Know all about TDS on payment of rent of more than Rs. 50,000
Tax deduction at source is a means of collecting tax on income, dividends or asset sales, by requiring the payer to deduct tax due before paying the balance to the payee. In India, under the Indian Income Tax Act of 1961, income tax must be deducted at source as per the provisions of the Income Tax Act, 1961. In this article we will discuss Tax deducted at source on transfer of certain immovable property. Section 194IB deals with the scheme of deduction of tax at source on payment of rent more than Rs. 50000.
When does section 194IB applies?
Section194IB applies to any person, being an individual or a HUF, other than those individual or HUF whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits of Rs. 1crore and Rs.50 lakh in the immediately preceding financial year.
When does section 194IB does not applies?
Section194IB does not applies a person being an individual or a HUF or any other person, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits of Rs. 1crore and Rs.50 lakh in the immediately preceding financial year.
What do you mean by rent under section 194IB?
“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 both.
What are the manner and rate of deduction of TDS under section 194IB?
A. Manner of deduction of TDS:
This deduction is to be made at the time of credit of such 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 cheque or draft or by any other mode, whichever is earlier.
Under this section, tax has to be deducted at source only if the amount of such rent exceeds Rs. 50,000 for a month or part of a month during the previous year
Section 206AA requires providing of Permanent Account Number(PAN) of the deductee to the deductor, failing which tax shall be deducted at a higher rate (i.e., higher of the rate provided in the relevant section, rates in force and 20%). Where the tax is required to be deducted as per the provisions of section 206AA, 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.
B. Rate of TDS:
Any person responsible for paying a resident any income by way of rent above Rs. 50,000, to deduct income tax at the rate of 5%. Where, rent is paid after 14th May 2020 than TDS is to be deducted at the rate of 3.75%;
Understanding with examples:
Mr. X, a salaried individual, pays rent of Rs. 55,000 per month to Mr. Y from June, 2020. Is he required to deduct tax at source? If so, when is he required to deduct tax? Also, compute the amount of tax to be deducted at source.
Since Mr. X pays rent exceeding Rs. 50,000 per month in the F.Y. 2020-21, he is liable to deduct tax at source @ 5% of such rent for F.Y. 2020 – 21 under section 194-IB. Thus, Rs. 20,625 [Rs. 55,000 x 3.75% x 10] has to be deducted from rent payable for March, 2020.
Would your answer change if Mr. X vacated the premises on 31st December, 2020? Also, what would be your answer if Mr. Y does not provide his PAN to Mr. X?
If Mr. X vacated the premises in December, 2020, then tax of Rs. 14,438 [Rs. 55,000 x 3.75% x 7] has to be deducted from rent payable for December, 2019.
In case Mr. Y does not provide his PAN to Mr. X, tax would be deductible @ 20%, instead of 3.75%.