How to Correct TDS Errors on Rent Payments and Handle Income Tax Notices for Incorrect Filing

Tax Deducted at Source (TDS) is a mechanism used by the government to collect taxes directly from the source of income. This system ensures that taxes are paid as income is earned. For businesses and individuals, the most common type of TDS is on rent payments, which applies when a person or entity pays rent to a landlord. For the Financial Year (FY) 2024-25 and FY 2025-26, there have been notable changes in the TDS rules applicable to rent payments. These changes impact landlords and tenants alike and require careful attention to ensure compliance and avoid penalties. Let's discuss the latest changes in TDS on rent for these years, how to correct any errors in TDS filings, and how to deal with income tax notices that arise due to incorrect TDS filing.

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Table of Contents

• Latest Changes in TDS on Rent (FY 2024-25 & FY 2025-26)

• How to Correct TDS Errors on Rent Payments

• Handling Income Tax Notices for Incorrect TDS Filing

• Resources and Latest Updates

• Conclusion

• FAQs

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Latest Changes in TDS on Rent (FY 2024-25 & FY 2025-26)

The TDS provisions on rent payments have undergone a few important changes for FY 2024-25 and FY 2025-26. These changes are meant to improve transparency and compliance in the taxation process. Below are the key changes:

• Threshold Limit for TDS on Rent: Under Section 194-IB, individuals or Hindu Undivided Families (HUFs) paying rent of ₹50,000 or more per month to a resident landlord are required to deduct TDS at the rate of 5%. However, for businesses and professionals, the threshold limit under Section 194-IA has been reduced to ₹2,40,000 for annual rent payments. The introduction of this change will require businesses to withhold TDS for a broader range of rental payments, making the system more inclusive and ensuring that a larger number of taxpayers are captured within the tax net.
  

• New Form for TDS on Rent: The Finance Act 2024 has also introduced a new format for TDS returns specifically for rent payments. The Form 26QC, which is filed by tenants, is now mandatory for all rent payments above the prescribed limit. This change ensures better reporting and tracking of rental transactions.
  

• TDS Rates for Non-Residents: For non-resident landlords, the rate of TDS has been revised to ensure greater consistency across various sections. Non-resident landlords must be aware of these rates, as they are required to comply with the same filing procedures as resident landlords.
  

• Updated Deduction for Rent Paid to Professionals: Another significant change involves professionals (such as doctors, lawyers, etc.) who receive rental income. There has been an alignment in TDS rates for rent payments made to professionals, meaning higher rates will now apply if the professional rent exceeds the threshold.

These changes are aimed at increasing compliance and reducing tax evasion by improving reporting accuracy.

How to Correct TDS Errors on Rent Payments

Errors in TDS filings can occur for various reasons, such as incorrect PAN numbers, mismatches in the rent amount, or failing to deduct the correct amount of tax. It’s important to correct these errors promptly to avoid penalties or tax notices. Here's how you can correct TDS errors on rent payments:

• Rectify the TDS Deduction: If you’ve deducted an incorrect amount, the first step is to file a correction statement with the Income Tax Department. This is done through the TDS return, where you can make adjustments to the amount deducted. Ensure that you update the TDS return with the correct rent payment details and the accurate TDS amount.
  

• File a Revised TDS Return: If the mistake was in the TDS return filed, you must submit a revised return with the correct details. This should be done within the time prescribed by the Income Tax Department. Ensure that all corrections are reflected in the revised return, including accurate rent details, correct TDS amount, and any necessary adjustments for missed deductions.
  

• Issue a Revised TDS Certificate: After correcting the TDS return, issue a new TDS certificate (Form 16A) to the landlord. This updated certificate reflects the corrected TDS details, which will help the landlord claim the correct TDS credit.
  

• Penalty for Late Correction: In case the correction is not made within the prescribed time limit, a penalty may be imposed. Therefore, it’s crucial to act promptly and rectify errors to avoid additional charges.

Handling Income Tax Notices for Incorrect TDS Filing

Receiving an income tax notice regarding discrepancies in TDS (Tax Deducted at Source) filings related to rent payments can be a daunting experience. However, understanding the notice and knowing the correct steps to take can help resolve the situation efficiently. Below is a detailed breakdown of the process and what you need to do if you receive a notice from the Income Tax Department for incorrect TDS filings on rent payments.

