Section 194I- TDS on Rent

The provisions of Section 194-I define how one should deduct tax at source, i.e. TDS on rent. The said section is primarily for individuals earning income from rent or subletting their property. The rent received on a property is subject to TDS since it is an additional income earned by people in business, salaried people, etc.

This guide is for the the persons paying rent for land, building, plant & machinery, furniture & fittings, etc.

What is Section 194I ?

• The person (not being an Individual or HUF) who is responsible for paying of rent is liable to deduct tax at source.
• TDS threshold for deduction of tax on rent is Rs 2,40,000 for the FY 2022-23 (the threshold limit was Rs. 1,80,000 until FY 2018-19).
• Also, individuals and/or HUFs who are subject to tax audit are under an obligation to deduct the tax at source.
• TDS on rent is required to be deducted at source at the time of credit of ‘income by way of rent’ to the account of the payee or at the time of payment, thereof, in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier.

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

The Finance Act, 1994 inserted the Section 194I, regarding deduction of tax while paying rent. The government introduced the provision to cover the income by way of rent under tax deduction at source. In other countries as well, such income is subject to deduction of income tax at source (TDS).

Conditions for TDS on Rent

• There is no surcharge levied on the TDS on rent, except where there is the involvement of a foreign company and the payment is above Rs.1 crore.
• For TDS deduction, the PAN number of the landlord or the person receiving rent must be given to the payee. If it is not given, the TDS on rent is deducted at 20% under Section 206AA.
• The TDS on rent does not charge any Education Cess or Secondary and Higher Education Cess.

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

• ‘Rent’ means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any:
  • land or
  • Building (including factory building) or
  • Land appurtenant to a building (including factory building) or
  • Machinery or
  • Plant or
  • Equipment or
  • Furniture or
  • Fittings
• whether or not any or all of the above are owned by the payee, i.e. Sub-letting is also covered.
• If the landlord collects security or advance payment at the time of letting out a building to a tenant on the condition that the deposit will be refunded at the time of vacating the building, then such a receipt is not in the nature of income and, therefore, no tax is to be deducted at source u/s 194I.
• However, advance rent (not in the nature of refundable security deposit) paid is, subject to a tax deduction. Moreover, where any such rent is credited to ‘suspense account’ or to any other account shall also be liable to deduct tax at source.

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What Payment is Covered u/s 194I?

• Income from letting out of factory building
  • Where a factory building is let out, the rent received generally is income from business in the hands of the lessor or the owner of the factory. Only in a few cases, it is income from property in the lessor’s hands.
  • But such payment also, which is business income in the hands of the lessor and for which he will necessarily be paying advance tax and finally be returning the rental income, will be subject to tax deduction at source or TDS.
  • This is an unnecessary burden on both taxpayer and the tax administrator because the collection of tax will take place as TDS from the lessor without much delay.
• Rent includes service charges
  • Service charges payable to business centres are covered under the definition of rent, as they cover payments by whatever named called.
• TDS requirement where building and furniture, etc., let out by separate persons
  • In the case where a building is let out by one person and furniture and fixtures are let out by another person, then the payee is required to deduct tax under Sec. 194I only from the rent paid/credited for the hire of the building.
• TDS on rent payment when rent is not payable monthly
  • Sec. 194I does not mandate that the tax deduction should be made on a month-to-month basis.
  • Therefore, if the crediting of the rent is done on a quarterly basis, the deduction at the source will have to be made on a quarterly basis only. Where the rent is paid on a yearly basis, deduction also will have to be made once a year on the basis of the actual payment or credit.
• Charges regarding cold storage facility
  • In the case of cold storage where milk, ice cream, and vegetables, are stored, the payment may be styled as charges for use of plant and not for use of the building. Cold storage is a plant.
• Hall rent paid by an association for use of it
  • Since the association is assessed as an association of persons and not as an individual or HUF, the obligation of tax deduction will be there, provided payment for the use of the hall exceeds Rs 2,40,000 (earlier it was Rs.1,80,000).
• Payments to hotels for holding seminars including lunch
  • Where hotels do not charge for use of premises but charge for catering/meal only, the provisions of Sec. 194I would not apply. However, Sec.194C would apply for the catering part.

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

• The person (not being an Individual or HUF) who pays rent to a resident is liable to deduct tax at source.
• Individuals or HUF who are liable for tax audit are responsible to deduct tax at source under Section 194I.
• The TDS needs to be deducted if the total rent amount of such income paid or likely to be paid during the financial year by the aforesaid person to the account of the payee exceeds Rs 2,40,000. The said limit was Rs 1,80,000 until FY 2018-19.
• In Budget 2017, a new section was introduced where the individual/HUF (not covered under tax audit) paying rent to a resident exceeding Rs 50,000 per month are also liable to deduct TDS @ 5%. This amendment will be effective from 1 June 2017. However, the TDS provisions for said purpose are covered under Section 194-IB.

Illustration

ABC Pvt. ltd. runs his business on a rented building, and monthly rent is Rs 25,000. The building owner is an individual Mr. Joy. As per Section 194-I, a company paying rent above Rs 2.4 lakh to any resident person should deduct tax at source at 10% on rent paid for land or building. Hence, tax should be be deducted by ABC Pvt. ltd. on rent paid to Mr Joy. In this example, ABC Pvt. Ltd. is paying rent which is the source of Income to Mr. Joy and hence, it is the duty of the ABC Pvt. Ltd. company to deduct TDS under Section 194-I on rent, if the total rent paid or payable during the financial year exceeds Rs 2.4 lakh, and deposit the same to the government on behalf of Mr Joy,

So, the total of rent amount during the financial year in our example is 12 x Rs 25,000= Rs 3,00,000. Hence, the rent it will attract TDS @ 10%.

