Section 194I- TDS on Rent

A Comprehensive Guide for Rent Payers

Section 194-I of the Income Tax Act lays down the guidelines for deducting tax at source (TDS) on rental income. This provision primarily targets individuals who earn additional income through renting out or subletting their properties. The rental income earned is subject to TDS, as it is considered a supplementary source of income for individuals engaged in business, salaried employment, or other professions.

This guide is specifically designed for those who pay rent for land, buildings, plant and machinery, furniture and fittings, or any other similar assets. If you fall into this category, it is essential to understand your obligations regarding TDS on rent payments.

What is Section 194I ?

1. TDS Deduction Responsibility: The onus of deducting tax at source (TDS) on rent payments lies with non-individual entities and Hindu Undivided Families (HUFs) responsible for making such payments.
2. TDS Threshold Limit: For the financial year 2022-23, the threshold limit for TDS deduction on rent payments is set at Rs. 2,40,000. Prior to the financial year 2018-19, this threshold stood at Rs. 1,80,000.
3. Tax Audit Obligation: Individuals and HUFs subject to tax audits are also obligated to deduct TDS on rent payments, irrespective of the threshold limit.
4. TDS Deduction Timing: TDS on rent must be deducted at the earlier of two events: either at the time of crediting the rental income to the payee’s account or at the time of actual rent payment, whether in cash, cheque, draft, or any other mode of payment.

It is crucial for entities responsible for rent payments to adhere to these guidelines to ensure compliance with the applicable tax laws and regulations.

What is the Reason for the Introduction of TDS u/s 194I?

In 1994, the Finance Act brought about Section 194I, focusing on tax deduction when paying rent. This legislative addition aimed to encompass rental income under tax deduction at source (TDS). Similar provisions exist in various other countries, where income from rent is subject to deduction of income tax at the source.

Conditions for TDS on Rent

1. No additional surcharge is imposed on TDS for rent, except in cases involving a foreign company where payments exceed Rs. 1 crore.
2. To deduct TDS, the PAN number of the landlord or recipient of rent must be provided. Failure to do so results in TDS being deducted at a rate of 20% under Section 206AA.
3. TDS on rent does not include Education Cess or Secondary and Higher Education Cess.

What is the Meaning of ‘Rent’ in reference to Section 194I?

The term “rent” encompasses a broad range of payments, regardless of their specific nomenclature, made under any lease, sub-lease, tenancy, or other agreement or arrangement. These payments are subject to TDS provisions if they are made for the use of any of the following assets, either individually or in combination:

1. Land
2. Buildings (including factory buildings)
3. Land appurtenant to a building (including factory buildings)
4. Machinery
5. Plant
6. Equipment
7. Furniture
8. Fittings

It is important to note that the ownership of these assets by the payee is not a prerequisite for the TDS provisions to apply. Subletting arrangements also fall within the purview of Section 194I.

Refundable Security Deposits and Advance Rent

In cases where a landlord collects a refundable security deposit or advance payment from a tenant at the time of leasing a building, with the condition that the deposit will be refunded upon vacating the premises, such receipts are not considered income. Consequently, no TDS is required to be deducted under Section 194I for refundable security deposits.

However, advance rent payments (excluding refundable security deposits) are subject to TDS deductions. Furthermore, even if such rent payments are initially credited to a suspense account or any other account, they are still liable for TDS deductions.

These guidelines clarify the comprehensive nature of the “rent” definition under Section 194I, ensuring compliance with TDS obligations across various leasing and rental arrangements.

What is the Rate of TDS?

Sr. No.	Nature of Payment	Rates of Tax Deduction
1	Rent of plant, equipment and machinery	2%
2	Rent of land, building, furniture or fitting	10%

What Payment is Covered u/s 194I?

1. Income from Letting Out Factory Buildings:
   • When a factory building is leased, the rental income is generally considered business income for the lessor or building owner.
   • However, even in such cases where the income is taxable as business income, the lessee is still obligated to deduct TDS on the rent paid.
   • This requirement may seem redundant since the lessor will eventually pay advance tax and report the rental income, but TDS compliance remains necessary.
2. Service Charges as Rent:
   • Service charges paid to business centers fall within the purview of the “rent” definition, as the law covers payments made under any nomenclature.
3. Separate Lessors for Building and Furnishings:
   • In situations where a building is leased from one party and furniture/fixtures are leased from another, the lessee is required to deduct TDS under Section 194I only on the rent paid for the building.
4. TDS on Non-Monthly Rent Payments:
   • Section 194I does not mandate TDS deduction on a monthly basis.
   • If rent is credited on a quarterly or annual basis, TDS must be deducted accordingly, aligning with the actual timing of the rent payment or credit.
5. Cold Storage Facilities:
   • Charges paid for the use of cold storage facilities, which are classified as plants, may be subject to TDS under Section 194I, as the payment is for the use of a plant rather than a building.
6. Hall Rent Paid by Associations:
   • If an association, which is assessed as an association of persons (not an individual or HUF), pays hall rent exceeding the prescribed threshold, it is obligated to deduct TDS on the rent payment.
7. Hotel Payments for Seminars:
   • If hotels charge only for catering or meals and not for the use of premises during seminars, Section 194I (TDS on rent) would not apply. However, Section 194C (TDS on contract payments) may be applicable for the catering portion.

