Tax Deducted at Source (TDS) is a system in India where a certain percentage of tax is deducted from payments made to individuals or entities, ensuring that tax is collected at the point of income generation. This system helps the government track income and prevents tax evasion.
TDS applies to various payments, including salaries, interest, payments to contractors, professional fees, and rental income, with different sections of the Income Tax Act governing each type.
Section 194I specifically addresses Tax Deducted at Source (TDS) on rent payments. Under this section, certain individuals or entities paying rent exceeding a specified threshold must deduct TDS at the prescribed rate before making the payment.
The deducted amount is then remitted to the government. This provision ensures that landlords report their rental income and pay taxes on it, promoting transparency in rental transactions and contributing to the overall tax revenue.
What is TDS on rent according to Section 194I?
TDS on rent means that if you earn a lot of money from renting out a property, a part of that rent will be taken out for taxes before you get it. This is done to make sure landlords pay taxes on their rental income.
According to the rules, if your total rent for the year is more than ₹2,40,000, you need to deduct TDS before paying the landlord. This mostly applies to certain individuals, HUFs and entities who don’t have to undergo a tax audit. So, in simple terms, if you’re getting a lot from rent, some of it will go to taxes automatically.
What Does ‘Rent’ Mean in Section 194I?
In the context of Section 194I, ‘rent’ refers to any payment, regardless of what it’s called, made under any lease, sub-lease, tenancy, or other agreements for using (either separately or together) any of the following:
- Land
- Building (including factory buildings)
- Land connected to a building (including factory buildings)
- Machinery
- Plant
- Equipment
- Furniture
- Fittings
This applies whether or not any or all of these items are owned by the person receiving the payment, which means subletting is also included.
Threshold Limit for TDS on Rent Payments
When you rent out or sublet a property, the rent you receive is subject to Tax Deduction at Source under Section 194I.
Section 194I of the Income Tax Act, 1961 states that if your annual rent exceeds ₹2,40,000, TDS will apply.
In simple terms, if you earn more than this amount in rent, a portion will be deducted for taxes before you receive your payment.
If the total rent paid during the financial year is below the threshold limit, no TDS needs to be deducted.
It’s important for the payer to check the cumulative amount paid to the same payee throughout the year to determine if TDS needs to be deducted.
TDS Rate Under Section 194I
Under section 194I, TDS is deducted at different rates depending on the nature of the payment.
The TDS rate under Section 194I is:
| Nature of Payment | Rates of Tax Deduction under section 194I |
| For rent of land, building, furniture and fitting | 10% |
| For rent of plants and machinery, equipment, etc. | 2% |
For TDS deduction, the PAN number of the landlord or the person receiving rent must be provided. If the PAN is not available, TDS on rent will be deducted at 20% under Section 206AA.
Additionally, TDS on rent does not include any surcharge or Cess.
Example Calculation
If monthly rent paid for a commercial property is Rs 50,000, TDS at the rate of 10% under section 194I is to be deducted every month, which will be Rs 60,000 a year.
Instead of a commercial property, if rent is for machinery, then tds at the rate of 2% will be deducted every month, which will be around Rs 12,000 (i.e. 50000*12*2%).
Who Needs to Deduct TDS Under Section 194I?
Under Section 194I, any person (except individuals or Hindu Undivided Families, or HUFs) who pays rent to a resident must deduct tax if the rent exceeds the specified threshold limit.
Individuals and HUFs that are subject to a tax audit under Section 44AB (a) and 44AB (b) must also comply with this rule.
TDS must be deducted if the total rent paid in a financial year exceeds ₹2,40,000. This limit was ₹1,80,000 until FY 2018-19.
Additionally, starting June 1, 2017, individuals or HUFs not undergoing a tax audit who pay more than ₹50,000 in rent per month are also obligated to deduct TDS at a rate of 5%. This is covered under Section 194-IB, not under section 194I.
