Are you occupying a residential house on rent? You may want to know your income tax obligations. The income tax law requires you to deduct tax (TDS) on monthly rent above Rs 50,000. The rate of TDS is 5% on the rent paid or due to your landlord.
We consider two situations of rental payments by an employee:
1. Rent paid under an agreement between you and the landlord
In the case of a lease agreement between you and the landlord, the tax deduction is on rental payments made by you.
Let us consider an example where you pay a monthly rent of Rs 38,000, and your employer pays an amount of Rs 16,000. The lease agreement is between you and the landlord.
Hence the payments made by you towards rental accommodation would be subject to TDS. We see that the aggregate monthly rent payment is Rs 54,000. However, the monthly rent paid is less than Rs 50,000. Hence, you are not required to deduct tax on the rent paid.
For the rent paid by your employer, he/she is liable to deduct tax on the payment. The rent paid by your employer on your behalf is taxable as a ‘perquisite’ under your salary. Your employer is liable to deduct tax on Rs 16,000 under your ‘salary’.
2. Rent paid under an agreement between your employer and the landlord
In a case where the lease agreement is between your employer and the landlord, your employer would be liable for TDS on the rental payments.
For example, your employer, XYZ Ltd, pays a monthly rent of Rs 32,000 to your landlord. Further, your employer recovers Rs 12,000 from your salary. In this case, the annual rental payments by your employer are Rs 3,84,000. Since the annual rental is above the threshold limit of Rs 2.4 lakh, your employer is required to deduct tax at the rate of 10%.
The arrangement of providing leased accommodation by your employer would be taxable as ‘perquisite’ under your salary. The rent paid by your employer reduced by the amount of rent recovered from you is taxable as a ‘perquisite’. In the example, Rs 20,000 is taxable as a ‘perquisite’ under your income from salary. Your employer has to deduct tax on Rs 20,000 as a component under your income from salary.
In a case where you deduct tax on rental payments above Rs 50,000, you are required to submit a combined challan cum TDS return in Form 26QC.
In a case where your employer pays rent on your behalf, your employer will deduct tax. The tax deduction would be on the rental payments made on behalf of you.
I am a Chartered Accountant by profession. I specialise in personal taxes and corporate income tax matters. I am an avid reader and track developments in financial markets, economy and other market developments.