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Once upon a time, in the grand kingdom of Vijayanagar, under the benevolent rule of Raja Krishan Dev Rai, peace and prosperity flourished. The markets bustled, trade flourished, businesses gleamed, and the people and king were mostly happy, except for one persistent royal headache- tax collection.
Though the kingdom was wealthy, the treasury often ran dry during the year. Taxes were due annually, but by the time the royal taxmen arrived at each village or taluka, the money was either spent, hidden, or simply forgotten. The royal coffers groaned under the delays, and the tax administration scurried in frustration.
The Raja summoned his trusted courtier, the ever-witty and wise Pandit Tenali Rama, and said with a sigh: “Tenali, the people are not dishonest, but our system is. We chase what should already be in our hands. Is there no better way?”
Tenali Rama, as always, smiled his quiet smile.
“Your Majesty, may I show you something in the palace gardens tomorrow morning?”
The next dawn, the two strolled through the dew-kissed royal garden, where rows of herbs and flowers bloomed. They stopped as the chief gardener Ramu kaka, presented a lush and fresh bouquet of flowers.
Tenali pointed to the flowers.
“Notice, Maharaj, how fresh these are? Ramu kaka collects a handful from each junior gardener before these flowers are sent in market. Your share is gathered before distribution. Not after.”
The Raja raised an eyebrow.
“So, he collects my offering at the source itself?”
“Exactly,” said Tenali. “And he does it without needing a second visit or a chase. What if we do the same with taxes? Let those who pay- landlords, merchants, employers- deduct the kingdom’s share first, before handing the rest to the recipient.”
The Raja’s eyes widened with understanding.
“Brilliant! So instead of waiting for each farmer, worker, or artisan to remember to pay taxes, we ask the payer to act as our collector?”
“Indeed,” Tenali nodded. “We ease the burden on the treasury. But we must do one more thing-reward these collectors. For if Ramu kaka doesn’t get his fair share of recognition and reward, he might stop collecting diligently.”
Thus, was born the ‘Royal Withholding Tax’ in Vijayanagar, where income givers-merchants, zamindars, and employers-deducted the Raja’s share and deposited it straight into the treasury. In return, they were honoured, exempted from additional levies, and even rewarded for honest collection.
Fast Forward to Modern India: The Irony of Tedious TDS Compliance
Today, that ancient wisdom of ‘royal withholding’ lives on in the form of TDS-Tax Deducted at Source, under the Indian Income Tax Act. The Indian Legislature, by the insertion of Chapter XVII-B containing sections 192 to 194T in the Income Tax Act, 1961 (Chapter XIX containing section 393 in the new Income Tax Bill 2025) has casted the responsibility of deducting and depositing Tax at Source (TDS) in relation to the income of the recipient, upon the payer of such income and as such the statutory onus and burden of the Exchequer has been shifted to the payer of income who also happens to be the taxpayer. TDS constitutes as high as 45-50% of the total tax collections. Interestingly, for discharging this statutory responsibility of the Exchequer, the taxpayer does not get rewarded in any manner. Infact to the contrary, a failure or default in discharge of this burden, even an unintentional one, results in some very dire consequences including prosecution also.
Fast forwarding further- Onus of Revenue becoming an Onerous Job for the helpless Individual Tenants u/s 194IB of the Income Tax Act
Individual tenants not liable for tax audits and making rental payments, in excess of ₹50,000/- per month, were required to deduct TDS @5% from their rental payments and deposit the same with the Exchequer under section 194IB of the Income Tax Act. This TDS rate got reduced from 5% to 2% with effect from 1.10.2024.
In many cases, due to lack of awareness about this rate change, individual tenants, continued deducting and depositing the higher TDS of 5% in place of 2% for the entire year of 2024-25, vide their annual challan cum TDS statement in prescribed form 26QC.
Non-Reflection of Full TDS Credit on Rent u/s 194IB:
Ideally, as per Law, full TDS credit of actual TDS deducted and deposited by tenants (even if higher than applicable rate) should be reflected in Form 26AS of respective landlords. This excess TDS credit can be claimed by respective landlords, while filing their ITRs.
But currently, TDS credit of only 2% is getting reflected in Form 26AS of respective landlords, for FY 2024-25, even where their tenants had deducted and deposited the higher TDS of 5% for the entire year. This appears to be due to a technical glitch in the updated TRACES utility, which is restricting the availability of TDS credit to the extent of 2% only, in such cases.
The more worrisome is the fact that TDS credit @ 2% is shown in 26AS of landlords, for the entire FY 2024-25, even for the period April- September 2024, when TDS rate as per law, was 5% only, and tenants had duly deducted and deposited TDS @5% only.
