Impact Of Union Budget’s TDS Measures on Rental Housing Growth

Posted On - 17 February, 2025 • By - Siri K Reddy

Introduction

Experts consider that the Union Budget 2025 shall have both positive and negative impacts on the wellbeing of both taxpayers and non – taxpayers. One prominent change is the increase in the TDS threshold of rental income from Rs.2.4 lakhs per year to Rs.6 lakhs per year. Needless to say, it also has both positive and negative impacts. This paper shall discuss the legal, social and economic impact of such a change.

Legal Impact

There exists no financial benefit to both tenants and landlords, but a reduction in legal compliances makes rental housing accessible and tax compliance easier. Sec. 194-I of the Income Tax Act, 1961 deals with the provision related to TDS on rent. Some of the legal impacts include:

  1. Reduction in the compliance burden – The rent for 2 or 3 – bedroom houses, service apartments, and workplaces in metropolitan cities is easily over Rs.20,000/-. People with lower incomes who do not fall under the tax bracket must still pay TDS on behalf of the landlord to the government, which increases compliance along with their respective tax returns. Apart from this scenario, the rents were higher as they would include the TDS to be paid. But, it can also have a negative impact of increase in rents due to relaxation in the TDS threshold.
  2. Unmonitored small scale landlords – The small landlords that fall under Rs.6 Lakh per year shall now remain unmonitored as they are free from compliances. There might be a decrease in filing of returns resulting in no submission on rental agreements.
  3. Streamlined tax system – The reduction in the TDS threshold reduces the number of tax filings related to rental income. This reduces the mismatch of returns between the tenant and landlord leading to reduced legal disputes.
  • Enhanced formal procedure – The removal of tax burdens on the tenants and landlords shall encourage the landlords who were outside the formal procedure and did not have rental agreements with the tenants, may formalize their procedure. This shall result in better tenant rights, protection under law and reduced unregistered arrangements.

Social Impact

The change in the TDS threshold shall have a major impact on the society, particularly to apartments, cohabitation arrangements etc. Some major impacts are as follows:

  1. Increase in number of individuals renting out properties – Due to less compliances and a tax-free environment up to Rs. 6 Lakh per year, individuals who refrained from renting out properties shall enter into the rent business.
  2. Greater Financial Flexibility – Landlords with rental income and their only source of income shall enjoy a larger portion of their income as it remains untaxed at source.

Other impacts include empowerment of small landlords and a shift in the perception of the society to prefer renting over owning a property.

Economic Impact (Real Estate)

  1. Investor – owned properties – The investments made by a developer are massive. To make these investments profitable, investors must rely on TDS credits, which are received after completion and payment by the tenant, along with navigating the complex procedure and fulfilling the compliance requirements. The reduction in the threshold has created a compliance-free environment making it profitable to the investor.
  2. Increase in rent – Initially, the threshold for TDS was Rs.2.4 Lakh per year, i.e., Rs.20,000/- per month. Now that the threshold has been increased to Rs.6 Lakh per year, i.e., Rs.50,000/- per month, the landlords might increase the rents as a larger bracket of threshold is untaxed. As per some reports, the average rental increase every year ranges from 3-5%. But, after the change in TDS, the rent is expected to increase over 5%. This shall affect tenants with lower income.
  • Increase in Supply – According to a newspaper report dated 01-02-2025 i.e., on the same day of the Union budget 2025, there is a significant surge of up to 9.3% in the real estate stock market. There are multiple investors investing in real estate such as Prestige Estate surged 9.3% and Sobha rose 4.6%. As per some reports, the increase in the rental sector in 2025 was calculated at 18% prior to the Union Budget. After, it is expected to increase over 18%.
  • Potential increase in demand – Because of many investors entering the renting business, there is an increase in supply which shall stabilize rents benefitting the tenants. Therefore, the tenants might prioritize rental properties over other options.

Conclusion

Therefore, the increase in the TDS threshold of rental income has long term impacts on the real estate sector. This shall further boost the real estate sector due to an increase in the number of investors, leading to an increase in the supply, stabilizing the price, potentially increasing the demand for rental properties.