"How To Secure Credit For TDS On Advance Rent”

 

The problem of giving credit for tax deducted at source on advance rent has now been solved by the Central Board of Direct Taxes through a Circular No. 5 of 2001 dated 2 March, 2001. According to that Circular if tax has been deducted at source in respect of advance rent received, say for three years then TDS benefit in income tax would be given in all the three years.

Sometimes the problem of giving credit for TDS also poses a problem when the agreement gets terminated or the property is transferred by way of sale, etc. In such cases the problem arises before the income tax authorities as to how to give the credit for the tax deducted at source to the assessee.

 

Likewise, the assessees also face the problem. In this para, we have offered the solution of the problem which is fair both to the tax-payers who are the owner of the house property and also to the Income Tax Department.


There are various problems which are faced by the owners of the house property in getting due credit for Tax Deducted At Source under Section 199 of the Income tax Act, 1961 in respect of the tax deducted as per Section 194-I of the I.T. Act. The problems arise in respect of different situations.

  • One common situation is relating to the receipt of advance rent for a period which is more than one financial year and which is to be adjusted against future rent.
  • Likewise, a problem arises when income-tax is deducted at source on advance rent pertaining to one or more financial years and the rent agreement gets terminated or cancelled resulting into refund of balance amount of advance rent to the tenant, as to which is the year in which the credit for the tax deducted at source is to be given to the property owner. This is a baffling problem both for the property owners as well as for the Income-tax Department.
  • Another situation arises where the house property, which has been let out, is transferred either by way of sale or by way of lease, or by way of gift with the tenant in occupation or otherwise. This normally results into the refund of the balance amount of advance rent to the transferee or to the tenant, as the case may be. Here the problem is that the time when the credit of tax deducted at source has to be granted to the house owner. Fortunately to all these problems have been discussed and analysed by the Central Board of Direct Taxes in its Circular No. 5 dated 2nd March, 2001. The Board has also given the necessary guidelines for giving credit in respect thereof, and which are given below:

The most common problem which arises in day-to-day transaction of letting out of the house property relate to the difficulty in getting the due credit for the tax deducted at source in one year, i.e. the year in which tax is deducted, because the entire amount of advance tax does not accrue to the assessee as taxable income in one financial year. This is because income from the property is taxed on the basis of annual letting value; whereas tax is deducted at source on the entire amount of advance rent pertaining to more than one financial year.

 

Hence, credit for entire amount of tax deducted at source is not allowed in terms of Section 199 of the IT Act because the credit is to be given for the assessment year for which such income is assessable. Thus, the assessees do not get credit for the entire amount of tax deducted at source in the first assessment year, in which part of the advance rent is offered as rental income, on the basis of the certificate furnished under Section 203 of the IT Act. Likewise, there is also a difficulty in claiming credit in the remaining assessment years to which the balance of advance rent relates in the absence of the certificate for tax deducted at source for those years. The Central Board of Direct Taxes has appreciated this problem and has issued instructions in the aforesaid circular to the effect where the advance rent is spread over more than one financial year and tax is deducted thereon, credit shall be allowed in the same proportion in which such income is offered for taxation for different assessment years based on the single certificate furnished for tax so deducted on the entire advance rent.


This credit will be given on the basis of the single certificate furnished for tax so deducted from the entire advance rent under Section 203 of the I.T. Act, read with Section 199. In this manner, the interest of the Income-tax Department will be served as no undue credit would be given to the house owner on the one hand and the house owner also will not suffer injustice as he will get due credit for tax deducted at source against the income-tax payable on the proportionate rent. There will not be any requirement for getting any other certificate for TDS as only one composite certificate for TDS would do, as per the Board’s clarification in the aforesaid Circular.


Where the rent agreement is terminated or cancelled resulting into refund of balance amount of advance rent to the tenant, the problem arises about the credit to be given for the TDS. Hence, the Central Board of Direct Taxes has given instructions that in such a situation the credit for the entire balance of tax deducted at source, which has not been given credit so far, would be allowed in the assessment year relevant to the financial year during which the rent agreement gets terminated or cancelled.


Another problem arises when the rental property is transferred by way of sale, lease, gift, etc. with tenant in occupation or otherwise. This would naturally result into refund of the balance amount of advance rent to the transferee or the tenant, as the case may be. In such a case also the C.B.D.T. has issued necessary instructions for solving the problem of granting credit for the entire balance of tax deducted at source which could not be given credit to the taxpayer so far. In such a situation, the C.B.D.T. has clarified that credit for the entire balance of tax deducted at source, which has not been given credit so far would be allowed in the assessment year relevant to the financial year during which the rented property is transferred and the balance of advance rent is refunded to the transferee or the tenant, as the case may be.

 

KEY POINTS

• Rental income from house property helps you to cut down your tax rate.

• A second residential house in your name can lead to higher incidence of income tax.

• Carry forward the tax deducted at source on advance rent received by you.

• Pay tax on rental income only when you actually receive the rent.

 

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