Budget 2017 – TDS On Rent Brings In Individuals and HUF Under The Law

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Budget 2017-18 comes to rest! Here is one of our coverage as we continue to dissect the 100s of pages of the documents published as part of the Budget!


Deduction of tax at source in the case of certain Individuals and Hindu undivided family

Here is what the Finance Minister proposed in his speech:

It is proposed to introduce a new provision in the Income-tax Act to provide for tax deduction at source at the rate of five per cent. by an individual or HUF, other than those whose books of account are required to be audited, while making payment of rent of an amount exceeding Rs. 50,000 per month. It is also proposed to provide that such tax shall be deducted and deposited only once in a financial year through a challan cum-statement. Further, the deductor shall not be required to obtain TAN or file any separate TDS return for this purpose.

Can you explain the change?

Under the current laws, Individuals and HUF (other than those liable for tax audit) were out of the scope of section 194-I of the Act which required deduction of tax at source when rents were paid in excess of Rs.1,80,000.00. The government today introduced a new section 194-IB which comes to effect from the 1st June, 2017 has brought these individuals and HUF payments under the rule.

So while anyone other than Individuals and HUF deducted TDS while making rent payments (any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of any land or building or both), Individuals and HUF were exempted from doing so under the law. Now both the parties (Individuals and HUF) will be responsible to deduct a tax at source of 5% of the rent collected if the monthly payment to another resident exceeds Rs. 50,000/-.

The amount so deducted shall be deposited only once a year through a challan cum statement without the payee being obliged to obtain a TAN or file any separate TDS return for this purpose.

Why the change?

Individuals currently paying a rent of more than Rs. 100,000/- a year require submission of the landlord’s PAN details to their employer. While this is only a regulatory requirement, active compliance is still not air tight.

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With this new rule, the frequency of TDS deductions and payments (compared to current process) reduces the pain of making multiple TDS deductions and submissions every quarter as the rule requires a single payment deduction to be made only in the last month of the year. Also since the requirement of TAN details is eliminated and the onus gets transferred from the payee to the payer, a higher compliance can be ensured.

Is there a workaround?

To get around this rule, all lords receiving rent payments may start breaking down these payments into multiple separate agreements to make sure the fixed rental component that is earned in the form of rent can be capped to Rs. 50,000/- while anything excess can be put up as maintenance expenses/ income which circumvents the rule which says rent of more than Rs. 50,000/- in a month.

But given the simple compliance offered, it makes a lot more sense to show the amount without resorting to tricks which can boomerang badly. But once again, the government has transferred the responsibility of collecting the tax from itself to the receiver.