If a property-owner is getting a rent of more than Rs50,000 per month (pm), then the rent-payer is required to deduct tax at source (TDS) @5%. It will create a trail for the income-tax (I-T) department to ensure that the property-owner has shown the rent in her/ his tax returns and has paid the taxes. Anyone earning more than Rs6 lakh a year as rental income must declare it in the tax returns; but people find ways to circumvent it. Hence, a new Section,194-I B, has been introduced in Budget 2017. The proposed change is effective 1 June 2017.
To make for easier compliance, it is proposed that the rent-payer need not obtain a TAN (tax deduction and collection account number) and is required to deduct the tax only once in a financial year. The TDS has to be deposited through a challan-cum-statement, for which the PAN of the property-owner is needed. The tenant is not required to file a separate TDS return for this purpose.
It has also been proposed that “tax shall be deducted on such income at the time of credit of rent, for the last month of the previous year, or the last month of tenancy if the property is vacated during the year, to the account of the payee, 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.”
For example, if you are paying a rent of Rs55,000 per month, payment of the rent for March 2018 will need deduction of 5% TDS on the total rent paid for FY17-18. TDS will be 5% of Rs55,000 for 12 months, i.e., Rs33,000. It is to be deposited with the I-T department. So, for the March 2018 rent, you pay the property-owner Rs55,000 minus Rs33,000, that is Rs22,000. If you vacate the place before March 2018, you will deduct the 5% TDS during the last month of your rent payment.
If you are a property-owner who shows the rental income in your tax returns, you don’t have to worry. Property-owners can take credit of TDS against their total tax due while filing tax returns. However, anyone getting a rent of over Rs6 lakh a year but unwilling to show it in tax returns, is asking for trouble. According to the existing laws, any renter who claims tax exemption under HRA will have to furnish the PAN of the property-owner if the annual rent exceeds Rs1 lakh. Moreover, the data will be available at the time of stamp duty/lease registration. Those who receive rental income need to properly report the income as the I-T department can easily find this information.