Are you paying monthly rent above ₹50,000? Here's what the new TDS rule means for you

Starting 1 April 2025, the rules for deducting tax on rent payments have changed. Earlier, tax had to be deducted at source (TDS) only if the annual rent paid was more than ₹2,40,000. But now, as per the new rule under the Income-tax Act, TDS must be deducted if the rent paid in a month is more than ₹50,000.

This change affects businesses, companies, LLPs, and even individuals or Hindu Undivided Families (HUFs) if their income from business or profession crosses a certain limit. Those required to deduct TDS must do so at the right time and rate. If they fail to deduct or deposit TDS, they may face interest charges and penalties, and the rent expense may not be allowed as a deduction in their tax return.

CA (Dr.) Suresh Surana, said, "As per the provisions of Section 194-I of the Income-tax Act, 1961 (hereinafter referred to as ‘the IT Act’) existing prior to 31 March, 2025, any person (other than an individual or Hindu Undivided Family) responsible for paying rent to a resident is required to deduct tax at source (TDS) if the total rent paid during the financial year exceeds ₹2,40,000 p.a. Individual or a Hindu undivided family are only required to deduct TDS u/s 194-I in case their total sales, gross receipts or turnover from the business or profession carried on by him exceeds Rs. 1 crore in case of business or Rs. 50 lakhs in case of profession during the financial year immediately preceding the financial year in which such income by way of rent is credited or paid."

However, the Finance Act, 2025, amended Section 194-I, effective from April 1, 2025, to provide that the threshold for TDS applicability on rent payments would be revised to ₹50,000 in a month or part of a month. Accordingly, the new threshold will require TDS deduction if the rent exceeds ₹50,000 in a month or part thereof, instead of the pre-existing ₹2,40,000 per annum limit.

Impact on rent payments:

Suppose one is paying monthly rent exceeding ₹50,000, and falls under the category of persons required to deduct TDS (such as companies, firms, LLPs, etc.). In that case, they will be mandatorily required to deduct TDS on such rent payments at the applicable rate.

Failure to deduct TDS will be treated as non-compliance, attracting interest, penalty, and disallowance of expense under section 40(a)(ia) of the IT Act as follows:

· Interest on Late Deduction or Payment: Interest is levied for delays in deduction or payment of TDS. Taxpayer not deducting TDS or deducting the TDS but not depositing it with the government within the specified time frame, would be liable to interest u/s 201(1A)(i), 201(1A)(ii) of the IT Act, respectively:

TDS not deducted: Simple Interest of 1% for every month or part  on the amount of such tax from the date on which such tax was deductible to the date on which such tax is deducted.

TDS deducted but not deposited: Simple Interest of 1.5% for every month or part on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid.

Late Filing Fees: A fee of ₹200 per day per return is imposed u/s 234E for each day the TDS return is delayed, subject to the total amount of tax deductible or collectible.

Penalty for Failure to File Statements: Section 271H of the IT Act provides that where a person fails to file the statement of tax deducted at source (TDS) return on or before the specified due dates or furnishes incorrect TDS return, then assessing officer may direct such person to pay penalty of ₹10,000 which can extend up to ₹1,00,000. However, no such penalty u/s 271H of the IT Act will be levied in case of delay in filing the TDS return, if following conditions are satisfied:

-The tax deducted/collected at source is paid to the credit of the Government

-Late filing fees and interest (if any) is paid to the credit of the Government

-The TDS return is filed before the expiry of a period of one year from the due date specified in this behalf

Prosecution: In severe cases, such as willful default in remitting TDS/TCS after deduction, prosecution may be initiated, leading to rigorous imprisonment for a term which may extend to 7 years, along with a fine.

Disallowance of Expense: Non-deduction of TDS may lead to disallowance of 30% of expense under Section 40(a)(ia) for persons carrying on business or profession.

"This amendment increases the compliance responsibility for high-value rent payments, particularly for those entities paying rent on a monthly basis rather than considering the annual threshold. It is recommended for all liable entities to review their rent arrangements and ensure timely deduction and deposit of TDS from FY 2025–26 onwards to avoid penal consequences as aforementioned," said Surana.