Failed to Deduct TDS on Rent? Income Tax Department Taking Action

The Income Tax Department is forwarding tax notices to the salaried taxpayers who claimed for House Rent Allowance (HRA) but did not pay Tax Deducted at Source (TDS) on the payments of rent in a previous financial year. The notice asks all these taxpayers to examine the HRA claim, and if it’s wrong, then before March 31, 2025, make amendments to their tax return.

For people who genuinely qualify for HRA, the problem isn’t about proving that their claim is real. Instead, the concern is that they might be held responsible for not deducting TDS on rent, said a chartered accountant from Bangalore.

Another Chartered Accountant has said those individuals who have claimed a genuine HRA claim are not required to file any amended return.

The department’s email indicates that if TDS was not deducted, the HRA claim might not be valid, encouraging taxpayers to review their claims.

TDS on Rent: What the Law Says?

Residents must reduce the TDS of 2% if their monthly income is more than Rs. 50,000, as per India’s tax laws—the landlord should be a tenant of India. In case the landlord is a non-resident Indian (NRI), the TDS rate will be increased to 31.2%, not relating to the rental value.

After reduction, residents must pay the amount using Form 26QC by the seventh of the following month. Failing to deposit/pay/deduct TDS on time will lead to the preferred consequences. For non-deduction, 1% of the monthly interest rate is implemented, while if unable to deduct the TDS value, it charges an interest rate of 1.5% per month.

An expert explained that for resident landlords, the TDS rate is low and applies only if the rent is more than Rs.50,000 per month. It must be deducted either in the last month of the tenancy or in March (the last month of the financial year). If there is a delay in filing the e-TDS return, a penalty of Rs.200 per day is charged until it is filed. However, the maximum penalty cannot be more than the TDS amount itself.

TDS on rent has been required since the financial year 2018, but many tenants still don’t follow the rule, mainly because they are not aware of it. Penalties and interest are only applied when the tax department detects a mistake. This means that tenants who don’t comply are always at risk of facing penalties later. Since the tax department hasn’t strictly enforced the rule on a large scale, many tenants still don’t realize they need to deduct TDS on rent.

What Should You Do to Remove the Penalty?

If you are receiving a tax notice from the income tax department, it means you are considered a defaulter under Section 201, which deals with all the possible consequences of not paying or reducing TDS. However, there are some ways through which you can come out of the problem.

An expert said that, according to Section 201, if TDS was not deducted on rent, the tenant may not face penalties if they can show the landlord has already paid tax on the rent received.

Tenants who have received the tax notice must file form 26A and obtain a CA certificate confirming that the landlord has declared the rent as income and paid the required taxes. This will help the tenant avoid interest charges and daily penalties for late filing. However, TDS officers can still choose to impose a penalty equal to the TDS amount, even if proof has been provided.

If a tenant files Form 26QC and pays TDS only after getting a notice, they will have to pay interest and late fees. This is a bigger problem for tenants whose landlords haven’t reported the rent as income. Without a CA certificate proving that the landlord paid tax, the tenant is fully responsible for the unpaid TDS.

Those who claimed false HRA should count these notices as final warnings from the tax department. Since the tax department is already aware, it’s safer to file an updated return now rather than risk a detailed investigation later.

In April 2024, the CBDT noticed differences between large rent payments and the income reported by landlords. However, they clarified that past cases wouldn’t be reopened automatically. An expert explained that with these new notices, taxpayers are being encouraged to check their records and fix any mistakes—either by paying TDS with interest or by adjusting their HRA claims.