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.
Being an essential component of income for many individuals, rent is subject to taxation. To streamline the payment of TDS on rent successfully, individuals need to pay it on time and as per the provisions of ITA.
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?
- 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 2024-25 (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.
Objective of TDS u/s 1941
- he 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.
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.
Who Has to Deduct TDS Under Section 194I?
Based on Section 194I of the Income Tax Act, a person is eligible for a TDS deduction if they will be paying their landlord a total of Rs 1.80 lakhs in rent in a financial year and have already debited that amount or are likely to do so.
Rate of TDS Under Section 194I
TDS is deducted when the payee credits ‘income by way of rent’ to the landlord’s account. One must note that if rent is paid through cash, cheque, or draft, then TDS is deducted at the time of payment. Here is the TDS rate on rent-
- TDS on rent paid on plant, machinery, or equipment is to be charged at 2%.
- TDS on the rent paid on land, building, or both of it is to be charged at 10%.
- TDS on the rent paid on furniture or fitting is charged at 10%.
Payments Covered Under Section 194I
Tax is deducted at varied rates for different assets such as furniture, factory, building, hotel, and more.
1) Rent from Factory Building | When a factory building is rented, the lessor or factory owner is required to pay the rent. The Lessor may occasionally receive it as property-related income. In these circumstances, the lessor will be required to pay an advance tax and return the rent income since the tax will be deducted at the source because the rent is regarded as business income. |
2) Rent from Cold Storage | Cold storage facilities that hold milk, vegetables, or ice cream are regarded as plants and are not subject to building rent. |
3) Two people renting from a building or piece of furniture | When the building and furnishings are rented out by two distinct people, the tax is only subtracted from the rent for the building. |
4) Hall Leased to an Organization | In the event that an association hires a hall, tax is subtracted if the rent is more than Rs. 1,80,000. |
5) Hotel room rental for seminars with meals | Tax is withheld at the source when hotels simply charge for food or catering and not for utilizing the facilities. At the same time, Section 194C is used for catering. |
6) Tax Reduction Depending on the Rent Period | Taxes are not always withheld on a monthly basis by law. It is determined by the rental time and is subtracted accordingly. For instance, if the rent is paid annually, the tax deduction is also made annually. |
7) Servicing Fees Owed to Business Centers | Rent is often regarded as the service fees paid to business centres. |
Section 194I – Exemption and Deduction at Lower Rate
Exemptions
TDS on rent is not applicable in the following cases –
- When the amount to be paid or has been paid is less than Rs. 180000 in a fiscal year.
- Then the rent is paid to a government agency.
- When the earnings are shared by a film exhibitor and distributor who own a cinema theatre.
- In case it is an individual tenant or HUF
TDS without Service Tax
Service tax is applied on TDS only when the aggregate rent from one or more sources in a given fiscal year is more than Rs.10 lakh. Ideally, service tax includes cess.
It has to be noted that service tax is calculated on the rent accrued and not on the amount of service tax that is paid.
Nil or Lower TDS Deduction
Entities can file Form 15G or 15H to avoid TDS on rent if individuals with nil tax receive rent as income.
Other than these, entities can claim TDS returns while filing ITR. To do so, the tax payee has to claim tax deducted at source as credit and must pay the difference between tax payable and the deduction that was made on rent. Also, a TDS refund can be claimed if the amount of tax deducted at the source was more than what was computed.
Tax Deducted at Source on Advance Rent
In the case of advance rent that is paid to the landlord, the payment is subject to TDS deduction. Regardless, there are a few exceptions that are factored in for TDS calculations, as discussed below–
- In case the advance rent crosses over to the next financial year, the tax deducted at source will be in proportion with earnings based on Form 16 that is issued for aggregate rent paid in advance.
- When an asset is sold or transferred to another individual, the tax deducted at source credit has been unavailable until the transfer has to be credited to its new owner.
- In case of cancellation of rent agreement after the payment of advance rent and deduction of TDS, the balance will be refunded to tenants. Notably, 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.
FAQs
Whether payments made by a company taking premises on rent but styling the agreement as a business center agreement would attract the provisions of section 194-I.
The tax is to be deducted from the rent paid, by whatever name called, to hire a property. The deduction of tax at source does not depend upon the nomenclature but on the content of the agreement. In this case, though the agreement has been styled as a business center agreement , the substance of the payments is of the nature of rent. Hence, TDS under section 194-I is required to be deducted.
On what amount is the tax to be deducted at source if the rentals include municipal tax, ground rent, etc.?
The tax deduction at source under section 194-I is to be done from income through rent. Rent has been defined, in the Explanation of section 194-I, to mean any payment under any lease, tenancy agreement, etc. for the use of any land or building. Thus, if the municipal taxes, ground rent, etc. are borne by the tenant, no tax will be deducted from such sum.