What is TDS on Rent and How to Calculate it?

You may have noticed an amount deducted as TDS at multiple instances like bank FDs, salary, sale of property, etc. But, what is it exactly?

 

TDS, i.e. the Tax Deducted at Source is a part of income tax, reduced even before the payment is received. This means that it is reduced at the source. To put it simply, the person paying the money will deduct a certain amount as tax and transfer it to the central government.

 

Let’s understand this better with an example:

 

Sanjana, a 40-year-old woman residing in Mumbai received Rs. 50,000 as interest on her fixed deposit. If the TDS charged on such interests is 10%, her bank will reduce Rs. 5000 as income tax and credit Rs. 45,000 in her account. The bank being the payer, deducts the money and remits it to the account of the central government.

 

Similarly, the TDS is reduced from rental income as well. Here’s all about TDS on rent, and how to make its calculations.

According to Section 1941, the person (not an individual or HUF) who has to pay rent is legally obliged to deduct tax at source. The TDS on rent limit for the financial year 2020-2021 is Rs. 2, 40,000.

 

For instance, an organisation rents an office for Rs. 90,000 per month. Since the yearly rent exceeds the threshold, it credits Rs. 83,250 every month to the owner after a 7.5% tax deduction. The remaining amount needs to be remitted to the government.

According to the Section 194I, ‘rent’ is any payment made under any lease, sublease, tenancy, or an agreement to use any of the following properties:

• Land or building (including factory buildings)

• Land belonging to a building (including factory buildings)

• Machinery

• Plant

• Furniture

• Equipment

• Fittings

 

However, please note that you do not have to deduct the TDS on the deposit money. Since it is always given back at the time of vacating the building, it’s not regarded as an income. Therefore, no income tax deductions are applied on deposits as per Section 1941. However, non-refundable advance rents are subject to tax deductions. 

Section 194Ib explains the TDS on rent paid by individuals or a Hindu undivided family. Under this section, an individual or a HUF paying a rent exceeding Rs. 50,000 per month to a resident is liable to deduct TDS.

 

For instance, Aakash, a 45-year-old family man, rented a 3bhk flat for Rs. 52,000 per month. As the amount surpasses the limit, Aakash will deduct TDS from the rent and transfer it to the central government.

When paying rent, it is imperative to calculate whether the amount falls under the TDS on rent income bracket. If the yearly amount surpasses Rs. 2,40,000 per year, the payee needs to calculate the TDS rate for rents and reduce it accordingly.

 

For example, Akshar Enterprises pays Rs. 35,000 for plant and machinery every month. The yearly rent goes up to Rs. 4,20,000. Therefore, the payee must reduce 1.5% TDS from their rent, i.e. Rs. 525 each month.

 

The onus of deducting TDS falls on the payer. If they fail to do so, the payer is liable to pay an interest of 1% each month from the date the tax is deductible to when the tax is deducted. If the payer reduces the TDS amount but doesn’t remit it to the government, they must pay an interest of 1.5% per month from the day the tax is deducted to the day it is deposited.