Higher TDS threshold for tax deducted at source for rental income can unlock new housing, say experts

The finance minister added that to compute the tax payable, taxpayers can value two "self-occupied" properties at nil, instead of one.

Union finance minister Nirmala Sitharaman announced in the Union Budget for 2025-26 that the threshold for tax-deducted at source (TDS) for income tax for rental income has been increased to Rs 6 lakh per year from the present Rs 2.40 lakh. The measure may come as a relief for those who own second homes and receive rental income on them, especially investor-owners, and can open up new rental housing.

Under Section 194-I of the Income Tax Act, the person responsible for payment of rent, be it property or machinery, have to deduct the tax at the source, at the rate of 10 percent for land and property, with a lower rate for machinery and plants. With the revision, rental payments of up to Rs 50,000 per month will now not be liable for TDS. Experts noted that it can be a major relief for tenants. In the case of housing, tenants can rent properties of good quality in most major cities in India at that monthly rent.

The finance minister added that to compute the tax payable, taxpayers can value two "self-occupied" properties at nil, instead of one.

In her speech, the finance minister said that the measures are intended to reduce the number of transactions liable under TDS, benefiting small taxpayers receiving smaller payments. Real estate industry figures have long termed the TDS threshold for rental income to be too low and demanded it to be increased, which may have contributed to many investment-led homebuyers to not rent out their assets.

"Exempting rent up to ₹6 lakh from TDS will greatly benefit tenants, who account for 40% of residential rentals. This will ease the financial burden on middle-class families, who often struggle with high rental costs and additional deductions. It will also encourage more investor-owners to rent out properties without tax concerns, boosting the residential real estate sector by improving supply and affordability," said Abhilash Pillai, partner at law firm Cyril Amarchand Mangaldas.

Until the 2018-19 financial year, the threshold on TDS for rent was Rs 1.8 lakhs per year, as per Section 194-I.

"With the recent changes in the TDS provisions on rental income, particularly the reduction of the TDS rate, landlords and tenants alike must stay informed. This adjustment not only aims to ease the tax burden but also enhances compliance and reduces evasion," said Ketan Mukhija, senior partner at Burgeon Law.