A Complete Guide on Section 194I- TDS on Rent

Section 1941 mandates the deduction of tax on rent payments, with a rate of 2% for hiring plant, machinery, or equipment, and 10% for rent paid for the use of land, buildings, or furniture and fittings. The TDS must be deducted if the total rent exceeds Rs. 6 lakhs in a financial year or Rs. 50,000 in a month. This requirement applies to any individual or HUF whose business sales or turnover exceed Rs. 1 crore or who has a professional gross receipts exceeding Rs. 50 lakhs in the financial year preceding the one in which such rent is paid.

When rent is paid to a non-resident Indian (NRI), TDS is to be deducted at a rate of 30%, regardless of the payment amount. Additionally, any applicable surcharge and cess must also be deducted over and above the TDS. Let's learn a little more about Section 194I.

What is Section 194I?

Section 194I of the Income Tax Act requires the deduction of Tax Deducted at Source (TDS) on rent paid for the use of plant, machinery, or equipment at a rate of 2% and at a rate of 10% for rent paid for land, buildings (including factory buildings), or furniture and fittings. Tax deduction at source (TDS) under this section is applicable if the rent payment exceeds the limit of Rs. 50,000 per month or Rs. 6 lakhs annually. This updated threshold limit will take effect on April 1, 2025.

The provisions of Section 194I apply to every individual, including Hindu Undivided Families (HUFs), whose business sales or turnover exceed Rs. 1 crore or whose profession gross receipts exceed Rs. 50 lakhs in a financial year during the financial year preceding the year in which the rent is paid.

It is essential to note that individuals and HUFs subject to TDS under Section 194I will fall under the provisions of Section 194-IB for TDS on rent payments. If the rent is paid to an NRI (Non-Resident Indian), TDS at a rate of 30% must be deducted, regardless of the amount paid, with surcharge and cess applying in addition to the TDS.

What Does the Word "Rent" Mean Under Section 194I?

• Under Section 194I, rent means any payment that is made under any of the following kinds of arrangements:
  • Tenancy
  • Lease
  • Sub-Lease
  • Any other agreement or arrangement.
• The entered agreement could be for the use of:
  • Land
  • Building (including factory, building)
  • Land attached to a building, such as a parking lot, garden, etc.
  • Machinery
  • Equipment
  • Plant
  • Furniture or Fittings.
• No TDS (Tax Deducted at Source) is required to be deducted under this section for the refundable security deposits, as they do not constitute income for the recipient.
• However, advance rent, which is not in the nature of a refundable security deposit, is subject to TDS deductions.
• Additionally, any such rent credited to a "suspense account" or other accounts will also be subject to TDS.

Who is Responsible for Deducting TDS Under Section 194I?

• TDS must be deducted if the total rent paid or likely to be paid exceeds Rs. 50,000 monthly or Rs. 6 lakhs in a financial year.
• For individuals and Hindu Undivided Families (HUFs), if they are not covered under Section 194I, they should deduct TDS under Section 194IB at a rate of 2%.

When to Deduct TDS Under Section 194I?

TDS on rent shall be deducted at source at the earliest of:

• When the "income by way of rent" is credited to the payee's account, or
• At the time of payment

Threshold Limit for Section 194I?

TDS for rent under Section 194I is not required to be deducted if the rent doesn't exceed Rs. 50,000 per month.

TDS on Rent

TDS Rate for Rent Paid to NRI

• When paying rent to an NRI (Non-Resident Indian), the TDS shall be deducted at a rate of 30% plus applicable surcharge and cess deduction at a rate of 4%.
• TDS deduction must be done regardless of the rent amount paid to an NRI because there is no specified limit.

Example

Payer: XYZ Pvt Ltd. (Company)

Receiver: Mr. Arjun (property owner, Indian resident)

Monthly Rent: Rs. 75,000.

As per Section 194I, since the company's monthly rent exceeds Rs. 50,000, XYZ Pvt Ltd. must deduct TDS at a rate of 10% on the rent paid for land or building. Therefore, tax should be deducted by the company from the rent paid to Mr. Arjun.

So, for a total annual rent of Rs. 9,00,000 (12 *75,000), TDS will be Rs. 7,500 monthly, which is 10% of Rs. 75,000. The net amount payable to Mr. Arjun would then be Rs . 75,000 - Rs. 7,500 = Rs. 67,500 monthly.

When TDS Under Section 194I is Not Required?

