Explained: How the budget’s TDS measures can spur rental housing growth

The TDS measure is expected to unlock more homes for rental housing, as well as reduce compliance needs

Finance Minister Nirmala Sitharaman's announcement in the union budget that the threshold for tax deducted at source (TDS) on rental income will now be Rs 6 lakh per annum, has raised hopes of  increased supply among watchers of the rental housing market. The current threshold is Rs 2.4 lakh per annum.

The primary beneficiary markets are expected to be metros and large cities, where most rentals are at or near the new TDS threshold of Rs 50,000 per month.

Besides that, observers also said that the compliance burden on both landlords and tenants is expected to reduce, as many tenants no longer have to deduct TDS nor do landlords need to declare rental income at or under Rs 6 lakh per annum.

The tax benefit will primarily be felt by investor-owners and speculative buyers in major cities, including Mumbai, Bengaluru, etc, where an above-average increase in home prices prompted elevated levels of investor interest in residential property. The measure is also expected to benefit seniors and retirees, who often depend on rent  as a key source of income to supplement their retirement benefits.

“Reducing the TDS burden is expected to stimulate the rental market, encourage greater investment in rental properties, and expand the overall supply of housing. It also has the potential to drive home-ownership with rental intent, particularly benefiting the affordable housing segment and contributing to the sector’s growth,” said Saurabh Runwal, Director, Runwal Realty.

Rental housing unlocked

The TDS threshold increase can incentivise more landlords to list their homes in the rental market. Industry estimates say that more than one crore homes across the major housing markets in India are lying idle and not released for rental purposes.

Brokers say that due to low rental yields in residential real estate (a national average of around 3 percent), as well as TDS, investor-owners were reluctant to list properties for rent. Rather, they tended to wait for home prices to appreciate over a few years, and sold the property instead. Developers have long-demanded that the TDS threshold be raised from the current levels, which they have deemed to be too low.

"A lot of properties in India are locked and not given on rent due to low yields and the TDS issue. With the announcement in the budget, landlords and tenants are expected to benefit in all cities, but especially in the metros, and tenants can expect to find better rents (thanks to increased supply). However, more needs to be done to spur rental housing growth, and more states should adopt the Model Tenancy Act that was passed by the union government," said Saurabh Garg, Co-Founder and Chief Business Officer at NoBroker, a rental housing and property technology platform.

Where the law stands

Under Section 194-I of the Income Tax Act, the tenant is required to deduct TDS on the rent paid at the rate of 10 percent for land and property. The current threshold of Rs 2.40 lakh per annum was increased after FY 2018-19, before which the threshold stood at Rs 1.80 lakh per annum.

The law also states that the landlord also needs to provide his/her permanent account number (PAN) to the tenant, as otherwise the  TDS will be 20 percent.