De-Tax. A guide to deducting tax on rent

If you pay more than ₹50,000 as rent per month, you have to comply with certain tax requirements as a tenant. With effect from June 2017, the Centre has made it mandatory for any individual/HUF paying rent to a resident landlord more than ₹50,000 per month to deduct tax at 5 per cent.

Earlier, only those who were mandatorily required to have their accounts audited, were required to deduct taxes on rent paid. However, the regulation introduced in 2017 does not mandate procedural requirements such as obtaining TAN (tax deduction account number), filing returns on a quarterly basis, etc, and has laid down simplified procedures.

Process

The tax is required to be deducted once every financial year, unless the tenancy ends during the course of a financial year. If the rental agreement period contains more than one financial year, the tenant needs to mandatorily deduct the taxes twice — at the end of the financial year and at the time of termination of the agreement.

For example, if the period of agreement is from October 1, 2018, to August 31, 2019, and the rent is ₹55,000 per month, tax of ₹16,500 (5% of ₹3,30,000 (₹55,000 x 6 months)) needs to be deducted on or before March 31, 2019; and ₹13,750 (5% of ₹2,75,000 (₹55,000 x 5 months)) on or before August 31, 2019.

The tax withheld needs to be deposited through Form 26QC within 30 days from the end of the month in which the tax is deducted. Form 26QC is a challan-cum-statement (available on the TIN NSDL website), through which the rent paid and the tax deducted thereon, needs to be reported and submitted to the tax authorities. The tenant has the option of paying the tax while submitting Form 26QC, or subsequently by visiting the nearest bank branch within the due date.

Once Form 26QC is processed by the Tax Department, the tenant is required to download Form 16C from the TRACES (TDS Reconciliation Analysis and Correction Enabling System) website, and issue it to the landlord within 15 days from the due date of furnishing Form 26QC.

If you don’t comply with the requirements, you may end up paying interest and/or penalty in addition to the tax.

Owner’s duty

Along with the tenants, even the landlords should be aware of their to-dos. One, the house owner has to provide her PAN to the tenant to ensure that the credit of the deducted taxes are reflected correctly.

Landlords also have to mandatorily obtain Form 16C from the tenant and declare the accurate rental income in their tax returns to avoid penal implications.

Hence, the tenant and the landlord have a joint responsibility in ensuring that they comply with the tax laws and filing requirements.

The writer is Tax Partner and India Mobility Leader, EY India. Shanmuga Prasad, Tax Director, EY, also contributed to the article .

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