Specific provisions are provided under Section 195 of the Income tax Act, 1961. It states that any person who is responsible for paying to an NRI interest or any other sum (not being income chargeable under the head “Salaries”) shall, at the time of credit of such income or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.
Thus, if your landlord is an NRI, then here’s all you need to know about TDS on rent paid by you.
How do you determine on what amount taxes have to be deducted?
Under the income tax laws, a tenant is required to deduct the tax at the time of paying rent. The tax must be deducted irrespective of monthly rent amount. This means that whether you are paying Rs 15,000 per month as rent or Rs 50,000, tax must be deducted before making the rent payment.
TDS is applicable irrespective of whether the rent is paid via cash, cheque or any other mode to the landlord.
What is the tax rate at which tenant has to deduct the taxes?
As per the income tax law, TDS must be deducted by the tenant at the rates in force or the current tax rates as announced in the annual Union Budget. At present, the tax rate for TDS on rental income from house property situated in India is 30%. The tax rate needs to be increased with applicable surcharge and cess depending upon quantum of rent payable. The maximum rate will be 42.744%.
For example, a tenant paying rent of Rs 50,000 per month to an NRI landlord who falls in the bracket of the maximum tax rate of 30%, will be responsible to deduct tax at source amounting to Rs 21,372 (Rs 50,000 x 42.744% which is 30% tax increased by highest surcharge rate and cess) per month before making the payment of such rent. If the surcharge is not applicable to the NRI landlord (due to income being below the threshold), he should intimate to the tenant to deduct tax at the appropriate tax rates.
Can the taxes be deducted at lower rate?
The Income-tax Act allows both tenant and landlord to make an application seeking lower or nil TDS. If the tenant believes that entire rental income or part of the income may not be subject to tax in the hands of the NRI landlord, he/she may make an application in the prescribed form and manner to his Assessing Officer (AO), to determine the appropriate proportion of income which is taxable and shall deduct the tax only on that proportion of the income.
Similarly, the NRI landlord may make an application in the prescribed form to his AO for the grant of a certificate authorising him to receive rental income without deduction of tax or at a lower rate. If such certificate is granted, tenant shall pay the rent without deducting the taxes or deducting the taxes at the lower rate. The certificate granted shall be valid till the date specified therein or if it is cancelled by the AO before the expiry of such period, till such cancellation.
What are the actions required to be taken by the tenant?
To comply with the provisions of the law, there are a number of actions required to be taken by the tenant. A quick summary has been provided below –
- Obtaining the Tax Deduction Account Number (TAN) – The tenant making the payment to a NRI landlord is mandatorily required to apply for a TAN. The TAN facilitates the tax deduction process for the tenant and is required to be quoted in the forms to be filed with the income tax authorities
- Deduction of TDS at the time of payment or credit to the account of the landlord, whichever is earlier
- Payment of TDS to the Government authorities – The tenant should fill and submit a challan within the 7th of the subsequent month to remain compliant with the provisions of the law. For e.g., TDS on rent deducted in the month of September should be deposited with the Government by 7th October.
- Online filing of TDS return -There is a requirement for the tenant to file online TDS return every quarter with the details of payments made to the NRI and TDS deducted.
- Issuance of TDS certificate to the NRI – The tenant is also required to issue a TDS certificate by downloading the same from TDS TRACES website of the Income tax department
Penalty for non-deduction/payment of TDS to the tax authorities
- Non deduction of TDS would attract interest under section 201 (1A) of the Income-tax Act. It would be 1% for every month or part of a month on the amount of taxes from the date on which such tax was deductible to the date on which such tax is deducted.
- In case where the tenant has deducted the taxes but failed to deposit the same to the tax authorities, it would attract interest of 1.5% for every month or part of a month on the amount of such tax, from the date on which such tax was deducted to the date on which such tax is actually paid.
- In addition to the above, AO may also levy penalty under section 271C of the Income-tax Act where the tenant has failed to deduct the taxes. The penalty amount would be a sum equal to the amount of tax which such person failed to deduct.
- Where the tenant has deducted the taxes but failed to pay the taxes, AO may levy penalty under section 221 of the Income-tax Act. The penalty amount shall not exceed the amount of tax in arrears.
Given the above implications, every person paying rent should be aware of the requirements under the statute and identify if their landlord is or will qualify as NRI. By paying your rent on time, your job is only half done. To comply with the Indian income tax laws, you have many more obligations and any non-compliance will have monetary implications.
(Amarpal S. Chadha, Tax Partner and India Mobility Leader, EY. Inputs from: Shanmuga Prasad (Director), EY)