Many employees in India who pay rent exceeding ₹50,000 per month may unknowingly violate tax laws due to a lack of awareness about Section 194-IB of the Income Tax Act. This provision mandates that individuals (including salaried employees) must deduct and deposit 5% TDS (Tax Deducted at Source) on rent paid to landlords if the rent exceeds ₹50,000 per month or part of a month.
In this blog, we will explain the rules, compliance requirements, consequences of non-compliance, and how employees can easily comply with this provision.
What is Section 194-IB?
Section 194-IB was introduced to ensure that high-value rental transactions are taxed at the source, even when the tenant is an individual or a Hindu Undivided Family (HUF) who is not required to obtain a TAN (Tax Deduction Account Number).
This provision applies to any individual or HUF whose gross receipts or turnover in the preceding financial year do not exceed ₹1 crore (for business) or ₹50 lakh (for profession).
Key Highlights of Section 194-IB
- If an employee (or any individual) pays rent exceeding ₹50,000 per month, they must deduct 5% TDS on the total rent amount.
- The TDS must be deducted in the last month of the financial year or in the last month of tenancy if the property is vacated before the year-end.
- The tenant (employee) is not required to obtain a TAN to deduct and deposit the TDS.
- TDS must be deposited to the government using Form 26QC within 30 days from the end of the month in which the deduction was made.
- The tenant must issue Form 16C (TDS certificate) to the landlord as proof of tax deduction.
Why Many Employees Ignore This Rule?
Many employees paying high rent are unaware of this provision because:
- Lack of Awareness: Unlike businesses, salaried individuals do not frequently deal with TDS deductions, leading to non-compliance.
- No Employer Involvement: Employers do not deduct this TDS on behalf of employees since house rent allowance (HRA) is a separate component.
- No TAN Requirement: Since individuals do not need a TAN to comply, they often overlook the responsibility.
- No Immediate Consequences: The Income Tax Department does not immediately flag non-compliance, leading many to believe it is not necessary.
How to Comply with Section 194-IB?
If you are an employee paying rent above ₹50,000 per month, follow these steps:
Step 1: Calculate TDS
- Example: If your monthly rent is ₹60,000, the annual rent is ₹7,20,000.
- TDS @ 5% of ₹7,20,000 = ₹36,000.
Step 2: Deduct TDS in the Last Month
- Deduct ₹36,000 from the total rent amount in the last month of the financial year (March) or the last month of tenancy.
Step 3: Deposit TDS Using Form 26QC
- Visit the TIN-NSDL website and fill Form 26QC.
- Deposit the TDS online through net banking or challan payment within 30 days.
Step 4: Issue Form 16C to Landlord
- After depositing the TDS, download Form 16C from the TRACES website and issue it to your landlord as proof of tax deduction.
What Happens if You Don’t Deduct TDS?
Failure to deduct and deposit TDS can lead to penalties and interest charges:
- Interest on Non-Deduction: If TDS is not deducted, interest at 1% per month will be levied from the due date.
- Interest on Late Deposit: If deducted but not deposited, interest at 1.5% per month applies.
- Penalty for Non-Filing of Form 26QC: A fine of ₹200 per day until the filing is completed.
- Disallowance of Rent Expense: The landlord cannot claim full rental income deductions if TDS is not deducted.
Conclusion
Many employees paying high rent unknowingly violate Section 194-IB by not deducting 5% TDS. Non-compliance can lead to penalties and interest. To avoid issues:
- Ensure you deduct TDS @ 5% in the last month of the financial year.
- Deposit the TDS through Form 26QC within 30 days.
- Issue Form 16C to your landlord.
By following these simple steps, you can stay tax compliant and avoid unnecessary penalties. If you are unsure about the process, consult a tax expert or use online tax portals to file TDS easily.