Introduction 

In India, lease agreements involving the payment of rent for land, buildings, or equipment often fall under the ambit of tax deduction at source (TDS). Under the Income Tax Act, payers of lease or rental amounts above a certain threshold are required to deduct tax before making payments. To comply with this obligation, such entities must obtain a TAN (Tax Deduction and Collection Account Number). TAN enables the government to track TDS activity and ensures that tax on lease transactions is correctly deposited and reported.

Need for TAN in Lease Transactions

Whenever rent paid exceeds the limits specified under Section 194I of the Income Tax Act, the payer must deduct TDS. To perform this deduction and report it to the government, the payer must have a valid TAN. Without TAN, the deduction and related filing cannot legally proceed.

Application of Section 194I

Section 194I mandates that TDS is applicable on rental payments for land, buildings, furniture, fittings, and machinery when annual rent crosses the threshold limit. TAN is required to report these deductions and file quarterly TDS statements with complete accuracy.

TAN for Corporate and Non-Corporate Lessees

Whether the lessee is a company, LLP, or partnership firm, TAN becomes mandatory if the entity is liable to deduct tax on rent. Even individuals or HUFs liable for tax audit must obtain TAN if making high-value rental payments under a lease agreement.

TDS Return Filing Linked to TAN

Once tax is deducted on lease payments, it must be deposited to the government under the deductor’s TAN. Subsequently, quarterly TDS returns (Form 26Q) are filed using TAN to reflect the transaction, vendor PAN, amount paid, and tax deposited.

Issuance of TDS Certificates

The lessee, after deducting tax on rent, is required to issue Form 16A as a TDS certificate to the lessor. This certificate is generated with reference to the lessee’s TAN and allows the lessor to claim tax credit on income received from lease.

Avoiding Legal and Financial Penalties

Failure to deduct TDS or to report it properly using TAN can result in penalties, interest charges, and disallowance of the rent expense under Section 40(a)(ia). Obtaining and using TAN properly ensures full legal compliance and financial safety.

Recordkeeping and Audit Clarity

TAN allows for clear audit trails of all rent-related deductions and payments. During audits, TAN-based returns and challans serve as proof of compliance, reducing the risk of scrutiny or reassessment by tax authorities.

Online Compliance and Automation

Most organizations use digital tools and accounting software that automatically deduct TDS on rent and report it under TAN. This automation helps maintain timely compliance, reduces manual effort, and integrates with GST and financial systems.

Applicable to Lease Renewals and Advances

TAN obligations are not limited to new lease agreements. They also apply to lease renewals, advances against rent, and security deposits if they are deemed taxable. Ensuring TAN compliance across all such payments protects the lessee from later complications.

Conclusion

TAN is an essential requirement in lease agreements where rental payments are subject to TDS. It allows lessees to deduct tax lawfully, deposit it with the government, file returns, and issue certificates. Failing to comply with TAN provisions can lead to penalties and disallowances, while proper usage ensures financial transparency and smooth compliance. Every entity involved in rental transactions must understand the role of TAN to maintain lawful and accurate tax practices.

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