Timing of Tax Deduction Under Section 194I
TDS should be deducted at the time of crediting the rent amount to the account of the payee or at the time of payment, whichever is earlier.
For example, if you are paying monthly rent of Rs 50,000 for your office, you need to deduct tax at the rate of 10% under section 194I on Rs 50,000, which is Rs 5,000. In this case we have assumed that your per year office rent will be more than 2,40,000 rupees and the landlord has provided a PAN.
If the payment is made in installments, TDS should be deducted on each installment at the time of payment or credit.
The deductor must ensure to deposit the TDS with the government within the specified due dates to avoid penalties.
Situations Where TDS is Not Required
TDS under Section 194I is not required in the following situations:
- Rent Below ₹2,40,000: If the total rent paid during the financial year is ₹2,40,000 or less (previously ₹1,80,000), no tax needs to be deducted.
- Individual or HUF Tenants: If the tenant is an individual or a Hindu Undivided Family (HUF) not engaged in an audited business, TDS is not required.
However, Individuals and HUFs (not subject to audit) must deduct TDS under Section 194IB if they pay the landlord rent of ₹50,000 or more per month.
Additionally, the payee can submit Form 13 to the Assessing Officer to request a lower deduction or no deduction of TDS. If the officer agrees that the total income justifies this, they may issue a certificate in Form 15AA to the payer.
Comparing Section 194I with Section 194-IB
| Particulars | Section 194I | Section 194-IB |
| Applicability | Rent paid by an individual/HUF (only if tax audit was applicable in the preceding FY) or rent paid by any other person | Rent paid by individual/HUF (tax audit not applicable in the preceding FY) |
| Limit | ₹2,40,000 per annum | ₹50,000 per month |
| Rate | 2% of rent on plant and machinery10% of rent on land, building, or furniture | 5% of rent on land or building or both |
Additional Points on TDS under Section 194I
- If a landlord collects a security deposit or advance payment when renting out a building, and this deposit is refundable when the tenant vacates, it is not considered income. Therefore, no tax needs to be deducted at source under Section 194I for this amount.
- However, if the advance payment is for rent and is not refundable, it is subject to tax deduction. Additionally, if any rent is credited to a ‘suspense account’ or any other account, tax must also be deducted at source.
- If you pay rent to a Non-Resident Indian (NRI), you must deduct tax (TDS) at 30%, along with any applicable surcharge and 4% cess. TDS is mandatory regardless of the amount of rent, as there is no minimum limit for payments to NRIs. However, the NRI can apply for a no or lower deduction certificate if their income in India is below the basic exemption limit.
- Warehousing charges are subject to TDS under section 194I.
- Payments for renting a business center also incur TDS under section 194I.
- Regular hotel accommodations (under an agreement) attract TDS under section 194I. However, if an employee pays for the hotel and is later reimbursed, no tax is deducted.
What is the Time Limit for Depositing TDS?
TDS deducted under Section 194I must be deposited with the government using Challan No. 281.
The deposit should be made on or before 7 days from the end of the month in which the deduction is made, if paid with an Income Tax challan. If the amount is credited or paid in March, it must be deposited by April 30.
In all other cases, TDS should be deposited within 7 days from the end of the month in which the deduction occurred.
For Government Payments, TDS must be deposited on the same day the payment is made, without using a challan form.
Non-deduction or late payment of TDS can lead to interest and penalties.
Consequences of Non-Deduction or Non-Payment of TDS
If TDS is not deducted under section 194I, interest will be charged at 1% per month from the date the tax should have been deducted until it is finally deducted. If TDS has been deducted under section 194I but not deposited with the government, the taxpayer is liable to pay interest at 1.5% per month from the date the tax was deducted until the date it is deposited.
TDS return Filing
TDS returns must be filed quarterly in Form 26Q for non-salaried payments which includes section 194I tax deductions.
