The Income Tax Department is more proactive than ever, utilizing information gathered from various sources to assess the accuracy of Income Tax Returns. The Department has effectively transformed its entire network into a vigilant system and is acquiring comprehensive details about an individual’s transactions throughout the year, including Fixed Deposits, Incomes earned, securities traded, Rent received, and Property sales or purchases, etc. Consequently, assesses have no option but to disclose their complete incomes.
The Disclosure of rent payment made by the Assessee for claiming HRA deduction was earlier mapped with the PAN of the Landlord, and the same started reflecting in AIS of the landlord as rent Income. Therefore, the Assessee could not disclose fake Rent as the same shall be considered as income of the Landlord.
Now, the department is invoking section 194-IB for the deduction of TDS on rent paid. The taxpayers are getting messages and notices where they have claimed deduction of HRA by declaring rent paid, but have failed to deduct the TDS on the same under section 194-IB. If you are the one who has received such notice, then this article discusses the possible course of action you may resort to.
1. Basis of issuance of Notice
The Income Tax Department selects the following method for sending Notices:
- Rent Paid Declared for Claiming HRA Deduction:
- The Income Tax Department picks the amount declared as rent paid while claiming HRA Deduction.
- As per Section 194-IB, TDS is to be deducted if the rent amount exceeds INR 50,000 per month or part of the month.
- Therefore, if rent paid to a landlord exceeds INR 6,00,000/-, then the same is selected for further validation.
- Validation with TDS Deduction:
- The IT Department cross-checks the TDS deducted by the Assessee on the rent under section 194-IB as per the filed TDS Return.
- Issue Notice:
- If no TDS is deducted by the Assessee or TDS is short deducted, then a notice is issued to the Assessee for failure to deduct TDS.
The Assessees are initially getting intimation mails and messages about checking their TDS compliance on rent paid. However, ignoring these intimations may result in notices.
2. Action to be Taken
The Assessee can take the following actions if he has failed to deduct and deposit the TDS under section 194-IB:
Read Also: TDS on Sale/Purchase of Immovable Property
2.1 If HRA deduction is claimed without any actual payment of rent (i.e., Fake rent payment)
- If you have claimed deduction for HRA without any actual payment of rent, then it is time to rectify such mistakes.
- The due date to file revised returns has expired for all earlier financial years.
- Therefore, now the Assessee only has the option to file the updated return in Form ITR-U, where the Assessee can forgo the HRA deduction and have their error rectified by paying an additional tax amount with interest.
2.2 HRA deduction is claimed against the actual rent payment
If you have made actual payment of rent but failed to deduct the TDS, then first, we need to understand the consequences of the same:
2.2.1 Consequences of non-dedication of TDS on rent paid:
- As per Section 201 of the Income Tax Act, 1961, any person who is liable to deduct TDS but has failed to do so shall be considered as an Assessee in default.
- Accordingly, the person shall be liable to pay the amount of TDS along with interest at the rate of 1% or 1.5% per month or part of the month.
- Further, as per Section 221, the Assessee in default may become liable to a penalty which shall not exceed the amount of tax in default.
- So, in case of non-dedication of TDS, the taxpayer shall be liable to pay the TDS amount, interest, and penalty.
2.2.1 Deposit the TDS Amount with applicable interest:
- Deposit TDS with interest: The Assessee has the option to deposit the applicable amount of TDS along with interest and file the Form 26QC.
- Recovery of TDS amount from Landlord: However, in such scenarios, the tenant may sometimes find it difficult to recover the tax amount from the landlord. Issues can arise if the property is already vacated.
- TDS credit to Landlord: Upon filing for Form 26QC, the TDS credit shall start reflecting in Form 26AS of the landlord. However, for FY 2023-24 and earlier years, the due date of filing of revised ITR is already expired. In such a scenario, the landlord may find it difficult to claim credit for such TDS.
2.2.2 Obtain the necessary documents from the Landlord to avoid the Assessee in Default:
- As per section 201(1) of the Income Tax Act, a payer shall not be considered as an assessee in default if the payee:
- has furnished his return of income under section 139;
- Has considered such rental income in his taxable income;
- has paid the tax due on the income declared by him in such return of income,
- Accordingly, the assessee is required to collect the following documents from the Landlord:
- Computation of Income of the relevant year;
- ITR Acknowledgment;
- A certificate from the CA to the effect that such income has been considered while filing ITR and the corresponding tax payment has been made.
- However, the tenant may still have to pay interest liability from the due date of payment of TDS till the date of payment of Income tax liability by the landlord.
2.2.3 Removal of HRA Claim shall not waive the obligation
- It is pertinent to note that the removal of HRA claim from the income tax return shall not waive the assessee from the obligation of TDS Deduction.
- If the rent payment exceeds INR 6 Lacs during the year, then the tenant shall be liable to deduct and pay the TDS amount.
- Therefore, removing the HRA claim shall not be the solution.
3. Conclusion
With Artificial Intelligence and advanced Information technology tools, the Income Tax Department is well informed about all the transactions carried out by the assessee during the year. The employees are required to ensure that, before claiming HRA deduction, the provisions of Section 194-IB are duly complied with. Further, for earlier years, the tenants are required to take suitable action well in time so that intimation and messages from the IT department do not get converted into notices.
