If you are a landlord and earn from rent, then be careful while making a rent agreement. Know the 5 big mistakes that can lead to an income tax notice. Understand the rules of TDS, PAN, and registration.
Renting out your house or property is a great source of passive income. Every month, a fixed amount comes into your bank account. But do you know that even a small mistake made while making a rent agreement can bring you under the radar of the income tax department? Yes, nowadays the tax department has become very advanced and it keeps an eye on your every financial transaction. Here know the 5 big mistakes that you should not make at all while making a rent agreement.
1. Ignoring the tenant's PAN card
This is the most common and biggest mistake. Many landlords do thorough investigation of the tenant, but forget to take their PAN card or do not consider it necessary.
What does the rule say
According to the Income Tax rules, if your tenant has to pay rent of more than Rs 1 lakh per year (ie ₹8,333 per month), then it is mandatory for him to provide your (landlord's) PAN to claim tax exemption on HRA.
How can you get trapped?
When your tenant gives rent receipts and your PAN to his company to claim HRA, that information reaches the Income Tax Department directly. If you do not show the income from that rent in your Income Tax Return (ITR) or show less, then the department will know immediately. After this, a notice can be sent to you.
What to do?
Always take your tenant's PAN card and mention it in the rent agreement.
2. Forgetting the TDS rule
Many landlords are not aware of this rule. If your rent is good, then this rule directly applies to you.
What does the rule say
According to Section 194-IB of Income Tax, if a tenant (who is a salaried individual or HUF) pays you rent of more than Rs 50,000 every month, then it is his responsibility to deduct 5% TDS (Tax Deducted at Source) on the total rent.
How can you get caught?
The tenant has to deduct this TDS and deposit it in the government treasury on your PAN. This deducted tax is visible in your Form 26AS. If the tenant has deducted TDS and you have not shown that income in your ITR, then you will be caught directly. On the other hand, even if the tenant has not deducted TDS, this income can come under the eyes of the department due to being a high-value transaction.
Understand the calculation
Suppose your monthly rent is Rs 60,000.
Annual rent: 60,000 x 12 = Rs 7,20,000.
TDS to be deducted by the tenant: 5% of 7,20,000 = Rs 36,000.
The tenant will deposit this Rs 36,000 in the tax department and pay you Rs 6,84,000. While filing ITR, you can adjust this Rs 36,000 in your total tax liability.
3. Taking rent in cash
Even today, many people prefer to transact in cash. But in the case of rent, this can put you in trouble.
What the law says
Although there is no restriction on taking rent in cash, but making a cash transaction of more than Rs 2 lakh at one time is a legal offense.
How can you get caught
Cash transactions of large amounts bring tax officials under suspicion. If you are taking a large amount in cash every month and are not showing it in your income, then you can get into trouble in any investigation. Since there is no paper trail, you will not be able to prove how much rent you received.
What to do
Always take rent through bank transfer, UPI or cheque. This will give you a solid record of every payment, which is completely transparent.
4. Not showing the correct amount of rent in the agreement
Some people show less amount than the actual rent in the rent agreement to save stamp duty or for some other reason. This is a big mistake.
How can you get trapped?
Suppose your actual rent is Rs 30,000 per month, but you have written Rs 15,000 in the agreement. Your tenant will use receipts of Rs 30,000 for HRA claim, while you have legal documents of only Rs 15,000. This can become a clear case of fraud. This is a red flag for the Income Tax Department.
What to do
Always clearly mention the correct amount of rent, security deposit and other charges in the agreement.
5. Not registering the rent agreement
Usually rent agreements are made for 11 months, as registration is not mandatory for it. But if your agreement is for 12 months or more, then it is legally necessary to get it registered.
What the rules say
According to the Registration Act, 1908, it is mandatory to register lease agreements for a period of 12 months or more in the sub-registrar office.
How can you get trapped
A registered agreement is a strong legal document. In case of any dispute, whether it is about rent or tax, the value of an unregistered agreement in the court is very less. The tax department also gives priority to a registered document during any investigation.
Frequently Asked Questions (FAQs)
1. Is the landlord's PAN required for every rent agreement?
No, it is not mandatory to provide a PAN card if the annual rent is less than Rs 1 lakh. But if it is more than that, the tenant will need your PAN to claim HRA.
2. What if my tenant does not deduct TDS?
Legally, it is the tenant's responsibility to deduct TDS on rent above Rs 50,000 per month. If he does not do so, he will be considered a defaulter. However, you should honestly declare your rental income in ITR.
3. What should a tenant do if the landlord refuses to provide his PAN?
If the landlord does not provide the PAN, the tenant will not be able to avail the full tax exemption on HRA. The tenant may have to inform his company and the Income Tax Department about this by giving a declaration.
4. Why is only an 11-month rent agreement made?
It is not mandatory to register an 11-month agreement and pay heavy stamp duty on it. This saves time and money for both the landlord and the tenant.
5. Will both owners have to pay tax on the rent received from a joint property?
Yes, if the property is in the name of two people, then the income from the rent will be divided between the two owners according to their share and both will have to pay tax on their respective income.
