A recent misconception has been circulating regarding the reduction of Tax Deducted at Source ( TDS ) on rental payments to 2%. This misinformation has led to confusion among both tenants and landlords regarding the applicable tax rates and sections of the Income Tax Act.
The misunderstanding primarily arises from a mix-up between two different sections under the Income Tax Act of IndiaāSection 194-I and Section 194-IBāeach governing the TDS on rental payments. While there has indeed been a reduction in TDS, it applies specifically to Section 194-IB and not to Section 194I.
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Section 194-IB applies to individuals or Hindu Undivided Families (HUFs) who are not required to undergo a tax audit but still make rental payments exceeding Rs. 50,000 per month. Under this section, the TDS rate has recently been reduced to 2%.
On the other hand, Section 194-I applies to companies, firms, and other taxpayers obligated to deduct TDS on rent payments above Rs. 2,40,000 per annum. The TDS rate under Section 194-I is 10% for rent paid for land, building, or furniture, and remains unchanged.
There are threshold limits that define these sections. Under Section 194-I of the Income Tax Act, the threshold for deducting TDS is rental payments exceeding Rs. 2,40,000 per annum. This section is generally applicable to businesses and other entities who engage in formal contractual leasing or renting of properties.
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Section 194-IB of the Income Tax Act applies to rental transactions involving individuals or HUFs, where the monthly rent surpasses Rs. 50,000. This provision was introduced to simplify tax compliance for individual taxpayers who, unlike corporations or firms, might not have tax audit obligations but still engage in substantial rental transactions.
In recent days, there has been considerable misunderstanding that all rent-related TDS has been uniformly reduced to 2%. However, the reduction only pertains to transactions under Section 194-IB. Rent covered under Section 194-I remains taxed at the standard rate of 10%. Therefore, if you are a tenant or landlord dealing with rent payments beyond the stipulated thresholds under Section 194-I, a 10% deduction rate still applies, not 2%.
Such confusions could lead to serious tax compliance issues if incorrect rates are appliedāresulting in penalties or complications during audits. Therefore, taxpayers must ensure they are applying the correct provisions and rates based on the nature of the transaction.
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To avoid such misconceptions, always refer to the latest guidelines from the Income Tax Department or consult a professional tax advisor for clarity on the applicable TDS rates.
Proper understanding ensures smooth compliance and helps avoid unnecessary fines or legal troubles.
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