions the separate rent payable by each tenant (Venkata and Dhiraj). Consequently, Venkata pays Rs 27,500 directly to the landlord and so does Dhiraj. In this case, TDS is not required to be deducted but provided there is no mention of ‘joint and several liability clause‘ in the agreement. “If multiple tenants make separate payments to the landlord and each payment is less than Rs 50,000 per month and the rental agreement mentions the amount of rent payable by each, a view could be taken that the TDS threshold is to be applied to each tenant paying rent separately,” says Chadha.
“However, if the rent agreement mentions the individual share of rent and also has ‘joint and several liability clause’, then there could be legal and technical complications in regard with the rent agreement,” says Neeraj Agarwala, Partner, Nangia Andersen India, a business consultancy company.
According to Agarwala, there could be another instance where TDS is not deductible despite monthly rent being more than Rs 50,000. This situation arises when the landlord has signed separate rent agreements with his/her tenants and the share of each tenant (in total rent paid) is less than Rs 50,000.
“The applicability of this limit hinges on the terms laid out in the rental agreement. When there are multiple tenants sharing a space and each tenant enters into a separate agreement with the landlord, Rs 50,000 threshold applies to each individual tenant’s portion of the rent,” he says.
When TDS is required to be deducted
TDS on house rent is required to be deducted, as per income tax law, in two cases: (i) Multiple tenants are sharing a flat but the rent is being paid by a single tenant who takes/pools the money from the other tenants; or (ii)the rental agreement has a specific legal clause ‘joint and several liability’. In both the cases, the monthly rental value must be over Rs 50,000.
(a) According to Wadhwa, in the first instance above, “The tenant who is paying the rent amount by pooling from other tenants should deduct the TDS.” Also in case of multiple tenants living in a shared flat (like a husband, wife and their childrens, etc), and any one of the tenant pays the rent, then TDS is to be deducted if the rent is above Rs 50,000.
(b) According to Chadha, “In case the rental agreement has a joint and several liability for the rent and total rent it is above Rs 50,000 per month, TDS provisions would become applicable even if the tenants individually pay rent of less than Rs 50,000 directly to the landlord.”
“The term ‘joint and several’ liability typically denotes a situation in which two or more parties share responsibility for a common obligation or debt. In the context of a landlord’s rights, it means that the landlord can pursue legal action or seek payment from any or all of the involved parties (in this case tenants), irrespective of their individual degrees of fault or contribution. In such instances, the responsibility (in this case rent payment) is shared collectively, and the specified threshold (Rs 50,000) applies to the entire payment collectively,” says Agarwala.
The term ‘joint and several liability’ is a legal term. It means that if any of the two or more people in the contract does not fulfil their obligations, the other party becomes liable to fulfil it. For example, Shyam and Raju sign a rent agreement contract for paying Rs 85,000 rent per month. If Raju runs away and does not pay his share of rent, then Shyam will be liable to pay the full Rs 85,000 to the landlord. The clauses mentioned in the rent agreement are a crucial determinant of the liability to pay the rent.
Another example can be of Ankita and Manjunatha who signed a rent agreement for paying Rs 85,000. However, their signed rent agreement does not have the word ‘joint and several liability’. Rather it has the wording that Ankita will pay Rs 42,500 and Manjunatha will pay Rs 42,500. Then in this case even if Ankita runs away without paying the rent, Manjunatha is liable to pay only Rs 42,500 to the landlord. “TDS obligations would arise only if the rent amount per tenant exceeds the threshold of Rs 50,000 in this case,” says Chadha.
So, check the rental agreement that you signed or are about to sign with your landlord for the clause ‘jointly and severally liable’. If this legal clause is there in the rent agreement, then TDS provisions will apply, provided monthly rental value is more than Rs 50,000 even if you are individually paying less than this amount as rent.