1. Understand the Notice

The first step when receiving an income tax notice is to fully understand the issue. The Income Tax Department typically issues notices to taxpayers when they identify discrepancies or errors in TDS filings. These discrepancies may include:

• Mismatches in TDS amounts: The amount of TDS claimed in your return may not match what is reported in the TDS records of the Income Tax Department.
  

• Incorrect PAN number: If the PAN number of the tenant (or the person receiving the rent) is incorrectly entered, it can lead to a mismatch in the records.
  

• Failure to file the TDS return: In some cases, the notice could indicate that the TDS return was not filed or was filed incorrectly.

Carefully read the notice to determine which specific issue has been identified. The Income Tax Department will usually provide a detailed description of the error or mismatch, along with a reference to the relevant section of the law. The notice will also specify the deadline by which you must respond or correct the error.

2. File a Revised Return

Once you have understood the issue, the next step is to file a revised TDS return. The process involves the following:

• Correcting the TDS deductions: If the error relates to incorrect TDS deductions, such as the wrong amount being deducted or reported, you will need to amend the original return to reflect the correct amounts.
  

• Updating the PAN details: If the error pertains to incorrect PAN numbers, you will need to update the PAN details to ensure they match the records of the Income Tax Department. This step is crucial because mismatched PAN numbers can lead to issues in reflecting the TDS credit correctly.
  

• Re-submitting the revised return: Once you have made the necessary corrections, file the revised return with the correct TDS details. The Income Tax Department allows you to file a revised TDS return within a specific period to correct any errors made in the original filing.

Ensure that you retain the revised return acknowledgement as proof of your correction.

3. Respond to the Notice

After filing the revised return, it is essential to respond to the notice within the stipulated time frame, usually 30 days from the date of receiving the notice. Failing to respond within this period can result in further penalties or legal complications.

• Submit the corrected TDS return: Attach the revised return and supporting documents (if requested) to your response. The Income Tax Department may require proof of the correct TDS amounts and updated PAN details.
  

• Provide an explanation for the mismatch: In some cases, if you believe there was a valid reason for the mismatch (e.g., a system error), you can provide a detailed explanation in your response.
  

• Supporting Documents: Depending on the nature of the issue, the Income Tax Department may ask for additional documentation. This could include bank statements, rent agreements, or copies of challans showing the correct TDS payments.

By responding promptly and providing the necessary documentation, you can avoid further complications or penalties.

4. Pay Penalties or Interest

If the Income Tax Department determines that the error in TDS filing resulted in underpayment of taxes, you will likely be required to pay penalties or interest on the underpaid amount. The interest will be calculated based on the amount of tax that was not deducted or deposited on time.

• Interest on underpaid tax: Interest is typically charged under Section 234A, Section 234B, and Section 234C of the Income Tax Act. These sections apply to different types of non-compliance, such as late filing or delayed payment of tax.

• Penalty for late filing: If the error in the TDS return is considered a case of non-compliance, you may be levied a penalty under Section 271C for failing to deduct or deposit the correct TDS amount.

It is important to pay these penalties and interest promptly to avoid further legal actions, such as garnishment of wages or bank accounts. The longer you delay, the more the interest will accumulate, leading to a higher total amount due.

5. Consult a Tax Professional

If you're unsure how to handle the notice or if the situation is complex, consulting a tax professional is highly advisable. Tax professionals, such as Chartered Accountants (CAs) or tax consultants, can help you navigate the intricacies of the tax laws, ensuring that you respond correctly and avoid future issues.

A tax professional can also assist you in:

• Filing a corrected TDS return: If you're not familiar with the process, a tax expert can file the revised return on your behalf, ensuring all information is accurate.
  

• Negotiating with the Income Tax Department: If the error is complicated or you’re facing additional penalties, a tax professional can help you negotiate with the department and potentially reduce your penalties.
  

• Using online tax platforms like TaxBuddy: Platforms like TaxBuddy can simplify the process of filing and responding to notices. They provide assistance in correcting errors and offer expert support if you need help navigating the tax system.

Resources and Latest Updates

For the latest updates on TDS on rent and related filing requirements, refer to the following resources:

• Income Tax Department’s Official Portal: The official website provides detailed guidelines, forms, and updates on TDS and income tax filing. You can check for the latest circulars, forms, and FAQs regarding TDS on rent payments.
  

• TaxBuddy Blog: TaxBuddy’s blog offers insights and updates on tax regulations, including TDS on rent. You can stay informed about the latest changes, deadlines, and filing procedures.
  

