Claimed HRA but Skipped TDS? IT Department Sends Notices, Penalties Explained

Income taxpayers claiming House Rent Allowance (HRA) exemptions should be aware. The Income Tax Department is sending notices to those who claimed HRA in their tax returns but did not deduct the required Tax Deducted at Source (TDS) on their rent payments.

As per Section 194-1 of the Income Tax Act, if a tenant pays more than Rs. 50,000 per month as rent to an Indian landlord, they must deduct 2% TDS from the rent (earlier 5% until October).

According to a report by a website, tax officials are verifying HRA claims made in previous Income Tax Returns (ITR). Taxpayers who are required to revise their returns will have until March 31 to submit a revised ITR and rectify the mistakes.

HRA claims without deducting the required TDS on rent are considered invalid. The TDS requirement is based on monthly rent, not the HRA exemption amount. Even if the rent is more than Rs. 50,000 for just one month, TDS must be deducted.

Tenants must include the PAN of the landlord in the TDS challan. If the PAN is missing or inactive, the TDS rate increases to 20% under Section 206AA. For Non-Resident Indian NRI landlords, the applicable will be 30%.

When should TDS be paid?

The TDS payment schedule varies depending on the duration of tenancy. For tenancies that leave a vacancy at mid-year, payment is within 7 days from the close of the month. For yearly tenancy, payment is required within the period of 30 days from the close of the financial year, regardless of the frequency of payment.

• For example, with a July-starting yearly agreement, TDS for nine months until March can be deducted from the rent of March, payable by April 30.
• For the vacancy of January, TDS must be deducted from January’s rent, payable by February 7.
• Tenants must submit Form 26QC through the income tax e-filing portal and provide Form 16C to landlords within 15 days of the filing deadline.

What Happens If TDS is Not Deducted?

Not following TDS rules can lead to financial penalties.

• 1.5% monthly interest applies on late payments until settled.
• If TDS is not deducted or paid late, a 1% monthly interest applies to the pending amount.
• Late filing of Form 26QC: Rs. 200 per day penalty under Section 234E, up to the total TDS amount.

What If You Get a Notice from the Income Tax Department?

• Wrong HRA claims: File an updated ITR before March 31 to avoid extra penalties.
• If TDS was not paid on a genuine claim, the entire amount, along with penalties, has to be paid. But Section 201 can give relief if the landlord has reported rental income and paid taxes (as reflected in Form 26AS).
• To prevent being declared a defaulter, tenants must get a Chartered Accountant’s certificate (Form 26A).
• If verification is not feasible, all outstanding taxes and penalties have to be paid