How to Claim Refund of Excess TDS deposited u/s 194IB?
Currently, the faulty TDS utility is resulting in non-reflection of the otherwise lawfully entitled TDS credit of 3% to the landlords, which in turn are asking their tenants to compensate/reimburse for such shortly reflecting TDS through additional payments. So, taking cognizance of the problem, as an alternative, CPC Bengaluru, is asking such individual tenants to claim the refund of this excess TDS of 3%, which is not being captured by TRACES. CPC is sending mails to the tenants from its email id intimations@tdscpc.gov.in. These emails are prompting such tenants to claim refund of the excess TDS of 3%, being deducted and deposited by them, by making an online application in Form 26B. A link containing the guidance note on step-by-step procedure for filing this online Form 26B, is also given in these emails.
For claiming refund of excess TDS amount, tenants need to log in to TRACES website. They need to click on ‘Request for Refund’ under ‘Statements/Forms’ tab. Then they need to select the reason, “I have made an excess payment of tax by mistake” from the drop-down list. They then need to add the relevant Challan 26QC, and fill in its details like its acknowledgement number, financial and assessment year, date and amount of TDS deposit, BSR code, challan serial number. The claimable refund amount of excess TDS of 3% gets auto populated in Form 26B. Then they need to add bank account details for getting the refund.
The last segment of Form 26B contains a certification to be provided by the applicant tenants that the refund amount shall not be claimed as TDS credit, and there is no outstanding TDS demand in their names. Applicants finally need to e-verify Form 26B, either through their digital signatures or by Adhaar based OTP verification, and submit it online.
Lengthy Checklist of Documents
Interestingly, the guidance note contained in the link shared by the CPC in its emails, suggests that applicant tenants will automatically get refunds of excess TDS amount in their bank accounts, after e-filing their refund application in Form 26B.
But, in reality, the TDS refund processing at the ground-level is tedious and time consuming. When tenants e-file Form 26B, then a message appears, directing them to take a print out of Form 26B acknowledgement and send it to jurisdictional TDS officer, for further verification. When applicants send such application acknowledgement to the officer concerned, they are again bombarded with a lengthy checklist of furnishing of numerous other records and documents. These include the rental agreement, bank statement for the entire year, evidencing payment of rent and deposition of TDS thereon, challan-cum-statement in Form 26QC, copy of PAN card, cancelled cheque. The applicant tenants are further asked to furnish a notarised Indemnity Bond on a stamp paper of ₹100, undertaking to indemnify the income tax department, against any probable losses and demands, arising out of such refund claims. Even after furnishing of the above plethora of records and documents, granting of refund is still at the discretion of the jurisdictional TDS officer concerned.
Tenants may still be considered as ‘Assessee in Default u/s 201(1)/(1A)
More worrisomely, the automated populated refund in online Form 26B by the online TDS utility is being calculated @ 3% for the entire FY 2024-25 and not from October- March 2025. This automated calculation of TDS refund by the utility in the online Form 26B is obviously wrong and inconsistent with the applicable TDS rate of 5% on rent under section 194IB uptill 30.9.2024. Therefore, even if the tenants succeed in getting such auto-calculated wrong and inflated refunds vide the online form 26B, later on, they may still be considered as assessee in default u/s 201(1)/(1A), for the alleged shortfall of TDS deduction and deposition to the extent of 3%, for the period April 2024 till September 2024, for no fault of theirs. This is because of the fact that the TDS utility is automatically calculating excess refund @3% even for the period of April 2024 till September 2024, in the online Form 26B.
Concluding Remarks: The Article 265 of the Constitution of India mandates that no tax can be collected except with the authority of Law. So, refunding the excess tax amount should have been the onus of the revenue. But instead, it had been converted into an onerous job for the helpless tenants, who have to run from pillar to post to get their otherwise constitutionally guaranteed refunds.
The income giver is still made responsible for tax collection, just like in Vijayanagar. But instead of being rewarded like Ramu kaka, the deductor is penalized for even a minor delay. Prosecution, penalties, and late fees hang over honest payers like a sword. The onus of precision, filing, and compliance lies entirely on the deductor/collector-with little appreciation for the effort.
If Tenali Rama were alive today, he would have asked, “Why must the gardener be punished for a flower that wilted on the way?”
[This Article, authored by our Founder, Shri Mayank Mohanka, FCA, has also been published in Taxmann with the Citation [2025] 174 taxmann.com 1068 (Article)]