The TDS should be deducted when the rent is paid or credited to the lessor’s account monthly /quarterly yearly @ 10 %.

No Deduction or Deduction at Lower Rate under Sec. 197

The payee can apply in Form 13 to the Assessing Officer for lower deduction or no deduction of tax at source. If the assessing officer is satisfied that this total income justifies no deduction of tax or deduction at a lower rate, the said tax officer may issue a certificate in Form 15AA to that effect directly to the payer.

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

• Amount payable/paid not exceeding Rs 2,40,000 during the financial year: No tax is required to be deducted in case the amount of rent due or paid does not exceed Rs 2,40,000 during the financial year (earlier it was Rs1,80,000).
• Where tenant is individual or Hindu Undivided Family: Deduction is not required under Sec. 194I when the rent is due or paid by an Individual or HUF not carrying on a business which is audited under income tax law.
• Sharing or proceeds of film exhibition between a film distributor and a film exhibitor owning a cinema theatre: In case of a film exhibitor and film distributor contract, the share of the exhibitor is on account of composite services. The distributor does not take cinema building on lease or sub-lease or tenancy or under an agreement of similar nature. The payment made is not rental in nature.
• Where the payee is the Government at agency: A person making payment to Government is not required to deduct tax at source under Section 194I. The payments made to statutory authorities and local authorities are exempt from tax and hence not tax deductible.

TDS on Advance Rent

When the advance rent is paid to the landlord, the payment is subject to a TDS deduction. Below are a few exceptions for TDS calculations on advance rent:

• When the advance rent crosses over to the next financial year, the TDS will be in proportion with earnings based on Form 16 issued for aggregate rent paid in advance.
• When an asset is transferred or sold to another individual, the TDS credit is not available until the transfer is credited to its new owner.
• When there is a cancellation of rental agreement after the payment of advance rent and deduction of TDS, the balance will be refunded to tenants. The landowner has to mention such cancellation in the ITR form submitted for TDS deduction.
• For payment besides salary, a TDS certificate has to be issued every quarter as Form 16A. 

What is the Time Limit on Depositing TDS?

• Where the payment is made by or on behalf of the Government- On the same day (without using any challan form)
• Where the payment is made in any other case than the Government- On or before 7 days from end of month in which deduction is made, where tax is paid accompanied by an Income tax challan
  • If the amount is credited or paid in the month of March- On or before April 30
  • In any other case- On or before 7 days from the end of the month in which the deduction is made.

Consequences of Non-Deduction/Non-Payment of TDS

• TDS not deducted: Pay interest @ 1% per month from the date when tax is deductible till the date when tax is deducted.
• TDS deducted but not deposited: A taxpayer who has deducted tax but not deposited the same to the government is liable to pay interest @ 1.5% per month from the date when tax is deducted to the date of deposit of the TDS.
• Click here to know more about the deposit of TDS and quarterly returns of TDS and penal implications for TDS defaults.

TDS on rent by Individuals

TDS on rent paid to NRI

If you pay rent to NRI, then TDS @30% +surcharge + 4% cess must be deducted. TDS must be deducted irrespective of the amount of rent paid to NRI as there is no limit on the rent payment. However, the NRI may obtain no or lower deduction certificate in case his income in India is less than the basic exemption limit. 

Frequently Asked Questions

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

• Applicability-Tenants, being an individual or HUF, whose books of accounts are liable for tax audit during the financial year shall deduct TDS under Section 194-I. Section is applicable to those tenants, being an individual or HUF, whose books of accounts are not liable for tax audit during the financial year.
• TDS rates- For rent on land, building or furniture, the TDS rate is 10% under Section 194-I. For rent on the plant and machinery, the TDS rate is 2% (Section 194-I). However, for rent on land, buildings, or both, the TDS rate is 5% under Section 194-IB.
• Exemption limit– the minimum exemption limit is Rs 2.4 lakh per annum for Section 194-I and Rs 50,000 per month for section 194-IB.

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

As per Circular: No. 715, dated 8-8-1995, issued by the income tax department, payments made by persons, other individuals and HUFs for hiring hotel rooms regularly will be liable for tax deduction under Section 194-I.

Whether the rent exemption limit of Rs 2.4 lakh per annum under Section 194-I would apply separately for each co-owner of a property ?

Under section 194-I, the TDS is deducted from the rent, if such payment is likely to be Rs 2.4 lakh or more during the year. However, if there are co-owners of the property, each having a definite and ascertainable share in the property, the limit of Rs 2.4 lakh will apply to each of the co-owner separately.

Whether the rent paid should be enhanced for notion­al income in respect of deposit given to the landlord?

The TDS is to be deducted from actual payments and not by computing notional income as per deposit given to the landlord. If the deposit is adjustable against future rent, the deposit is in the nature of advance rent subject to TDS.

What is the limit for TDS on rent?

The exemption limit for TDS on rent under section 194-I is Rs 2.4 lakh per annum. The limit for TDS on rent under section 194-IB is Rs 50,000 per month.

Will tax be deducted from the service tax added in my rent?

No, service tax is not considered part of the landlord’s income. Therefore, tax is deducted under Section 194I without including the service tax.

Which form should I file when Nil tax is applicable on my income?

In the case where there is a Nil tax applicable on the your income and you are receiving rent as income, then you can file Form 15G or Form 15H for non-deduction of TDS.

Related Guides

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• How to import your Consolidated File to prepare a Correction Statement
• How to generate Form 16 (part B) from TDS return?
• What happens if I do not file my TDS returns on time?
• How to download your CSI File
• How to file TDS on the Sale of Property
• How to validate Certificate U/S 197 from Assessing Officer
• How do I correct form details after filing?

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