You pay your rent diligently each month, file your income tax returns on time, and even claim your House Rent Allowance (HRA). But suddenly, an unexpected Income Tax Notice arrives, questioning your rent payments and demanding answers.
The trigger? A little-known TDS obligation tied directly to monthly rents above ₹50,000, which many tenants overlook, leaving themselves vulnerable.
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Efiletax, an online tax filing provider, recently highlighted this oversight on X, breaking down exactly who's at risk and how to set things right.
If your monthly rent exceeds ₹50,000 and you’ve claimed HRA without deducting Tax Deducted at Source (TDS), the Income Tax Department’s automated system may flag your return. This usually happens for two reasons: either your reported rent details appear incorrect, or you've missed complying with TDS requirements under Section 194-IB.
Efiletax clearly states that individuals and Hindu Undivided Families (HUFs)—not under a tax audit—who pay rent above ₹50,000 per month must deduct TDS at 5% (this drops to 2% from October 2024). Tenants must file Form 26QC and issue Form 16C to landlords. Crucially, even if your employer provides an HRA exemption, this TDS obligation remains yours alone.
Here’s an example for clarity:
You, as the tenant, must deduct this TDS in the final month of tenancy or the financial year. Missing this requirement can be costly, with penalties quickly mounting. Late fees under section 234E amount to ₹200 per day (up to the TDS amount), and interest charges add 1% per month from the original due date. Over two years, this mistake could easily cost more than ₹70,000.
Efiletax debunks a widespread myth as well: claiming an HRA exemption below ₹6 lakh won't exempt you from TDS compliance. The monthly rent amount, not the claimed exemption, determines your obligation.
However, there is relief: If your landlord has already reported this rental income and paid the required taxes, you can avoid penalties by submitting a CA-certified Form 26A through TRACES. Interest charges remain, but penalties can be waived.
Finally, tenants renting from multiple landlords paying below ₹50,000 each are exempt, provided payment shares are clearly documented.
To avoid tax notices and financial penalties, Efiletax recommends promptly deducting TDS, filing Form 26QC, and maintaining clear documentation of all rent payments and agreements.