Section 194I - TDS on Rent

Section 194I – TDS on Rent

As per Section 194I, the word rent can be described as a payment categorised as a lease, sub-lease, tenancy, or any agreement to use – land, building, machinery, plant, equipment, furniture, fittings, or land adjunct to a building. Regardless of whether the payee owns it or not. Also, sub-letting is considered a rent payment. The rent received from the renting out or subletting of property is subject to Tax Deduction at Source(TDS). Tax Deducted at Source (TDS) is applicable on rent payments exceeding a certain threshold. As per Section 194-I of the Income Tax Act, 1961, TDS on rent is applicable when the annual rent paid or payable exceeds Rs. 2,40,000. TDS on rent applies to individuals or Hindu Undivided Families (HUFs) who are not liable to tax audit under Section 44AB of the Income Tax Act.

What is TDS on Rent?

According to Section 194I, an individual who pays rent is subject to tax deduction at the source. One must note that TDS can be deducted when the amount of tax to be paid or received in a given fiscal year is over Rs. 180000.

Typically, HUFs and individuals are liable to pay TDS at the rate of 5% of the total rent that is collected when the rent is more than Rs. 50000. One must note that the rent that is paid out to government agencies or bodies is exempted from TDS.

What is Section 194I of the Income Tax Act?

Section 194I of the income tax covers TDS on rent. It imposes an obligation for TDS deduction on persons (other than individual/HUF who are not subject to audit) making rental payments to resident Indians above a specified limit, i.e., Rs.2,40,000 in a year. The rent under this section broadly includes house rent, machine rent, building rent, office rent, furniture rent etc.

This section was introduced to bring rent under the ambit of TDS provisions as rent is a substantial source of income in India, which was escaping the tax net.

Who deduct TDS u/s 194I?

Any person (who is not an Individual/HUF) who pays another resident an income by rent must deduct TDS u/s 194I. But individuals or a Hindu undivided family who are covered under Section 44AB (a) and (b) during the financial year immediately preceding the financial year in which such income by way of rent is credited or paid, shall be liable to deduct TDS under this section.

Objective of TDS u/s 1941

The Finance Act, 1994 inserted Section 1941, on basis of deduction of tax from rent.
The government established the provision to cover the income by way of rent under TDS.
In other countries, such income is subject to deduction of TDS.

What are the rate and time of tax deduction u/s 194I?

The tax rate under this section is as follows:

2% for the use of any machine, plant, or equipment.
10% for the use of any land or building (including factory building), furniture or fittings.

TDS must be deducted at the earlier of the following two events:

At the time of credit of the rent to the account of the payee (receiver).
At the time of actual payment of the rent, whether in cash, cheque, draft, or any other mode.

What is the Limit of Tax deduction under 194I?

The time of deducting tax is earlier than the credit of income to the account of the payee (receiver) or actual payment (in cash, cheque, draft, or other modes).

TDS on rent limit:

No TDS Requirement
Where the amount paid as rent (at once or total in a financial year) to a payee (i.e., receiver) does not exceed 180000 240000. (the threshold limit was Rs. 1,80,000 until FY 2018-19).
Where the rent is given to a business trust (such trust owns the asset), a real estate investment trust is referred u/s 10(23FCA).

Importance of Section 194I

In India, a lot of people, including individuals and HUFs, buy properties for investment needs. Here the primary motive was to sell the property at an appreciated rate in the future or rent out the property for getting rent. Thus, the rent collected is one of the most important components of income for a lot of people, including individuals and HUFs in the country.

Due to this, the finance minister has considered the need to introduce Section 194I, which would have the tax deduction from the rent in the Income Tax Act. Another reason for being is that in other countries, income from renting property is already subject to TDS.

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

As per the explanation of Section 194I, rent means any payment made under lease or sub-lease or tenancy or any agreement for the use of the following:

Land
Building (including factory building)
Machinery
Plant
Equipment
Furniture
Fittings

What are some Special Considerations under section 194I?

Amount paid as warehousing charge is liable to TDS u/s 194I
The amount given as a security deposit to the owner of an asset is not liable to TDS u/s 194I if such amount is refundable in nature. But when that amount of ‘deposit’ is adjusted against rent, it becomes liable to TDS u/s 194I.
Payment made for renting a business center is liable to TDS under this section.
When accommodation in the hotel is taken regularly (i.e., under an agreement), then such payment attracts TDS under this section.

But, if such payment is made by an employee or individual (who represents the company) and is later reimbursed, then no TDS will be deducted.

FAQs

What is Section 194IB of the Income Tax Act?

According to Section 194IB, it is mandatory for any person, i.e., individuals / HUF who is not liable to audit u/s 44AB, to deduct TDS for rent paid to a resident exceeding Rs 50,000 per month.

Who deducts TDS u/s 194IB?

Any person (who is an Individual/ HUF but not liable to audit u/s 44AB) who pays income by way of rent to a resident is required to deduct TDS under this section.

What is the rate & time of tax deduction u/s 194IB?

The rate of tax deduction is 5% but it has been reduced from 5% to 2%, effective from October 1, 2024. However, if the PAN of the recipient is not available, then the rate will be 20% as per Section 206AA, or in case the receiver of rent is a specified person as per Section 206AB then the deduction would be at 10%. However, the amount of TDS cannot exceed the amount of rent paid for the last month. The time of tax deduction is earlier of

The time of credit of rent (for the last month in the previous year or the last month of the tenancy if the property is vacated before or during the year), or
The time of payment (via cash or cheque or draft or any other mode).

No TDS Requirement

Where the amount paid by way of rent does not exceed Rs. 50000 per month (or part of it), then TDS is not required to be made.
Also, to deduct TDS under this section then there is no requirement of TAN.

What is Section 194IC of the Income Tax Act?

Section 194-IC has been introduced to bring rent under the scope of ‘Joint Development Agreements.’ So let’s understand this section in detail:

Who deducts TDS u/s 194IC?

Under Section 194IC of the Income Tax Act, the responsibility to deduct TDS (Tax Deducted at Source) lies with any person who is paying a resident any sum by way of consideration under a Joint Development Agreement (JDA). This means that the developer or any other party making the payment to the landowner or property owner under the JDA must deduct TDS at the applicable rate

What is a Joint Development Agreement?

A Joint Development Agreement (JDA) is a legal contract between a landowner and a real estate developer. Under this agreement, the landowner provides the land, and the developer undertakes the construction of the project.

What is the rate & time of tax deduction u/s 194IC?

The rate of the tax deduction is 10%, and if the PAN of the receiver is not available, then the rate is 20%.

TDS must be deducted at the earlier of the following two events:

At the time of credit of the sum to the account of the payee.
At the time of actual payment, whether in cash, cheque, draft, or any other mode.

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