Paying Rs 55,000 rent on time could not save salaried taxpayer from Rs 1 lakh penalty for missing TDS, know why

Economic Times

29-07-2025

ET Online (Representative image) This salaried individual was asked to pay a tax penalty of Rs 1 lakh because he was paying Rs 55,000 as monthly house rent and did not follow TDS compliance Recently , Abhishek, a salaried person who was living in a rented house, was asked to pay a tax penalty of Rs 1 lakh by the income tax department. Even though this penalty was discretionary, it was applied in his case because he was paying a rent of Rs 55,000 per month, but didn't comply with the tax deducted at source (TDS) rules. He neither deducted TDS nor submitted the TDS challan cum return statement.
Sujit Bangar, the founder of Taxbuddy.com, handled this case and shared his insights with ET Wealth Online: 'Abhishek, a salaried person, was asked to pay a penalty of Rs 1,00,000 by income tax. His mistake? He paid Rs 55,000/month in rent but didn't deduct TDS. As per section 271H of Income Tax Act, 1961, if a person fails to comply with TDS provisions and doesn't file a statement of TDS, there can be a penalty of minimum Rs 10,000 which can be extended to Rs 1 lakh. In this case , Abhishek paid rent of Rs 55,000 per month but didn't deduct TDS and also didn't file the TDS statement (challan).'
Also read: Taxpayer wins Rs 69-lakh unexplained investment income tax case in ITAT Mumbai on these technical grounds When is a tenant required to deduct TDS on house rent? As per Section 194-IB of the Income Tax Act, 1961, if you are an individual or HUF paying over Rs 50,000 in monthly rent to an Indian resident,you need to deduct 2% as TDS and file a TDS challan to make the payment. Just so you know, the TDS deduction rate for these rental payments was 5% before October 1, 2024.Here's what tenants need to do: Deduct 2% TDS and file Form 26QC online. Tenants will get Form 16C once they file Form 26QC. Tenants must give the Form 16C to the landlord. O. P. Yadav, Tax Evangelist at Prosperr.io & Former Principal Commissioner (Income-Tax) explains: 'In the case of rent paid to a non-resident landlord, TDS is to be deducted under Section 195 at the rate of 30% plus 4% cess, irrespective of the rent amount, at the time of payment or credit,whichever is earlier.
For resident landlords, the deducted TDS is to be deposited using the Form 26QC (challan-cum-statement).
In contrast, for non-resident landlords, the TDS must be deposited using Challan Form 281 and reported through a quarterly TDS statement in Form 27Q.' When will a tenant deduct TDS on house rent? The TDS on house rent must be deducted either at the end of a particular financial year, before you make the monthly rent payment, on the date on which the property is vacated, or when the rent agreement is terminated with the landlord, whichever comes first.
Example 1: If a tenant has a rent agreement with a landlord for 11 months, say from September 2023 to July 2024, then the tenant can either deduct TDS on a monthly basis and deposit the same every month or deduct once from the March's rental payment. The TDS will be deducted for the rent paid i.e. from September to March 2023.
Example 2: If the tenant is vacating the property in August 2023, then he will be required to deduct TDS before paying rent. Here rent will be deducted from April to August 2023 for 5 months. Tenants can be jailed for non-compliance of house rent TDS provisions? Yadav who is the former principal commissioner of Income Tax says that regular salaried individuals don't need to worry about imprisonment for non-compliance with house rent TDS provisions.Yadav explains: 'Prosecution under Section 276B, applies when TDS is deducted but not deposited within the prescribed time. The Section provides for rigorous imprisonment ranging from 3 months to 7 years, along with a fine. However, as per CBDT guidelines dated 09/09/2019, prosecution is generally considered only where the TDS default is up to Rs 25 lakh and the delay in payment is 60 days or more, unless the defaulter is a habitual offender. Importantly, such offences are compoundable under the CBDT's compounding guidelines.'
