Getting a refund of excess TDS on rent deposited by tenants is harder than it's supposed to be
It's that time of the year when taxpayers start downloading the Annual Information Statement (AIS) and Form 26AS to file their income tax returns (ITR).
AIS is a detailed summary of a taxpayer's information provided in Form 26AS, which details the amounts of tax deducted at source (TDS) or tax collected at source (TCS) from various income streams, apart from the advance tax/self-assessment tax paid and high-value transactions.
Recently, many landlords were taken by surprise while carrying out this exercise in respect of their rental incomes. They found that the amount of TDS credit on their rental incomes in Form 26AS was substantially lower than what was deducted and deposited by their tenants.
Individual tenants paying rent in excess of ₹50,000 per month were required to deduct 5% as TDS and deposit the amount with the exchequer under Section 194IB of the Income Tax Act. This TDS rate was reduced to 2% with effect from 1 October 2024.
In many cases, due to lack of awareness about the rate change, tenants deducted and deposited TDS at 5% for FY25 through their annual challan-cum-TDS statement prescribed in form 26QC.
Also Read | Details on rent, home loan, TDS: ITR forms seek more disclosures this year
Ideally, as per the law, the full TDS credit of the actual tax amount deducted and deposited by tenants (even if higher than the applicable rate) should be reflected in Form 26AS. The excess TDS credit can be claimed by the landlords while filing their ITRs.
However, TDS credit of only 2% is reflected in Form 26AS even though the tenants had deducted and deposited TDS of 5%. This appears to be due to a glitch in the TRACES utility, which limits the availability of TDS credit to the extent of 2% only.
Refund applications
This faulty TDS utility is causing undue hardship to landlords and tenants because getting a refund is not easy. Taking cognisance of the problem, the Income Tax Department's Centralised Processing Centre (CPC) in Bengaluru has been sending mails to deductor tenants, prompting them to claim refunds of the excess TDS deposited by them by applying online in Form 26B. A link containing a note on the step-by-step procedure for filing Form 26B is also provided.
To claim the refund of excess TDS amount, tenants should log in to the TRACES website. They need to click on 'Request for Refund' under the 'Statements/Forms' tab and select the reason 'I have made an excess payment of tax by mistake" from the drop-down list.
They then need to add the relevant challan 26QC and fill in details including acknowledgement number, financial and assessment years, date and amount of TDS deposit, BSR code, and challan serial number. The claimable refund amount of excess TDS gets auto populated in Form 26B. They then add their bank account details to get the refund.
Also Read | TDS on rent and contract work: How small taxpayers can avoid penalties
The last segment of Form 26B contains certification to be provided by applicant tenants that the refunded amount shall not be claimed as TDS credit and there is no outstanding TDS demand in their names. Applicants finally need to e-verify Form 26B, either through their digital signatures or by Aadhaar-based OTP verification and submit it online.
The guidance note suggests that applicant tenants will automatically get refunds of excess TDS amounts in their bank accounts after e-filing their application in Form 26B. But, in reality, when tenants e-file Form 26B, a message appears, directing them to take a printout of the Form 26B acknowledgement and send it to the jurisdictional TDS officer for further verification.
Lengthy checklist
When applicants send such application acknowledgements to the officer concerned, they are asked to furnish numerous other records and documents. These include the rental agreement, bank statement for the entire year, evidencing payment of rent and deposit of TDS, challan-cum-statement in Form 26QC, copy of the PAN card, and a cancelled cheque.
The applicant tenants are further asked to submit a notarised indemnity bond on stamp paper of ₹100, undertaking to indemnify the Income Tax Department against any probable losses and demands arising out of such refund claims. Even after providing the plethora of records and documents, granting the refund is still at the discretion of the jurisdictional TDS officer.
Also Read | Claimed HRA but skipped TDS on rent? The taxman wants answers
Article 265 of the Constitution of India mandates that no tax can be collected except with the authority of law. So, the onus of refunding the excess tax amount should have been on the revenue department. Instead, it has been converted into an onerous task for tenants who have to run from pillar to post to get their otherwise Constitutionally guaranteed refunds.
Mayank Mohanka is founder of TaxAaram India and a partner at S.M. Mohanka & Associates.
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