Is TDS Applicable on Security Deposit for Rent?

Is TDS applicable on security deposit for rent?

Short answer: no, TDS is not applicable on a refundable security deposit at the time it is paid.

But timing and usage matter. A lot.

Why TDS is usually not deducted on security deposit

TDS is deducted on income.

A refundable security deposit is not income.

It is money given as security and expected to come back.

Because of that, tax law does not require TDS to be deducted when a refundable deposit is paid to the landlord.

No income earned. No TDS.

How TDS on rent actually works

TDS under rent rules applies to rent payments, not deposits.

Rent is paid monthly.

Security deposit is paid once and held.

That difference decides everything.

As long as the deposit is refundable and clearly mentioned as such in the agreement, TDS does not apply.

An example

Monthly rent: ₹45,000

Annual rent: ₹5,40,000

Security deposit: ₹1,35,000

TDS applies on the rent component, depending on the applicable section and limits.

The ₹1,35,000 deposit is paid separately and fully refundable.

No TDS is deducted on that ₹1,35,000 at the time of payment.

Clean separation. No confusion.

When TDS can apply on security deposit

Here’s the part that gets missed.

TDS may apply later, not at payment.

If the security deposit is:

• Adjusted against rent
• Used to cover unpaid rent
• Forfeited by the landlord

Then the adjusted or forfeited amount becomes income.

And income attracts TDS, if thresholds and conditions are met.

Same money. Different timing. Different treatment.

Why wording in the agreement matters

Quick tip. The lease agreement decides a lot here.

It should clearly say:

• Deposit is refundable
• Deposit is not rent
• Conditions for adjustment

If the agreement is vague, tax authorities may treat part of the deposit as advance rent.

Advance rent can attract TDS.

Words matter. A lot more than expected.

Does TDS apply on interest paid on deposit?

If interest is paid on the security deposit, that interest is income.

That interest may attract TDS under applicable sections, depending on limits and payer type.

Deposit itself stays untouched.

Interest follows a different rule.

Two buckets. Two outcomes.

Common mistakes people make

These happen often:

• Deducting TDS on deposit unnecessarily
• Ignoring TDS when deposit is adjusted as rent
• Mixing GST rules with TDS rules

Different laws. Same confusion.

Quick checklist before paying deposit

Before transferring money, check:

• Is deposit clearly refundable in the lease?
• Is it shown separately from rent?
• Are adjustment conditions written clearly?

Clear answers avoid tax headaches later.

FAQ

Is TDS deducted on refundable security deposit?

No, TDS is not applicable.

Is TDS applicable if deposit is adjusted as rent?

Yes, TDS may apply on the adjusted amount.

Does interest on deposit attract TDS?

Interest may attract TDS, depending on limits.

In short

Refundable security deposit does not attract TDS.

Once adjusted or forfeited, tax rules change.

Clear drafting keeps things simple.

Still unsure how a specific deposit clause affects TDS?