Also read: Income tax offences: To avoid jail term when can you use income tax compounding provisions; CBDT issues new FAQ What are the four transactions where even a salaried individual has to deduct TDS? Bangar shares a table to show when a salaried individual is required to deduct TDS: Transaction Type Threshold TDS rate Section House rent Rent is more than Rs 50,000 per month 2% 194IB Real estate house purchase More than Rs 50 lakh 1% 194IA Contractor/Professional payments Annual payment more than Rs 50 lakh 2% 194M P2P Crypto payments Annual payments more than Rs 50,000 1% 194S Source: Taxbuddy.com How much penalty can be levied if a tenant failed to follow TDS provisions for house rent? Experts that ET Wealth Online talked to mentioned there are two types of penal interest a tenant might face if they failed to deduct TDS on house rent. The first kind is when the tenant has deducted the TDS but did not deposit it with the government, that is 1.5% per month. The second type is the tenant neither deducted the TDS nor deposited it -- which incurs 1% penalty per month.
Situation 1: Tenant did not deduct TDS on house rent despite the house rent being above Rs 50,000 per month (1% Interest) Chartered Accountant Mohit Gupta, partner, PNAM & Co. LLP explains: 'This TDS deduction from the house rent is to be made once in the financial year, at the time of credit or payment of the last month's rent. However, the Penalty under Section 271H may be waived if TDS is deposited and Form 26QC is filed voluntarily before the tax notice is issued.' Component Explanation FY 2022–23 FY 2023–24 Total TDS Liability @5% Rs 7.2L x 5% Rs 36,000 Rs 36,000 Rs 72,000 Interest u/s 201(1A) 1% p.m. from due date of deduction to actual deduction 24 months 12 months — Computation Interest = Rs 36,000 × 1% × 24 = Rs 8,640 Rs 36,000 × 1% × 12 = Rs 4,320 Rs 8,640 Rs 4,320 Rs 12,960 Late filing fee u/s 234E Rs 200/day from due date of filing Form 26QC till actual filing 730 days × Rs 200 = Rs 1,46,000 365 days × Rs 200 = Rs 73,000 Rs 2,19,000 Penalty u/s 271H(Discretionary) Rs 10,000 to Rs 1,00,000 if Form 26QC not filed Up to Rs 1L Up to Rs 1L Up to Rs 2L Prosecution (unlikely) Applicable only if willful default, not in routine salaried cases Not likely Not likely — Source: PNAM & Co. LLP
Situation 2: Tenant has deducted TDS for FY 2022–23 and FY 2023–24 but missed depositing the TDS with the government within the due date but paid in April 2025. (1.5% interest) Yadav, explains: Particulars FY 2022–23 FY 2023–24 Yearly rent Rs 7,20,000 Rs 7,20,000 TDS Rate @5% @5% TDS Liability Rs 36,000 Rs 36,000 Date of rent paid for last month of FY 25/03/2023 25/03/2024 Date of deposit of TDS 30/04/2025 30/04/2025 Delay in deposit 25 months 13 Months Interest u/s 201(1A) @1.5% per month Rs 13,500 Rs 7020 Late payment fee u/s 234 E @ Rs 200/- per day - restricted to TDS Rs 36,000 Rs 36,000 Penalty u/s 271H Minimum Rs 10,000Maximum Rs 1,00,000 Minimum Rs 10,000Maximum Rs 1,00,000 Source: Prosperr.io What happens if a tenant is sharing an accommodation with another person whose rent is Rs 60,000 per month? Gupta explains: If two tenants share an accommodation with a total rent of Rs 60,000 per month, they can legally avoid deducting TDS under Section 194-IB, provided certain conditions are met.
The Rs 50,000 monthly threshold for TDS under this section is applied per tenant, not per property. Therefore, if each tenant pays Rs 30,000 directly to the landlord from their own bank account, and their respective obligations are clearly documented—either through separate rental agreements or a joint agreement specifying the rent split—then no TDS is required from either tenant.
However, if one tenant pays the full Rs 60,000 and the other reimburses their share later, the tenant making the full payment becomes liable to deduct TDS on the entire amount.
Similarly, if the rental agreement is solely in one tenant's name or there's no clear documentation of individual rent shares, the tax department may treat the full rent as paid by one person, triggering TDS liability.