Section 194IB of the Income Tax Act: TDS on Rent by Individuals and HUFs

Section 194IB of the Income Tax Act, 1961, was introduced to widen the scope of Tax Deducted at Source (TDS) on rent, specifically targeting high-value rental payments made by individuals and Hindu Undivided Families (HUFs) who are not covered under Section 194I (i.e., those whose accounts are not subject to tax audit). This provision aims to bring a significant portion of rental transactions into the tax net, improving compliance and revenue collection.

Applicability of Section 194IB

Section 194IB applies to any person, being an individual or a Hindu Undivided Family (HUF), who is responsible for paying to a resident any income by way of rent, where the rent paid or payable **exceeds fifty thousand rupees (₹50,000) per month or part of a month.**

Key Conditions for Applicability:

• Deductor's Status: The deductor must be an individual or a HUF. Importantly, this section applies to those individuals and HUFs whose total sales, gross receipts, or turnover from business or profession **does not exceed** the limits specified under Section 44AB (Tax Audit) in the immediately preceding financial year. If they are covered by Section 44AB, then Section 194I would apply instead.
• Payee's Status: The payee (landlord/lessor) must be a **resident of India**.
• Rent Amount: The monthly rent paid or payable must be **more than ₹50,000**.
• No TAN Required for Deductor: Similar to Section 194IA, the individual or HUF deducting TDS under this section **is not required to obtain a TAN (Tax Deduction and Collection Account Number)**. Their PAN is sufficient for compliance.

What Constitutes 'Rent'?

The definition of "rent" for Section 194IB is the same as under Section 194I, meaning any payment, by whatever name called, under any lease, sub-lease, tenancy, or any other agreement or arrangement for the use of (either separately or together) any:

1. Land
2. Building (including factory building)
3. Land appurtenant to a building
4. Furniture or Fittings
5. Plant, Machinery, or Equipment

TDS Rate and Deduction Timing

TDS Rate: The rate of TDS under Section 194IB is **5%** of the rent paid or credited.

• Higher Rate for Non-PAN: If the landlord (payee) does not furnish a valid Permanent Account Number (PAN), TDS will be deducted at a higher rate of **20%**, as per Section 206AA, subject to the maximum of the rent payable for the last month of the financial year or tenancy, as the case may be.
• No Surcharge or Health & Education Cess is applicable on this TDS rate.

Time of Tax Deduction: Once a Year or at Last Payment

Unlike most TDS sections requiring monthly deductions, Section 194IB specifies a unique deduction mechanism:

• TDS is to be deducted **once in a financial year**, at the time of credit of rent for the last month of the financial year or the last month of tenancy (if the property is vacated earlier), whichever is earlier.
• The TDS is to be deducted on the **total amount of rent paid/credited during the entire financial year or part thereof.**

Example: If monthly rent is ₹60,000, and the tenancy runs from April 2024 to March 2025, the total rent for the year is ₹7,20,000. TDS of 5% on ₹7,20,000 (i.e., ₹36,000) will be deducted from the rent payment of March 2025. If the tenant vacates in January 2025, the TDS would be deducted from the January rent payment, on the cumulative rent paid till then.

Exemptions from TDS under Section 194IB

TDS is not required in the following scenarios:

• If the monthly rent paid or payable **does not exceed ₹50,000**.
• If the deductor is a person whose accounts are subject to tax audit under Section 44AB in the immediately preceding financial year (in which case Section 194I would apply).
• When the landlord (payee) is a Non-Resident Indian (NRI). In such cases, Section 195 of the Income Tax Act applies, which has different rules and rates.
• Payments made to the Government (Central or State).

Responsibilities of the Tenant (Deductor)

The individual or HUF tenant deducting TDS under Section 194IB has specific compliance obligations:

• Obtain Landlord's PAN: It is mandatory for the tenant to obtain the PAN of the landlord. Without it, TDS must be deducted at 20%.
• Deduction of Tax: Deduct TDS at 5% (or 20%) from the last month's rent payment of the financial year or tenancy.
• Deposit of Tax (Form 26QC): The deducted TDS must be deposited to the credit of the Central Government using **Form 26QC**. This is a Challan-cum-Statement form for payment of TDS on rent by specified tenants.
  • Due Date: The TDS must be deposited within **30 days from the end of the month in which the deduction was made**.
  • Online Payment: Form 26QC can be filled and payment made online through the Income Tax e-filing portal.
  • Multiple Parties: If there are multiple tenants or landlords, each tenant will need to file Form 26QC for their share of the rent and each landlord. For instance, if two tenants pay rent to one landlord, each tenant will file Form 26QC. If one tenant pays to two landlords, the tenant will file two Form 26QCs (one for each landlord).
• Issuance of TDS Certificate (Form 16C): After depositing the TDS, the tenant is required to issue a TDS certificate in Form 16C to the landlord. This certificate confirms the deduction and deposit of tax.
  • Form 16C can be downloaded from the TRACES website (TDS Reconciliation Analysis and Correction Enabling System).
  • Due Date: Form 16C must be issued to the landlord within **15 days** from the date of uploading Form 26QC on the TRACES portal.

Penalties for Non-Compliance: Failure to comply with the provisions of Section 194IB can lead to significant penalties and interest for the tenant:

• Interest for Non-Deduction or Late Deduction: 1% per month or part of a month from the date on which TDS was deductible until the date it is actually deducted.
• Interest for Non-Deposit or Late Deposit: 1.5% per month or part of a month from the date TDS was deducted until the date it is actually deposited to the government.
• Late Filing Fee (Section 234E): ₹200 per day for delay in filing Form 26QC, subject to a maximum of the TDS amount.
• Penalty for Non-Filing or Incorrect Information (Section 271H): A penalty ranging from ₹10,000 to ₹1,00,000 may be levied for failure to file Form 26QC or for furnishing incorrect information in it.

Taxability for the Landlord (Payee)

The rent received by the landlord, even after TDS deduction, remains taxable income. This income is generally taxable under the head "Income from House Property" (for land/building) or "Profits and Gains from Business or Profession" or "Income from Other Sources" (for plant, machinery, equipment, furniture, if not part of business). The landlord must report the full gross rent when filing their Income Tax Return (ITR).

The TDS deducted by the tenant can be claimed as a credit against the landlord's final tax liability. The landlord can verify the TDS credit in their Form 26AS (Annual Tax Statement) and reconcile it with the Form 16C provided by the tenant. This credit helps offset the final tax payable or may lead to a tax refund.

Conclusion

Section 194IB significantly broadens the ambit of TDS on rent, bringing many individual and HUF tenants into the compliance framework for high-value rental payments. Despite not requiring a TAN, the compliance steps involving Form 26QC and Form 16C are crucial. Both tenants and landlords must be fully aware of their obligations and rights under this section to ensure smooth transactions, proper tax accounting, and avoidance of penalties. Diligent adherence to these provisions contributes to better financial record-keeping and tax discipline in the real estate sector.