The Central Board of Direct Taxes (CBDT) has proposed changes to India’s draft tax regulations that could significantly affect how rent-paying arrangements within families are treated for taxation. The key issue: whether payments made to close relatives — such as parents, in-laws or a spouse — for use of residential property should be classified as “rent” for tax purposes, potentially triggering TDS obligations and other compliance implications.
What The Draft Rules Say
Under current provisions of the Income Tax Act, rent paid by a tenant to a landlord is generally subject to Tax Deducted at Source (TDS) if it exceeds specified thresholds. However, relationships between the parties often dictate whether such payments are treated as rent or something else for tax calculations.
In the newly proposed draft tax rules, the CBDT has clarified that:
- Rent paid to parents, in-laws or a spouse may be considered ‘rent’, not merely a familial support payment, if the arrangement reflects a bona fide lease with documented terms.
- This means the person receiving rent could be deemed a landlord under tax laws, and the payer might need to deduct TDS at the applicable rate if the rental value crosses the threshold stipulated under section 194-I of the Income Tax Act.
The move aims to plug loopholes where rental arrangements within families might be used to artificially reduce tax liability — for example, by diverting income and avoiding TDS — under the guise of informal family transfers.
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Why This Matters
If the draft rules are finalised in their current form, taxpayers will need to be more careful with intra-family rent arrangements:
- Documentation will be crucial: Informal verbal agreements may no longer suffice. A proper rental agreement with clear terms, payment records and a genuine landlord–tenant relationship will help define tax treatment.
- TDS obligations: If relatives qualify as landlords under the proposed rules, tenants may become responsible for making TDS deductions and issuing TDS certificates to avoid penalties.
- Impact on housing costs: For families treating “rent” as a means of support or financial planning (e.g., parents leasing property to children), the new interpretation may add a tax compliance burden.
Reactions And Concerns
Tax professionals say the proposal reflects an effort by the government to streamline tax compliance and curb revenue leakage, but it could also lead to practical challenges for ordinary taxpayers. Their concerns include:
- Administrative burden: Small landlords or tenants may find it cumbersome to comply with TDS rules on intra-family rentals.
- Unintended consequences: Routine family support arrangements — such as a son paying nominal rent to parents to secure a home — could get caught in the tax net if not carefully documented and justified.
- Transitional issues: Taxpayers may need time to adjust lease agreements, show proof of regular payments and manage additional record-keeping.
The CBDT has invited public comments on the draft rules, and the final version may be refined based on feedback from industry experts, taxpayers and chartered accountants.
About the author – Rehan Khan is a law student and legal journalist with a keen interest in cybercrime, digital fraud, and emerging technology laws. He writes on the intersection of law, cybersecurity, and online safety, focusing on developments that impact individuals and institutions in India.
