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How To Calculate TDS On Rent?

How To Calculate TDS On Rent?

calculate TDS on rent

It is a universal truth that only people with extraordinary luck find a home with reasonable rent and a good landlord. But even if they get this amazing package all-together, they can’t run away from other unseen elements such as tax deduction. Such elements make the whole process more complicated and unnerving.

The word “rent” arrives like a trouble knocking on the door every month. The addition of terms like TDS or Tax Deducted at Source and its calculation under Section 194-IB further leaves common people baffled. But not anymore!

To ensure you don’t get tensed with TDS next time, we have elaborated almost everything about the process, from calculation process to plans that help save tax. Scroll down to find out more:

What is Section 194I- TDS on Rent?

Let’s begin with the basic understanding of TDS under the Income Tax Act. As per the 194-I section of Income Tax Act, 1961, a person (not being an Individual or HUF) who is responsible for paying of rent is liable to deduct 10% of the annual rent as tax deducted at source, if the annual rent exceeds Rs. 2.4 lakhs.

Earlier, this TDS limit for deduction of tax on the rent was Rs. 1.8 lakhs. However, it was increased to Rs. 2.4 lakhs with effect from the financial year 2019-2020.

What is “Rent” as per the IT Act?

Many people often consider only the rent of a house when they think about the TDS deduction. However, there is more to the definition of rent when it comes to the Income Tax Act. Section 194-I gives an elaborate definition of rent as a payment for the following things:

  • A land
  • Any building whether residential or commercial
  • Machinery
  • Furniture
  • Equipment such as computers systems, networks
  • Plant for an industrial or manufacturing facility

Should You Deduct TDS on Rent?

Currently, a person who is not an individual or a HUF is liable to deduct TDS on rent of more than Rs. 2.4 lakhs.

In case you belong to the Individual or HUF category, you can deduct the TDS at 5% if the rent that you are giving exceeds Rs. 50,000 per month.

TDS Deduction Rates And Exceptions:

Owing to the ongoing coronavirus pandemic and resultant lockdown, the Indian government has offered relief in TDS rates across particulars, including the TDS on rent. The new rates will be applicable for the period from 14.05.2020 to 31.03.2021.

Below is the table for new TDS deduction rates:

S. No. Income Tax Act Nature of Payment Existing TDS Rate Revised TDS Rate from 14/05/2020 to 31/03/2021
1 Section 194-I (a) Rent for Plant & Machinery 2% 1.5%
2 Section 194-I (b) Rent for Land or building or furniture or fitting 10% 7.5%
3 Section 194 – IB:  Rent paid by an individual or HUF not covered under section 194I (w.e.f from 01.06.2017) 5% 3.75%

Note: this benefit of the revised rates is applicable only if you are an Indian resident.

Moving forward to exceptions, there are certain conditions in which TDS is not deductible under Section 194-I. These include:

  • When the annual rent amount does not exceed Rs. 2.4 lakhs.
  • When the rent is made to the government and entities whose income is exempt from income-tax under clauses (20) and (20A) of Sec.10 of the Income-tax Act.
  • When the tenant is an individual or HUF and the income from the profession does not exceed Rs. 50 lakh. This also applies to the case if they own a business having a turnover of less than Rs. 1 crore during the financial year.
  • When there is a sharing of film exhibition between the film exhibitor who owns the theatre and film distributor.

How to Calculate TDS on Rent?

Now, coming back to the eternal question – how can one calculate the TDS on rent? Let us understand this with a simple example.

Mahesh pays a rent of around Rs 40,000 to his landlord every month. Now, as per the new revised TDS rate, Mahesh will have to deduce 7.5% of the total amount.

But for April and May 2020, old TDS rates will apply.

Here’s how much he’ll need to deduct:

  • TDS on rent (April 2020 and May 2020): Rs. 8,000 (10% of the rent for the first two months)
  • TDS on rent (June to March 2020): Rs. 30,000 (7.5% of the remaining 10 month’s rent)
  • Total TDS for financial year 20-21 will be: Rs. 38,000 (A + B) (You will need to deduct Rs. 38,000 from the rent of March 2020)

With this new revision, you too will be able to save money during the crisis. In addition to the government’s relief on TDS, you can also look for other tax saving instruments that can help you save your money legally.

Effect of TDS on Tenant & Owner

TDS deduction on rent simply reflects on the owners ITR and a deduction on total tax liability follows. So, TDS deducted by tenant reduces your overall income tax liability.

As a tenant, however, you need to be careful with the deducted money and ensure that you can deposit this money to the revenue department. This deduction does not add to your taxable income, so there is no change in your usual tax liability.

Tax Saving Options

TDS deduction doesn’t affect your tax liability much. So, you will still need traditional modes of saving taxes. With proper tax planning, you can also reduce the burden of taxes while maximizing savings. There are plenty of tax-saving instruments that ensure liquidity and better returns.

Here are some options for tax saving under the Income Tax Act:

Section 80C

It is by far the most popular section to save tax and plenty of investment options to use. The section offers to reduce your taxable income by up to Rs 1.5 lakh. Some of the most useful tax-saving instruments include…

  • Unit Linked Insurance Plans: Great for long-term tax-free wealth creation, providing safety to your child’s education goals and boost your retirement corpus
  • Public Provident Fund (PPF) & Sukanya Sammriddhi Yojana (SSY): One of the safest long-term investment option
  • National Pension Scheme (NPS): Geared for retirement goal, offers equity exposure and dynamic asset allocation. But only works for retirement as lock-in period ends only when you are 60.
  • Equity Linked Savings Scheme (ELSS): Pure equity mutual funds with three-year lock-in and tax-exemption.

Other sections where you can save additional tax:

  • Section 24: Interest paid on a home loan up to Rs. 200,000. Helps reduce your tax from house property. So, this is an important section if you are the owner of the let-out property.
  • Section 80E: You can save tax on the interest paid on an education loan.
  • Section 80G: As per this section, you are eligible for a tax deduction on the amounts given as donations to social organizations and NGOs.

While TDS is just one more transaction in your rental deal, saving income tax is more compelling cause for your attention. So, deduct TDS or receive rent do not miss out on the tax-saving investments to grow your wealth.

Speak to an insurance specialist now!

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