The Income Tax Department has recently started issuing notices to taxpayers who claimed the House Rent Allowance (HRA) exemption without deducting the required Tax Deducted at Source (TDS) on rent payments. This move is part of the department’s effort to ensure compliance and accuracy in tax filings.
The Issue at Hand
Many salaried individuals claim HRA exemptions to reduce their taxable income. However, according to Section 194-I of the Income Tax Act, tenants who pay a monthly rent exceeding Rs 50,000 to a resident Indian landlord are required to deduct 2% TDS from the rent amount. Previously, the rate was 5% until October of the previous year.
Although it is legally required, many taxpayers did not deduct TDS when paying rent, which caused errors in their Income Tax Returns (ITR). As a result, tax officials are now checking the HRA exemption claims made in previous ITRs. Taxpayers who find any mistakes are advised to file an updated ITR by March 31 to fix the issues and avoid penalties.
Penalties for Non-Compliance
Not deducting TDS on rent can lead to financial problems. If you don’t deduct TDS on time, the Income Tax Department charges 1% interest per month on the unpaid amount from the due date. If you deduct it but don’t pay on time, the interest goes up to 1.5% per month until the payment is made. Also, if you delay submitting Form 26QC, you will have to pay a penalty of Rs 200 per day, but the total penalty cannot be more than the TDS amount.
For landlords who do not provide their PAN or whose PAN is inactive, the TDS rate can increase significantly to 20% as per Section 206AA. Non-resident Indian landlords attract a TDS rate of 30%.
Advice for Taxpayers
Tax professionals recommend people who have availed HRA exemptions without adequate TDS compliance to correct their tax returns before the deadline of March 31. Those who received a notice should consult a chartered accountant to get it properly filed and prevent large penalties.
If the landlord has already reported the rent income and paid the taxes, the tenant can avoid being marked as a defaulter by submitting a CA certificate in Form 26A.
With the tax department tightening scrutiny on HRA claims, taxpayers must ensure that their filings are accurate and complete. Taking proactive steps to correct discrepancies can prevent future legal and financial complications.
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