The due dates for filing TDS returns are:
| Quarter | Due Date |
|---|---|
| Q1 (April – June) | 31st July |
| Q2 (July – September) | 31st October |
| Q3 (October – December) | 31st January |
| Q4 (January – March) | 31st May |
Consequences of late filing of TDS returns
Under Section 234E, a fee of ₹200 per day is charged for the late submission of TDS statements, calculated from the due date until the statements are filed. However, the total fee cannot exceed the total amount of tax that should have been deducted. This fee must be paid before submitting the TDS statements.
The Assessing Officer can impose a minimum penalty of ₹10,000 on anyone who fails to file TDS statements by the due date, with the penalty potentially increasing to ₹1,00,000. This penalty is in addition to the late filing fee under Section 234E and applies to cases of incorrect filing as well.
However, no penalty under Section 271H will be imposed for delays in filing TDS returns if the following conditions are met:
- The tax deducted at source is paid to the government.
- Any late filing fees and interest are paid to the government.
- The TDS return is filed within one year from the specified due date.
TDS Certificates
The deductor (tenant) must issue Form 16A to the recipient, which serves as a TDS certificate for the tax deducted under section 194I. This form will contain details of the tax deducted under section 194I, including the amount and the PAN of both parties.
The landlord must check the accuracy of the details in Form 16A, including amount of rent received, tax deducted under section 194I, deposited and PAN of both the parties.
Exemptions from deduction of tax under section 194I
If the total sales, gross receipts, or turnover does not exceed Rs 1 crore in the preceding financial year, TDS is not applicable for rent payments made by individuals and HUFs.
No TDS is required if the annual rent does not exceed Rs 2,40,000.
Compliance
The landlord while filing income tax return must include the rental income in the income tax return. The TDS deducted under section 194I can be claimed as a credit against the tax liability while filing the return.
The recipient should ensure that the TDS deducted under section 194I is reflected in Form 26AS, which is a tax credit statement available on the Income Tax Department’s website.
If the TDS is reflected in Form 26AS, the recipient can claim this amount while filing their income tax return.
If the TDS deducted exceeds the recipient’s total tax liability, they may be eligible for a refund. Ensure that all necessary forms are filed to claim this refund.
The recipient of the rent can claim credit for the TDS deducted under section 194I while filing their income tax return.
Keep a record of all rent agreements, payment receipts, and TDS certificates for future reference and compliance purposes. The rent agreement should specify the terms of payment to avoid disputes regarding the TDS obligations.
It’s always advisable to consult with a tax professional or financial advisor for specific situations or changes in legislation.
Frequently Asked Questions (FAQs)
Does rent include payments made to a hotel for rooms hired during the year?
Yes, according to Circular No. 715 from the income tax department, payments for hiring hotel rooms regularly are subject to TDS under Section 194I. This means that if you frequently stay at hotels and pay for the rooms, those payments are considered rent and will incur tax deductions.
Would the rent exemption limit of ₹2.4 lakh per annum under Section 194I apply separately for each co-owner of a property?
Yes, each co-owner with a definite share in the property can claim the ₹2.4 lakh exemption separately. This allows co-owners to benefit individually from the tax exemption, making it important to track each owner’s share in the rental income.
Should the rent paid be increased for notional income in respect of a deposit given to the landlord?
No, TDS is deducted only on actual payments made, not on any notional income from deposits. If the deposit is meant as an advance rent that will be adjusted later, it falls under TDS regulations.
What is the limit for TDS on rent?
The exemption limit for TDS on rent under Section 194I is ₹2.4 lakh per annum. For Section 194-IB, the limit is ₹50,000 per month. This means that if your rent exceeds these amounts, TDS must be deducted.
Will tax be deducted from the GST added to my rent?
No, GST is not considered part of the landlord’s income for tax purposes. Therefore, TDS is calculated only on the base rent amount, excluding GST.
CBDT has clarified vide circular number 23/2017, that TDS is to be charged on the amount of rent and not on GST if it’s charged separately in invoice.