These nuances highlight the complexities involved in determining TDS obligations on rent payments, emphasizing the need for careful examination of each specific situation to ensure compliance with the relevant tax laws.

Who is Liable to Deduct TDS u/s 194I?

1. Non-Individual and Non-HUF Payers: Entities other than individuals and Hindu Undivided Families (HUFs) are liable to deduct tax at source (TDS) when making rental payments to resident payees.
2. Individuals and HUFs under Tax Audit: Individuals and HUFs who are subject to tax audits are also required to deduct TDS on rental payments made to residents, irrespective of the rental amount.
3. TDS Threshold: The TDS obligation arises if the total rental income paid or likely to be paid during the financial year by the aforementioned entities exceeds Rs. 2,40,000. Prior to the Financial Year 2018-19, this threshold was set at Rs. 1,80,000.
4. Individual and HUF Payers (Non-Tax Audit Cases): In the 2017 Budget, a new provision (Section 194-IB) was introduced, effective from June 1, 2017. Under this provision, individuals and HUFs (not covered under tax audit) are liable to deduct TDS at 5% if they pay rent to a resident exceeding Rs. 50,000 per month.

It is crucial for entities and individuals falling under the purview of these provisions to diligently comply with the TDS obligations on rental payments. Failure to do so may attract penalties and interest charges under the applicable tax laws.

Illustrating TDS on Rent

ABC Pvt. Ltd., a company, operates its business from a rented building owned by an individual, Mr. Joy. The monthly rental payment for the building is Rs. 25,000. According to Section 194-I of the Income Tax Act, companies paying rent exceeding Rs. 2.4 lakh to a resident person are required to deduct tax at source (TDS) at the rate of 10% on the rent paid for land or buildings.

In this case, ABC Pvt. Ltd. is liable to deduct TDS on the rent paid to Mr. Joy, as the rental income constitutes a source of income for the individual lessor. The company has a statutory obligation to deduct the applicable TDS under Section 194-I and deposit the deducted amount with the government on behalf of Mr. Joy.

Calculating the TDS Liability: The total rent amount payable by ABC Pvt. Ltd. during the financial year is calculated as follows: Monthly rent × Number of months in a year = Total rent for the year Rs. 25,000 × 12 = Rs. 3,00,000

Since the total rent payable during the financial year exceeds the threshold of Rs. 2.4 lakh, ABC Pvt. Ltd. is required to deduct TDS at the rate of 10% on the rent paid.

TDS Deduction and Remittance: The TDS should be deducted at the time of paying or crediting the rent to Mr. Joy’s account, whether on a monthly, quarterly, or yearly basis. The deduction rate applicable is 10% of the rent amount.

By adhering to the TDS provisions outlined in Section 194-I, ABC Pvt. Ltd. fulfills its legal obligation as a responsible taxpayer and ensures that the appropriate taxes are withheld and remitted to the government on behalf of the lessor, Mr. Joy.

No Deduction or Deduction at Lower Rate under Sec. 197

The payee has the option to request reduced or zero tax deduction at the source by submitting Form 13 to the Assessing Officer. Upon review, if the Assessing Officer deems that the payee’s total income warrants either no deduction or deduction at a reduced rate, they may issue a certificate (Form 15AA) directly to the payer confirming this arrangement.

Under What Circumstances TDS u/s 194I is Not Deductible?

1. Rent payments not exceeding Rs 2,40,000 annually: If the rent paid or due in a financial year doesn’t surpass Rs 2,40,000 (previously Rs 1,80,000), no tax deduction is required.
2. Exemption for Individuals and HUFs: Individuals or Hindu Undivided Families (HUFs) not engaged in audited business are exempt from tax deduction under Sec. 194I for rent payments.
3. Film Exhibition Proceeds: When sharing proceeds between a film distributor and an exhibitor, if the distributor doesn’t lease or sub-lease the cinema building, payments are not considered rental.
4. Payments to Government Agencies: Payments made to the government or its agencies are exempt from tax deduction under Section 194I. This includes payments to statutory and local authorities.

TDS on Advance Rent

When making advance rent payments to a landlord, it’s important to be aware of TDS deductions.

