TDS not deducted by tenant but rental income duly declared and taxes paid by NRI owner

Hi, and thanks for explaining the situation in detail — this is a genuine concern that many tenants unknowingly run into when renting from NRIs.

Let’s go over the facts and your responsibilities, and then assess the risk and next steps.

🔍 Summary of Your Case:

• You're a tenant renting a house in Mumbai.

• The actual owner is an NRI, but this wasn’t disclosed to you at the time of signing the rental agreement.

• You’ve been paying full rent to the NRI’s Indian bank account, without deducting 31.2% TDS as required under Section 195 of the Income Tax Act.

• You’ve now found out the truth, and the owner has paid taxes on rental income and filed returns, which you’ve verified.

✅ Legal Position:

1. Tenant's Responsibility Under Section 195:

• If you're paying rent to an NRI, you are legally obliged to deduct TDS (currently 31.2% on rental income, including surcharge and cess).

• This applies regardless of the amount or whether the landlord is declaring income.

2. What if TDS wasn't deducted but taxes were paid by the NRI?

Good news here — based on court rulings and CBDT Circulars:

If tax has already been paid by the recipient (NRI landlord), the payer (you) cannot be treated as an assessee-in-default, though interest under Section 201(1A) may still apply.

📌 CBDT Circular No. 8/2009 and later judicial rulings support this.

So, if the NRI has paid full taxes on time, the only liability you may face is interest for late deduction, not penalty or being considered in default.

⚖️ What if You’re Issued a Notice?

If the Income Tax Department issues you a notice for non-deduction of TDS, you can:

1. Respond with full documentation:

   • Rent agreement (even if unregistered)

   • Bank statements showing payments to owner's account

   • PAN and ITR of NRI owner showing rental income

   • Proof of tax paid on that income

2. Submit Form 26A (through NRI’s CA):

   • If needed, a Chartered Accountant can issue a Form 26A certificate under Rule 31ACB and Section 201(1).

   • This proves that tax has been paid, and allows you to avoid “assessee-in-default” status.

   • But this requires some cooperation from the landlord and their CA.

❗ Your Claim That You Didn’t Know the Owner Was an NRI:

While it may be factually true, legally:

• Ignorance of the landlord's residency status is not a complete defense.

• The law says the payer is responsible for checking if the payee is a resident or not (especially when making substantial periodic payments like rent).

• The responsibility of TDS compliance still rests on the tenant.

However, in your case, you may argue:

• No willful concealment

• The landlord’s brother misrepresented himself

• There was no intention to evade tax

• Taxes have been fully paid

These facts can definitely help reduce or nullify penalties.

✅ What You Should Do Now:

1. Talk to the landlord again, request:

   • Proof of taxes paid on your rental payments

   • Help from their CA to prepare Form 26A (in case of future notice)

2. Keep all rent payment records and communications safely.

3. Consider voluntary disclosure (optional):

   • You could proactively write to the AO or file a letter on TRACES, stating the facts.

   • Not mandatory, but helpful if you're concerned.

🔚 Bottom Line:

• You won’t face penalty or default status if the NRI landlord has declared and paid full tax.

• At most, interest under Section 201(1A) may be levied if the ITD chooses to pursue the matter.

• You can avoid default status by proving the tax was paid, or via Form 26A.