TDS on rent, contract work: How small taxpayers can avoid penalty

Understanding the hidden costs of TDS compliance for landlords, both residents and NRIs, and contractors

- Shipra Singh

When a young Mumbai-based couple bought an apartment from a seller who resides outside India, they ensured that they fully complied with the rules on tax deducted at source (TDS).

They deducted the tax at source at the higher 31.2% rate (includes cess) applicable to non-resident Indian (NRI) sellers and submitted it to the tax authorities on time. However, they missed one additional step: filing an e-TDS return. Consequently, the couple, who did not wish to be named, was slapped with a penalty of ₹80,000. Many individuals like this couple face penalties and interest charges each year due to missed steps in TDS compliance, often stemming from limited awareness.

After the TDS amount is submitted, the deductor has to file the return within the last date of the quarter in which TDS is deducted (the 31st of July, October, January and March). The penalty for this default is a severe ₹200 per day, capped at the TDS amount. The TDS rate in the case of NRI property sellers is quite high at 31.2%, which means cap equivalent to the TDS amount for the ₹200 daily penalty doesn't really help the tenant when the landlord is an NRI.

The couple was late in filing e-TDS by seven months, which added up to about ₹40,000 for both individuals. Since they bought the property jointly, both were required to deduct TDS and file the return separately. Hence, they both paid a combined penalty of ₹80,000 for this slip-up.

Individuals and HUFs that are not liable for tax audits were first brought under the purview of TDS in 2013 with the introduction of Section 194-IA that deals with tax deducted at source on the purchase of immovable property. Gradually, more sections on other types of payments were added to broaden the tax base.

Mint lists out some key TDS provisions that small taxpayers should be aware of to avoid paying penalties through their nose.