Taxpayers can heave a sigh of relief with higher tax deduction limit

Date : 20/09/2019
Read: 4 mins

The threshold limit for the deduction of TDS on rental income and interest income has been significantly increased.

Taxpayers can heave a sigh of relief with higher tax deduction limit

Tax Deducted at Source (TDS) aims to simplify the collection of income tax for the government by collecting it at the very source of income. The Interim Budget of 2019 proposed an increase in the TDS threshold on interest other than interest on securities and the TDS threshold on rent. These amendments have been tabled with a view to benefit people who may have some amount of interest or rental income but otherwise fall below the tax bracket.

TDS on rental income: The recent amendment made in the threshold limit for TDS on rent has effectively increased the limit from Rs. 1,80,000 to Rs. 2,40,000 for a financial year. Thus, according to the revised Section 194I, TDS will be deducted only if the rental income of the resident is above Rs. 2,40,000 in a financial year. It must be noted that this is applicable only for rent paid by non-individuals, like corporate entities. If an individual is letting out his or her property to another individual, the Section is not applicable. Besides, if the tenant is a company, and the rent is less than Rs. 20,000 per month, the company doesn’t need to deduct TDS on the rent paid. This rental income can be against property as well as against machinery, plant or equipment. However, the TDS rate for rental income on machinery, plant or equipment is 2%, while it is 10% for land or building (including factory building) and land appurtenant to the building. Although the Section is applicable for non-individual tenants only, it also becomes applicable for individuals and Hindu Undivided Families (HUF) whose total sales, gross receipts or turnover exceeds the monetary limits of Section 44AB (limit of tax audit). This Section is, however, not applicable if the rent is paid to a real estate investment trust.

The amendment benefit of Section 194I goes out specifically for people who are earning and/or are dependent on their rental income but fall below the overall income-tax taxable limit. For someone with no other income, a rental income of over Rs. 1,80,000 means a portion of his or her income remains deducted as tax and which has to be claimed later, as a tax refund. The increase in the threshold limit spares those people whose taxable income falls under the limit and are earning up to Rs. 2,40,000 in a year through rent.

TDS on income by way of interest other than "Interest on Securities": TDS under Section 194A is deducted on interest income earned by any entity, be it individuals, HUFs, companies or firms. However, only interest payments made to resident Indians are covered under this Section. It is important to remember that the interest referred to by this Section can be interest on fixed deposits, recurring deposits, and any other forms of deposit or on a loan taken by a company or a firm. Not everyone is required to deduct TDS on interest income. Payments made by banks and financial companies or firms are subject to TDS under this Section. The Section also excludes individuals and HUFs unless the individual is subject to a tax audit under Section 44AB. In other words, an individual paying interest to a bank for a loan taken is not required to deduct TDS on the interest paid. But if a company is paying the interest to the bank, this section becomes applicable.

The amendment benefit of Section 194A goes out to small depositors and non-working spouses who are earning interest income but aren’t necessarily liable to pay income tax. The earlier limit for the deduction of TDS on interest income was Rs. 10,000. If someone was earning more than the limit as interest income but has an expected total income below the tax bracket, he or she could submit Form 15G to the bank to avoid TDS deduction. If the form is not submitted, TDS would inevitably be deducted and the person falling below tax bracket would have to apply for a tax refund. The recent amendment saves small depositors of this trouble. With the limit raised to Rs. 40,000, someone with a fixed deposit of over Rs. 5,00,000 need not worry about TDS deductions, on interest earned at, say, an interest rate of 7.5%.

Although the threshold limits for both the TDS categories have increased, the rate of deduction will remain the same for now. And, with the income tax bracket itself raised significantly from Rs. 2.5 lakh to Rs. 5 lakh, it makes perfect sense to raise the TDS limits on these incomes as well.