Renting out properties in India has various tax implications that the tenant and landlord must be aware of. One such provision is TDS or Tax Deducted at the Source. The government introduced it as a tax collection mechanism to streamline the process and avoid tax evasion on rental income.
Understanding the nature of TDS on house rent in India from different aspects is thus necessary if you are somehow linked with rental properties. In this blog, we will explore various aspects of TDS and its requirements from the perspective of residents and Non-Resident Indians (NRIs).
What is TDS?
TDS refers to the tax deducted at the source of income. For instance, if A is liable to pay B any amount of specified nature, then A shall deduct tax right at the source, i.e., TDS, and transfer it to the Central government’s account. This deducted amount will then be credited to B as per the provisions of the Income tax act.
Taxes on Rent in India
Properties in India are subject to taxation under various sections of the Income Tax(IT) Act 1961. That means a certain amount of tax cut will be applicable whether you are selling or leasing your property. Taxes like the tax on selling property in India or income tax on house rent are examples where deductions are made at the source.
The provisions for rental income have been covered under section 194-I of the IT Act. According to this, the tenants are required to deduct TDS and remit it to the central government account, which the lessor/landlord is entitled to receive as a credit by duly filling the TDS certificate or Form 26QC.
However, the tax treatment depends on certain factors, such as the nature of the property, its usage, rental amount income, and an individual’s tax status.
Under the same provisions, the nature of the properties has been divided into the following:
As the name suggests, the house properties used for rental purposes are subject to income tax on house rent in India. The taxable rental income here is calculated by subtracting expenses such as municipal taxes and interests on housing loans from the gross rental income.
Rental income earned from commercial properties will be treated as business income and is subject to different tax rules. Also, the expenses related to property maintenance and management need to be deducted from the rental income to determine the taxable income.
Tax Deducted at Source on the Rent
Though TDS is a key term in IT Act, only a few know how taxes are deducted at the source. The Indian Government introduced this provision to ensure that rental income is collected accurately. Here are some important things that both residents and NRIs need to know.
TDS on Rent for Residents
In the case of residential properties, if the monthly rent exceeds Rs 50,000, the tenant has to deduct TDS at the rate of 5% of the total annual rent. On the other hand, tenants are required to subtract 2% from the yearly gross rent if it exceeds Rs. 2,40,000 for commercial properties.
Here are two examples to understand the variations in both scenarios:
Example for TDS on House Rent in India–
Suppose Raj is a tenant paying 60,000 monthly rent to Ramesh (landlord), which is more than Rs 50,000 per month. The total annual income of Ramesh from this property will be 7,20,000 (60,000*12), liable for TDS at the rate of 5%. Other expenses like municipal taxes will also play a role in this calculation.
Example for TDS on Rental Income from Commercial Properties–
Suppose MNC Pvt. Ltd. is renting a commercial property, i.e. a plant from the XYZ group, for a monthly rent of 30,000. In this case, the total rent paid by MNC will be 3,60,000 (30,000*12) for one financial year (April to March). As the rent paid exceeds the limit of 2,40,000, TDS will be applicable at the rate of 2%. Hence, the estimated amount of tax deducted from the source will be 7,200 (2% of 3,60,000). In addition, other factors like maintenance expenses will also determine the final amount deducted as TDS from XYZ’s rental income.
TDS on Rent for NRIs
Under section 195 of the Income Tax Act, the NRIs renting or leasing out their properties in India are subject to TDS. However, the rates and procedures will vary for them and their tenants. As per the regulations, the tax is deducted at the rate of 31.2% for residential properties and at the rate of 2% for commercial ones. Apart from these, the tax treaty provisions between NRIs’ country of residence and India will also impact the TDS rates.
In addition, other provisions like having a Tax Deduction Account Number (TAN) is a must-have document for taxpayers responsible for deducting the tax from the source (here, NRI landlords). On the other hand, NRIs must possess a valid PAN so tenants can file the TDS within time.
Knowing the basics of tax implications on Income tax on house rent in India is thus important for tenants and landlords. Compliance with the procedure is crucial as discrepancies of any form and delay can result in hefty penalties. Therefore, it is recommended to consult a tax expert who can guide you through the process and notify you about the latest amendments and changes in the regulations.