• If the tenant is an individual or HUF involved in a business with a turnover of less than Rs. 1 crore or gross receipts from a profession under Rs. 50 lacs from the previous financial year preceding the financial year in which such rent is liable to be paid. Individuals and HUFs having no business or profession may deduct TDS under Section 194-IB for the amount paid.
• Payments made between a film distributor and exhibitor that do not involve leasing the cinema building. In a contract between a film distributor and a film exhibitor, the exhibitor's share is considered part of the composite service. The distributor does not acquire the cinema building through a lease, sub-lease, or any similar agreement. Consequently, the payment made does not have a rental nature.

No Deduction or Deduction at Lower Rate Under Section 197

• Regarding deduction under Section 197 for tax at source, a payee may file Form 13 with the Assessing Officer to request either a lower deduction or no deduction of TDS.
• If the AO is convinced that the total income warrants no deduction of tax or deduction at a lower rate, they may issue a certificate in Form 15AA directly to the payer.

What is the Time Limit for Depositing TDS?

The deadline for depositing TDS mandates that the amount be submitted to the government within seven days following the end of the month in which the deduction occurs, alongside an income tax challan.

• For the amount credited or paid in March, the due date extends to April 30.
• For any other month, the submission should occur on or before 7 days from the end of the month in which the deduction is made.

Additionally, it is crucial to file quarterly TDS statements by their respective due dates.

Consequences of Non-Deduction or Non-Payment of TDS

• If TDS is not deducted, interest is charged at 1% per month from the date the tax should have been deducted until it is eventually deducted.

• If TDS is deducted but not deposited, the taxpayer must pay interest at a rate of 1.5% per month, starting from the deduction date until the date of deposit of the TDS.

Specific Circumstances-TDS Under Section 194I

Income from Letting Out of Factory Building

• In relation to TDS under Section 194I, specific conditions apply for income from the letting of a factory building. Generally, rent earned from such a building is considered business income for the owner. However, in certain instances, it may qualify as property income for the lessor.
• In these cases, the payments, despite being categorized as business income for the lessor, for which he is responsible for advance tax payments and reporting the rental income, are still subject to tax deduction at source (TDS).

Including Service Charges

Service charges from business centers also come under the definition of rent, as they fall under payments by "whatever is named".

TDS Where Building and Furniture, etc., Let-Out by Separate Persons

When a building is rented out by one party and furniture is provided by another, the payee must deduct tax under Section 194I from the rent paid/credited to both the building and furniture owners separately.

TDS When Rent is Not Payable Per Month

Regarding rent that is not paid monthly, Section 194I does not require a tax deduction to occur on a month-to-month basis. If rent crediting occurs quarterly, deductions should align with this and must be made every quarter only. Similarly, if the rent paid is annually, the deduction should occur once a year based on the actual payment or credit.

Cold Storage Facility Charges

• For cold storage facilities where milk, ice cream, and vegetables are stored, payments may be labeled as charges for use of the plant rather than for the use of the building itself.
• Cold storage qualifies as a plant. However, since the agreements between customers and cold storage owners are primarily contractual, it makes Section 194C applicable.

Association Paying the Hall Rent

When an association of persons pays hall rent, they have a tax deduction obligation, provided that payments exceed Rs. 50,000 monthly, as they are considered a different kind of assessee from an individual or an HUF (Hindu Undivided Family).

Payment Made to Hotels for Holding Seminars, Including Launch

Situations where hotels charge for both premises and catering during seminars, Section 194I provisions will not apply for the catering part. While the catering service is subject to Section 194C.

TDS On Advance Rents

When the advance rent is paid to the landlord, TDS must also be deducted. However, certain exceptions are there for calculate TDS on advance rent, which are as follows:

• If the advance rent paid applies to the next financial year, TDS will be applicable only according to earnings from that financial year.
• When a rental agreement is cancelled after the advance payment of rent and the deduction of TDS, the balance must be refunded to the tenants. This cancellation should be noted in the landlord's income tax return form (ITR) submitted for the deduction of TDS.
• A TDS certificate is required to be issued quarterly as Form 16A for every payment apart from salary.

To Conclude

When making rent payments, it is vital to deduct the TDS appropriately, either at 2% or at 10% as applicable, when the payment exceeds the Rs. 50,000 threshold. Failing to deduct TDS may result in disallowances, while delays in deduction and payments can incur late payment interest and penalties. To avoid such penalties, Savetaxs comes to your rescue. We have a team of professionals who have been helping individuals for decades with taxation services. Don't wait anymore, we are actively working 24*7 across all time zones to assist you with everything and provide you with the best quality service possible.