Tax Deducted at Source (TDS) is not only for big companies. As per India's Income Tax Act, individuals and small enterprises can also be compelled to deduct and deposit TDS on rent or contract work if the payment exceeds certain limits. Non-compliance can lead to penalties, interest, and even disallowance of expenses, causing undue burden on small taxpayers who might not know their responsibilities.
When do people have to deduct TDS on rent?
Section 194-IB requires taxpayers or Hindu Undivided Families (HUFs) who are not eligible for tax audit to deduct TDS where they receive rent above ₹50,000 during a month. The TDS rate is 5% and will have to be deducted only once a year—at the time of payment or credit, whichever is earlier, in the end month of the tenancy or financial year, whichever earlier.
Unlike companies, these individuals need not apply for a TAN (Tax Deduction and Collection Account Number) to deduct TDS under this section. Tax deducted should be deposited through Form 26QC within 30 days from the last day of the month on which TDS is deducted.
TDS on contract payments by small businesses
Under Section 194C, the individuals or HUFs engaging in business or profession are required to deduct TDS on remittances made to contractors or subcontractors where they were required to undergo tax audit in the last financial year. The threshold limit for deducting TDS is ₹30,000 on a single contract or ₹1,00,000 in the aggregate in a financial year.
TDS has to be deducted at 1% in the case of payee being an individual or HUF and 2% in other cases. A TAN is compulsory in this regard, and the TDS has to be deposited within the specified due dates—usually the 7th of the subsequent month.
How to avoid penalties and remain compliant
1. Know the thresholds: Ensure you monitor the total yearly payments for rent or contractual work to determine whether TDS rules are applicable to you.
2. Check audit status: TDS on contracts is only applicable if you were under audit in the last financial year, so know your audit requirements.
3. Use correct forms: For rent payments under Section 194-IB, use Form 26QC. For contracts, submit quarterly TDS returns in Form 26Q.
4. Pay TDS on time: There is a 1% interest per month for delay in deduction and 1.5% per month for delay in payment of TDS. There is also a penalty of ₹200 per day for failure to file TDS returns on time.
5. Issue TDS certificates: You have to issue Form 16C (for rent) or Form 16A (for contract) to the payee within the due time to escape penalty.
Small taxpayers tend to believe that TDS regulations are meant for large organizations, but with the thresholds set as low as ₹30,000, individuals and small businesses need to remain vigilant.
Familiarity with TDS requirements and prompt compliance can save you from unnecessary legal hassles and monetary penalties.
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