Which form should I file when nil tax is applicable on my income?
If no tax is applicable to your income, you can file Form 15G or Form 15H to avoid TDS on your rent. This helps ensure that the government is aware of your income situation.
How do I claim a deduction for rent paid?
Rent payments can be claimed as a deduction under Section 10(13A) for House Rent Allowance (HRA) or Section 80GG. This allows you to reduce your taxable income based on the rent you pay.
How to apply the threshold limit in case of rent paid to co-owners?
If each co-owner has a definite and ascertainable share, the limit of ₹2.4 lakh applies separately to each one. This means each owner can claim their exemption without affecting the others.
Do payments made by a company under a business center agreement attract Section 194-I?
Yes, tax must be deducted from rent paid, regardless of how the agreement is labeled. Even if the contract is called a business center agreement, the payments are still considered rent and fall under Section 194-I.
Is a contract for putting up a hoarding covered under Section 194C or 194-I?
Contracts for hoardings are generally categorized under Section 194C, which pertains to contracts. However, if a space is rented out specifically for hoardings, TDS will apply under Section 194-I instead.
What amount is subject to TDS if rentals include municipal tax, ground rent, etc.?
TDS is deducted only from the actual rent amount defined under Section 194-I. If the tenant pays additional charges like municipal taxes or ground rent, these are not subject to TDS.
Is Section 194-I applicable to rent for only part of a property?
Yes, Section 194-I applies to any rent payment made for using a part or portion of land or a building. The law recognizes rent for both full properties and portions of them.
Is TDS deductible for regular hotel room accommodations?
According to Circular 715/1995, payments for hotel accommodations taken regularly are treated as rent and subject to TDS under Section 194-I. However, if the arrangement is only for fixed room rates, TDS may not apply.
What is the difference between Section 194-I and Section 194-IB?
Difference between 194I & 194IB can be understood as:
| Particulars | Section 194-I | Section 194-IB |
| Person Responsible for tax deduction | Applies to individuals and Hindu Undivided Families (HUFs) who are covered under Section 44AB (a) and (b). For other assessees, there are no specific conditions. | Applies to individuals and HUFs who are not covered under Section 44AB (a) and (b). For other assessees, this section is not applicable. |
| Monetary Limit | ₹2,40,000 per annum | ₹50,000 per month |
| Applicable | Applicable to rent including rent paid for land, buildings, plant and machinery, as well as furniture and fittings. | Applicable only to rent for land and buildings. |
| TDS Rate | 2% for plant and machinery; 10% for land, buildings, furniture, and fittings. | 5% on rent for land and buildings. |
| Time Limit of tax deduction | TDS must be deducted at the time of credit or payment, whichever occurs first. | TDS must be deducted at the time of credit for the last month’s rent or last month of tenancy, or at the time of payment, whichever occurs first. |
| Time Limit for Payment of TDS | Must be paid within 7 days from the end of the month in which it was deducted. For March, payment is due by April 30 instead of April 7. | Must be paid within 30 days from the end of the month in which TDS was deducted. |
| TAN Required | Yes, a Tax Deduction and Collection Account Number (TAN) is required. | No, a TAN is not required for this section. |
| Form to be Filed | Form 26Q must be filed for reporting TDS under Section 194-I. | Form 26QC must be filed for reporting TDS under Section 194-IB. |
Is GST applicable on rent?
GST is applicable on commercial property rentals but not on residential property rentals. This distinction affects how tax is calculated on different types of rental agreements.
Who deposits TDS on rent?
The person responsible for paying the rent is required to deduct TDS from the payment and deposit it with the government. This ensures compliance with tax regulations.
What happens if I don’t report my rental income?
Failure to report rental income can lead to penalties under Section 270A, which can range from 50% to 200% of the tax owed on the unreported income. It’s crucial to accurately report all income to avoid these consequences.
