Deduct taxes or face the consequences: Things to remember while paying rent to an NRI landlord

Renting a house in India involves legal requirements which the tenant must fulfil. However, if renting from an NRI, you must meet this additional requirement as per Section 195 of the Income Tax Act 1961.

Paying rent to an NRI

Renting a house or a property in India is common for most people. Renting from a resident individual is a fairly easy process as the tenant must pay the rent on time to the owner. However, in the case that a tenant is renting from an NRI, there are certain legal obligations which must be fulfilled to avoid legal troubles.

As per the Income Tax Act 1961, section 195, any individual paying an NRI must deduct TDS from the rent, and the tenant is liable to ensure that the TDS is being deducted. The tenant will have to face legal consequences if the TDS is not deposited to the tax department. 

How to determine if the tax is applicable?

As per the Indian Income-tax law, the tenant tax is applicable if the landlord is an NRI. Irrespective of other factors about the landlord and tenant agreement, the tax must be deducted while paying the rent. The tax must be deducted even if the rent is paid in cash. 

What is the rate at which the taxes must be deducted?

The rate at which the taxes have to be deducted will depend upon the income of the NRI landlord. The basic TDS, which has to be removed by the tenant, is 30 per cent. However, the tax can be increased as per applicable surcharge and cess. This surcharge and cess depend on the amount of rent paid and the income of the NRI landlord. A maximum tax deduction of 42.744 per cent can be levied on the rent paid to the landlord.

The tenant and the landlord can file an application to lower the TDS rate with the Assessing officer. 

Also read: Maximize HRA benefits and save tax on rent!

How can the tenant comply with the provisions of the law?

The tenant can comply with the provisions of the law by taking the following actions:

  1. Deducting the TDS before crediting the rent to the account of the NRI landlord.
  2. Obtaining the TAN (Tax Deduction Account Number) facilitates the process of deducting the tax from the NRI landlord.
  3. The tenant must pay the tax deducted to the government authorities by the 7th of the upcoming month.
  4. The tenant must file a TDS return with the details of the tax deducted and the NRI landlord.
  5. The tenant must download and issue a TDS certificate to the landlord for the tax deducted.

What is the penalty for Non-compliance with the law?

If the tenant fails to comply with the provisions of the law, it can result in the following consequences:

  1. If the tenant fails to deduct the tax, he/she will have to pay an interest of 1 per cent of the taxes for the number of months until the tax is deducted.
  2. If the tenant fails to deposit the tax to the government authorities, an interest of 1.5 per cent per month must be paid until the tax is deposited. 
  3. In case of failure to deduct taxes or deposit taxes, the Assessing officer can penalize the tenant with the same amount as the taxes.

Also read: Affordable Cities to buy or rent a house in India

Final Words

Tenants with NRI landlords must ensure the deduction of taxes as per Indian law. The tenants must ensure that all provisions of the law are satisfied to avoid penalties or serious legal consequences. 

Renting a house or a property in India is common for most people. Renting from a resident individual is a fairly easy process as the tenant must pay the rent on time to the owner. However, in the case that a tenant is renting from an NRI, there are certain legal obligations which must be fulfilled to avoid legal troubles.

As per the Income Tax Act 1961, section 195, any individual paying an NRI must deduct TDS from the rent, and the tenant is liable to ensure that the TDS is being deducted. The tenant will have to face legal consequences if the TDS is not deposited to the tax department. 

How to determine if the tax is applicable?

As per the Indian Income-tax law, the tenant tax is applicable if the landlord is an NRI. Irrespective of other factors about the landlord and tenant agreement, the tax must be deducted while paying the rent. The tax must be deducted even if the rent is paid in cash. 

What is the rate at which the taxes must be deducted?

The rate at which the taxes have to be deducted will depend upon the income of the NRI landlord. The basic TDS, which has to be removed by the tenant, is 30 per cent. However, the tax can be increased as per applicable surcharge and cess. This surcharge and cess depend on the amount of rent paid and the income of the NRI landlord. A maximum tax deduction of 42.744 per cent can be levied on the rent paid to the landlord.

The tenant and the landlord can file an application to lower the TDS rate with the Assessing officer. 

Also read: Maximize HRA benefits and save tax on rent!

How can the tenant comply with the provisions of the law?

The tenant can comply with the provisions of the law by taking the following actions:

  1. Deducting the TDS before crediting the rent to the account of the NRI landlord.
  2. Obtaining the TAN (Tax Deduction Account Number) facilitates the process of deducting the tax from the NRI landlord.
  3. The tenant must pay the tax deducted to the government authorities by the 7th of the upcoming month.
  4. The tenant must file a TDS return with the details of the tax deducted and the NRI landlord.
  5. The tenant must download and issue a TDS certificate to the landlord for the tax deducted.

What is the penalty for Non-compliance with the law?

If the tenant fails to comply with the provisions of the law, it can result in the following consequences:

  1. If the tenant fails to deduct the tax, he/she will have to pay an interest of 1 per cent of the taxes for the number of months until the tax is deducted.
  2. If the tenant fails to deposit the tax to the government authorities, an interest of 1.5 per cent per month must be paid until the tax is deposited. 
  3. In case of failure to deduct taxes or deposit taxes, the Assessing officer can penalize the tenant with the same amount as the taxes.

Also read: Affordable Cities to buy or rent a house in India

Final Words

Tenants with NRI landlords must ensure the deduction of taxes as per Indian law. The tenants must ensure that all provisions of the law are satisfied to avoid penalties or serious legal consequences. 

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