Paying Rent Above ₹50,000? Why HRA Alone Won’t Save You from a Tax Notice

Many tenants pay rent on time, file their income tax returns properly, and even claim House Rent Allowance (HRA). Yet, some still receive unexpected tax notices questioning their rent payments. The reason? A lesser-known Tax Deducted at Source (TDS) rule that applies to rent payments above ₹50,000 per month.

Why Does the Income Tax Department Flag High Rent Payments?

If you are paying more than ₹50,000 in rent and claiming HRA without deducting TDS, the Income Tax Department’s system may flag your return. This happens due to two main reasons:

1. Your rent details do not match official records.

2. You have not deducted TDS as per Section 194-IB of the Income Tax Act.

Who Needs to Deduct TDS on Rent?

As per tax rules, individuals and Hindu Undivided Families (HUFs) who are not subject to a tax audit must deduct TDS at 5% on rent above ₹50,000 per month. This rate will be reduced to 2% from October 2024.

Tenants must:

• Deduct TDS in the final month of the financial year or tenancy.

• File Form 26QC and issue Form 16C to the landlord.

Even if your employer provides an HRA exemption, this TDS responsibility remains with you.

Example Calculation

• Monthly Rent: ₹55,000

• Annual Rent: ₹6.6 lakh

• TDS @ 5%: ₹33,000

You need to deduct this amount and deposit it with the government.

What Happens If You Don’t Deduct TDS?

Failing to comply with this rule can lead to penalties and interest charges:

• Late Fees: ₹200 per day under Section 234E (up to the TDS amount).

• Interest Charges: 1% per month from the due date.

Over two years, these charges could exceed ₹70,000, making it an expensive mistake.

Common Myths and Exceptions

• Myth: If your HRA exemption is below ₹6 lakh annually, you don’t need to deduct TDS.

• Fact: The TDS rule applies based on monthly rent, not HRA exemption claims.

• Exception: If your landlord has already reported the rental income and paid taxes, penalties may be waived upon submitting Form 26A (CA-certified) through TRACES.

• Multiple Landlords: If you split rent across landlords and pay below ₹50,000 to each, you don’t need to deduct TDS. However, proper documentation is necessary.

How to Stay Compliant and Avoid Notices

• Deduct TDS at 5% (2% from October 2024).

• File Form 26QC before the due date.

• Issue Form 16C to your landlord.

• Maintain clear records of rent payments and agreements.

By following these steps, you can ensure compliance and avoid unnecessary tax penalties.

Conclusion

Many tenants assume HRA is enough, but ignoring the TDS rule can be costly. By deducting TDS, filing Form 26QC, and issuing Form 16C, you can stay compliant and avoid penalties.

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