Decoding TDS on Rent: Navigating the 2% vs. 5% Rate under Section 194IB for FY 2024-25

[Mohit Jain]

Introduction:

The Union Budget 2024 introduced a significant amendment to Section 194IB of the Income Tax Act, 1961. This revision brought a crucial change in the Tax Deducted at Source (TDS) rate on rent payments, reducing it from 5% to 2%, effective October 1, 2024. This amendment has raised concerns and queries among taxpayers, especially regarding its impact on rent payments made towards the end of the financial year 2024-25.

This article provides an in-depth analysis of Section 194IB, explaining its provisions and how the revised TDS rates should be applied under different scenarios.

Understanding Section 194IB of the Income Tax Act, 1961:

The relevant extract of Section 194IB is as follows:

194-IB. (1) Any person, being an individual or a Hindu undivided family (other than those referred to in the second proviso to section 194-I), responsible for paying to a resident any income by way of rent exceeding fifty thousand rupees for a month or part of a month during the previous year, shall deduct an amount equal to ⁴[two per cent.] of such income as income-tax thereon.

(2) The income-tax referred to in sub-section (1) shall be deducted on such income at the time of credit of rent, for the last month of the previous year or the last month of tenancy, if the property is vacated during the year, as the case may be, to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier.

(3) The provisions of section 203A shall not apply to a person required to deduct tax in accordance with the provisions of this section.

(4) In a case where the tax is required to be deducted as per the provisions of ²[section 206AA ³[****], such] deduction shall not exceed the amount of rent payable for the last month of the previous year or the last month of the tenancy, as the case may be.

Explanation.-For the purposes of this section, “rent” means 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 or both.]

Analysis of Key provisions:

As per Section 194IB, any individual or Hindu Undivided Family (HUF) (who is not required to undergo tax audit) must deduct TDS if:

• They are paying rent to a resident exceeding ₹50,000 per month.
• The deduction must be made at the time of crediting or paying the rent for the last month of the financial year or the last month of the tenancy (if vacated earlier).
• The TDS must be deposited once in a financial year if tenancy remains the same.

Case Scenarios: When to Deduct TDS at 5% or 2%?:

Case 1: Last Month of Tenancy is Before October 1, 2024 (Vacated before 1^st October, 2024)

🔹 Example: A tenant vacates the property in September 2024, and the rent for September is credited or paid before October 1, 2024.

🔹 Applicable TDS Rate: 5% (since the payment/credit happens before the effective date of the amendment).

Conclusion: If the last month of tenancy is before October 1, 2024, TDS must be deducted at 5%.

Case 2: Last Month of Tenancy is After October 1, 2024 (Vacated after 1^st October, 2024)

🔹 Example: A tenant continues to stay in the property until March 2025, and the rent for March is credited or paid in March 2025.

🔹 Applicable TDS Rate: 2% (as the payment/credit happens after October 1, 2024).

Conclusion: If the last month of tenancy is on or after October 1, 2024, TDS must be deducted at 2%.

Case 3: Tenancy Continues Beyond October 1, 2024

🔹 Example: A tenant pays rent for April 2024 to March 2025, but the rent for March 2025 is credited in March 2025.

🔹 Applicable TDS Rate: 2% (since the last month's rent is credited after the amendment date).

Conclusion: For tenancies extending beyond October 1, 2024, the applicable rate for the last month of the financial year (March 2025) will be 2%.

Frequently Asked Questions (FAQs):

1. Is there any need to split the TDS deduction between 5% and 2%?

No. The TDS rate is determined by the timing of rent credit/payment for the last month. There is no requirement to deduct at 5% for earlier months and 2% for later months. The applicable rate is based solely on when the deduction occurs for the last month of the financial year or last month of tenancy.

2. How frequently should TDS be deposited under Section 194IB?

Unlike other TDS provisions, under Section 194IB, TDS is deducted only once per year:

• At the time of crediting or paying the rent for the last month of the financial year.
• At the time of crediting or paying rent for the last month of tenancy (if vacated before year-end).

3. Who is responsible for TDS compliance?

Any individual or HUF (not subject to tax audit) making rent payments of ₹50,000 or more per month is responsible for:

• Deducting TDS at the applicable rate (5% or 2%).
• Depositing it with the government.
• Issuing a TDS certificate (Form 16C) to the landlord.

4. What if a tenant fails to deduct TDS?

If a tenant fails to deduct or deposit TDS, they may face:

• Interest penalties under Section 201(1A).
• Disallowance of expenses under Section 40(a)(ia), if claimed as business expense.
• Late filing penalties under Section 234E.

5. Can landlords claim a refund of deducted TDS?

Yes. Landlords can claim credit for TDS deducted while filing their income tax returns (ITR). If excess TDS is deducted in comparison to their respective tax liability, they can also claim a refund.

For further clarifications, taxpayers are advised to consult with a tax professional or refer to the latest notifications from the Income Tax Department.