Here are some key considerations:

1. Crossing Financial Years: If the advance rent extends into the next financial year, TDS should be calculated proportionately based on the aggregate rent paid in advance as per Form 16.
2. Asset Transfer or Sale: In the event of transferring or selling the property to another individual, TDS credit is not available until the transfer is finalized and credited to the new owner.
3. Cancellation of Rental Agreement: If a rental agreement is canceled after advance rent payment and TDS deduction, any balance remaining must be refunded to the tenant. It’s the landlord’s responsibility to declare such cancellations in the ITR form submitted for TDS deduction.
4. TDS Certificate Issuance: For payments other than salary, such as rent, a TDS certificate in the form of Form 16A must be issued quarterly.

What is the Time Limit on Depositing TDS?

For payments made by or on behalf of the government, the transaction should occur on the same day without the necessity of using any specific challan form.

In all other instances apart from government payments, if tax is paid with an Income Tax challan, it should be done on or before the 7th day following the end of the month in which the deduction is made.

When the payment is credited or made in March, it should be settled on or before April 30th.

For all other cases, the payment should be completed on or before the 7th day following the end of the month in which the deduction was made.

Consequences of Non-Deduction/Non-Payment of TDS

When taxes aren’t deducted: Interest at 1% per month accrues from the date when tax should have been deducted until it’s actually deducted.

When taxes are deducted but not deposited: If a taxpayer deducts tax but fails to deposit it to the government, they’re liable for interest at 1.5% per month from the date of deduction until the date of deposit.

TDS on rent by Individuals

Particulars	Section 194-I	Section 194-IB
Applicability	Rent paid by an individual/HUF (only if tax audit was applicable in the preceding FY), or Rent paid by any other person	Rent paid by individual/HUF (tax audit not applicable in the preceding FY)
Limit	2,40,000 per annum	Rs 50,000 per month
Rate	2% of rent on plant and machinery 10% of rent on land, building or furniture	5% of land or building or both

TDS on rent paid to NRI

When renting from an NRI, it’s essential to deduct TDS at a rate of 30%, plus any applicable surcharge and a 4% cess. Regardless of the rent amount paid to the NRI, TDS must be deducted. However, NRIs can apply for a no or lower deduction certificate if their income in India falls below the basic exemption limit.

Frequently Asked Questions

What is the difference between 194I and 194IB and how to calculate TDS on rent?

Particulars	Section 194-I	Section 194-IB
Applicability	Rent paid by an individual/HUF (only if tax audit was applicable in the preceding FY), or Rent paid by any other person	Rent paid by individual/HUF (tax audit not applicable in the preceding FY)
Limit	2,40,000 per annum	Rs 50,000 per month
Rate	2% of rent on plant and machinery 10% of rent on land, building or furniture	5% of land or building or both

Tenants, whether individuals or HUFs, subject to a tax audit during the financial year, are required to deduct TDS under Section 194-I. Conversely, Section 194-I applies to tenants, individuals, or HUFs whose books of accounts are not subject to a tax audit during the financial year.

When it comes to TDS rates, rent on land, building, or furniture incurs a 10% deduction under Section 194-I. For rent on plant and machinery, the TDS rate stands at 2% under the same section. However, for rent on land, buildings, or both, the TDS rate is reduced to 5% under Section 194-IB.

Regarding exemption limits, Section 194-I has a minimum exemption limit of Rs 2.4 lakh per annum, while Section 194-IB sets it at Rs 50,000 per month.

Does rent includes payments made to a hotel for rooms hired during the year?

According to Circular No. 715, dated August 8, 1995, from the income tax department, individuals and Hindu Undivided Families (HUFs) are required to deduct tax under Section 194-I on payments made for the regular hiring of hotel rooms.

Is the Rs 2.4 lakh annual rent exemption under Section 194-I applicable individually to each co-owner of a property?

In accordance with Section 194-I, tax deducted at source (TDS) is applicable on rent payments exceeding Rs 2.4 lakh annually. However, if a property has multiple co-owners with distinct and identifiable shares, the Rs 2.4 lakh threshold applies individually to each co-owner.

Is it fair to increase rent based on hypothetical earnings from the security deposit provided to the landlord?

TDS should be deducted based on the actual payments made, rather than calculating it on hypothetical income derived from the deposit provided to the landlord. When the deposit is adjustable against future rent, it is considered as advance rent and is liable for TDS.

What’s the maximum permissible TDS on rental payments?

The threshold for TDS on rental payments varies depending on the section of the Income Tax Act applied:

• Under section 194-I, TDS exemption for rent is up to Rs 2.4 lakh annually.
• Contrastingly, under section 194-IB, the exemption is capped at Rs 50,000 per month.

Will my rent include service tax, and if so, will tax be deducted from the service tax portion?

Service tax does not constitute part of the landlord’s earnings. Thus, tax deduction under Section 194I is done excluding the service tax amount.

When your income is exempt from taxation, which form should you submit?

If your income is subject to Nil tax and you earn rental income, you have the option to submit either Form 15G or Form 15H to avoid TDS deduction.