Section 194I - TDS on Rent

The provisions of Section 194-I define how one should deduct tax at source, i.e. TDS on rent. TDS at 10% is deducted when rent paid exceeds Rs. 50,000 per month. If the asset rented is plant and machinery, 2% TDS is deducted. The said section is primarily for individuals earning income from rent or subletting their property. 

When the rent is paid to an NRI, TDS at 30% needs to be deducted irrespective of amount of the rent paid. Surcharge and cess should also be deducted, over and above TDS.

This guide is for persons paying rent for land, buildings, plant & machinery, furniture & fittings, etc. to ensure compliance with the tax provisions. 

What is Section 194I?

Section 194I prescribe provisions related to TDS on rent. The provisions for these sections are explained below:

• Applicability: 
  • Rent paid by an individual/HUF* to whom tax audit was applicable in the preceding FY, or 
  • Rent paid by any other person
• Threshold Limit : Rs.50,000 per month.
• Rate: 
  • 2% of rent on plant and machinery 
  • 10% of rent on land, building or furniture

*If tax audit is not applicable to an individual or HUF paying rent, TDS under section 194-IB is applicabe

What is the Meaning of ‘Rent’ u/s 194I?

• ‘Rent’ means any payment made under any of the following kinds of arrangements:
  • Lease
  • Sub-lease
  • Tenancy
  • Any other agreement or arrangement.
• The agreement entered could be for the use of:
  • Land or
  • Building (including factory building) or
  • Land attached to a building (e.g., parking lot, garden, etc.,) or
  • Machinery or
  • Plant or
  • Equipment or
  • Furniture or
  • Fittings.
• No TDS needs to be deducted under this section for refundable security deposit paid as it is not in the nature of income to recipient.
• However, advance rent (not in the nature of refundable security deposit) paid, is subject to tax deduction. 
• Moreover, any such rent is credited to ‘suspense account’ or to any other account shall also be liable to TDS.

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

• The person other than 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 exceeds Rs 50,000 per month. 
• If the individual paying rent to a resident is not covered under tax audit, TDS under section 194IB is deducted at 2%. 

When TDS needs to be deducted u/s 194I?

TDS on rent is required to be deducted at source at the earliest of:

• Credit of ‘income by way of rent’ to the account of the payee or 
• At the time of payment.

Threshold Limit for Section 194I

TDS for rent u/s 194I is not required to be deducted as long as the rent paid does not exceed Rs.50,000 per month.

TDS Rate on Rent

Note: 

1. No additional rates like surcharge or cess are added to TDS rent. Therefore, the TDS is deducted only in rates as prescribed in this section.
2. 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.

TDS Rate for 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.

Illustration

Payer: ABC Pvt Ltd., (Company

Receiver: Mr. Joy (Property owner, resident in India)

Monthly Rent: Rs. 75,000 

 As per Section 194-I, a company paying rent above Rs 50,000 per month to any resident person should deduct tax at source at 10% on rent paid for land or building.  Hence, tax should be deducted by ABC Pvt. Ltd. on rent paid to Mr. Joy. 

So, the total rent amount during the financial year in our example is 12 x Rs 75,000= Rs 9,00,000 p.a. Hence, the rent will attract TDS @ 10% i,e., Rs. 75,000 x 10% = Rs. 7,500 per month. 

Therefore, the net rent payable to Mr. Joy is Rs. 75,000 - Rs. 7,500 = Rs. 67,500 per month.  

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

• Amount payable/paid not exceeding Rs 50,000 in a month: No tax is required to be deducted in case the amount of rent does not exceed Rs 50,000 per month.
• Where the tenant is an individual or Hindu Undivided Family not liable to tax audit: Deduction is not required under Sec. 194I when the rent is due or paid by an Individual or HUF not liable for tax audit. However, for such persons, TDS u/s 194-IB is attracted.
• 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.

No Deduction or Deduction at Lower Rate under Section 197

• The payee can apply in Form 13 to the Assessing Officer for a 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.

What is the Time Limit For Depositing TDS?

• TDS amount should be deposited to 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.
• It is also very important to file the quarterly TDS statements within the specified due dates.

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.

TDS u/s 194I - Specific Circumstances

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 owner. 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.

Inclusion of Service Charges

Service charges payable to business centers are covered under the definition of rent, as they are covered under payments by 'whatever named called'.

TDS 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 from the rent paid/credited to the owners of both building and furniture separately.

TDS 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 for 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. However, since the arrangement between the customers and cold storage owners are basically contractual in nature, 194C is applicable.

Hall Rent Paid by an Association

Since an association of persons is a different kind of assessee and not an individual or HUF, the obligation of tax deduction will be there, provided payment for the use of the hall exceeds Rs 50,000 per month.

Payments to Hotels for Holding Seminars Including Lunch

• Where hotels do not charge only for use of premises but also charge for catering/meal, the provisions of Sec. 194I would not apply for the catering part. 
• However, Sec.194C would apply for the catering part.

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 paid pertains to the next financial year, the TDS will be in proportion with earnings for the financial year.
• 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.

Final Word

While making rent payments, it is important to deduct TDS as applicable, 2% or 10% as the case may be as it crosses threshold limit of Rs. 50,000. Non deduction of TDS might lead to disallowances, and delay in deduction and payment will lead to late payment interest and penalty.