• Professional Tax Consultants: Seeking assistance from professional tax consultants can ensure that your TDS filings are accurate and compliant. They can also help rectify errors and guide you in responding to notices.

Conclusion

The changes in TDS on rent for FY 2024-25 and FY 2025-26 introduce new compliance requirements that both landlords and tenants must be aware of. By staying updated on the latest rules and ensuring that all TDS payments are correct, you can avoid penalties and delays in the tax filing process. It's important to file accurate TDS returns and promptly address any errors to avoid legal issues and ensure a smooth experience. With platforms like TaxBuddy, you can simplify the entire process, from filing accurate returns to handling notices efficiently.

Frequently Asked Question (FAQs)

Q1: What is the TDS rate for rent payments?

For individuals and HUFs (Hindu Undivided Families) paying rent of ₹50,000 or more per month, TDS (Tax Deducted at Source) is deducted at 5%. For businesses and professionals, the TDS rate is generally higher, typically 10%. This TDS is applicable when rent exceeds the prescribed threshold, and the tenant is responsible for deducting and remitting the TDS to the government.

Q2: What happens if TDS is not deducted on rent payments?

If TDS is not deducted on rent payments where required, the Income Tax Department can impose penalties on both the tenant and landlord. The tenant may be held liable for the tax amount along with interest and fines. Non-compliance with TDS deduction obligations may also lead to increased scrutiny by the tax authorities.

Q3: How do I calculate TDS on rent?

TDS on rent is calculated by multiplying the monthly rent by the applicable TDS rate. For individuals and HUFs, the rate is 5%, while for businesses and professionals, it is 10%. For example, if the rent is ₹60,000 per month, the TDS for an individual would be ₹60,000 x 5% = ₹3,000.

Q4: Can I claim TDS deducted on rent as a deduction?

Yes, the landlord can claim the TDS deducted by the tenant as a credit against their total tax liability. The TDS deducted will be reflected in the Form 26AS, and the landlord can use it to reduce their tax burden when filing their returns.

Q5: How do I file TDS on rent?

TDS on rent is filed through the Income Tax Department’s e-filing portal or via TDS return forms such as Form 26QC. Tenants are responsible for deducting the TDS and remitting it to the government. TaxBuddy simplifies the process by guiding users through the filing steps and ensuring timely compliance.

Q6: Can I file a revised TDS return?

Yes, if you discover an error in your TDS return, you can file a revised return through the Income Tax Department’s portal. This is useful for correcting mistakes in TDS deductions, the tenant’s information, or other details that may have been filed incorrectly.

Q7: How do I handle incorrect TDS deductions on rent?

To correct TDS errors on rent payments, you must file a revised TDS return through the official Income Tax portal. If necessary, you should issue a corrected TDS certificate to the landlord, which can help adjust their tax credit and prevent any discrepancies in their filings.

Q8: Can I avoid TDS on rent payments?

TDS on rent payments is mandatory if the rent exceeds ₹50,000 per month. However, there may be exemptions or deductions available depending on the circumstances, such as the tenant not meeting the threshold or both parties agreeing to a lower rent. It is important to stay compliant to avoid penalties.

Q9: What is the penalty for incorrect TDS filing?

Penalties for incorrect TDS filing can include interest on unpaid taxes and fines for non-compliance. The penalty amount can range up to ₹5,000, depending on the severity of the error, such as late filing or missing information. It's crucial to ensure TDS returns are filed accurately to avoid these penalties.

Q10: How can TaxBuddy help with TDS on rent filings?

TaxBuddy simplifies the TDS filing process by ensuring compliance with tax laws. It helps both tenants and landlords file TDS returns correctly and on time, ensuring no penalties. TaxBuddy also assists in the revision of returns, helping users make necessary corrections quickly and accurately.

Q11: Can I claim tax benefits on rent payments?

Yes, tenants can claim tax deductions under Section 80GG for rent payments if they do not receive house rent allowance (HRA). Additionally, landlords can claim deductions on rental income after expenses such as property maintenance. It's important to ensure that the rent payment is supported by proper documentation like rent receipts and TDS certificates.

Q12: What happens if I don’t file TDS on rent within the due date?

Failure to file TDS on rent within the due date can result in penalties and interest. The penalty can range up to ₹200 per day for late filing, and the tax deducted but not paid on time will accrue interest. Moreover, the tenant may be liable for the interest on the unpaid amount.