Section 194I of the Income Tax Act mandates the deduction of Tax Deducted at Source (TDS) on rent payments made to resident Indians. The Indian government has set clear rules to ensure that individuals and entities deduct TDS when paying rent, whether for personal or commercial purposes. This ensures transparency and prevents tax evasion by ensuring that taxes are properly collected and deposited with the government. Rent payments are typically made on a monthly basis by tenants to landlords. Under Section 194I, specific taxpayers, such as businesses and individuals with high income, are required to deduct TDS on rent payments exceeding certain thresholds. The deducted TDS is then deposited with the government, helping to maintain compliance with tax laws and contributing to the proper functioning of India’s tax system.
If you are a taxpayer and pay rent regularly, you may be subject to the provisions of section 194I of the Income Tax Act. This blog will help you understand everything you need to know about section 194I of the Income Tax Act to better comply with Indian taxation laws.
What is Section 194I of Income Tax Act?
Section 194I of the Income Tax is a section included in the Income Tax Act 1961 that requires a person paying rent to an Indian resident to deduct TDS from the rent amount before making the payment. However, the provisions of section 194I do not apply to individuals and Hindu Undivided Families (HUFs). This means that persons other than individuals and HUFs need to deduct TDS from the rent amount they are liable to pay to a resident Indian and deposit the amount with the Indian government. However, if the individuals and HUFs are subject to a tax audit, they are required to deduct TDS under this section. The TDS rate under this section is 10% of the rent amount paid in a financial year.
Furthermore, the provisions of section 194I of the Income Tax Act only apply to persons (other than individuals and HUFs) if the total amount of rent paid in a financial year is higher than Rs. 2,40,000. As there can be various types of rent, the meaning and type of rent are defined under section 194I of the Income Tax Act.
Also read: 44AD of Income Tax Act
What is TDS on Rent?
Income received from renting or subletting property is subject to Tax Deduction at Source (TDS). TDS is applicable on rent payments that exceed a specific threshold. According to Section 194-I of the Income Tax Act, 1961, TDS on rent must be deducted when the annual rent paid or payable is over Rs. 2,40,000. This provision applies to individuals or Hindu Undivided Families (HUFs) who are not subject to tax audit under Section 44AB of the Income Tax Act.
Objective of TDS u/s 1941
The objective of TDS under Section 194I of the Income Tax Act is to ensure that the government receives timely and regular tax payments on rent transactions. It aims to reduce tax evasion by collecting tax at the source itself, rather than relying on the taxpayer to pay taxes at the end of the financial year. The provision applies to individuals or entities paying rent to resident landlords, requiring them to deduct a specified percentage of TDS before making payments. This ensures that tax is paid consistently and is deposited with the government. Additionally, TDS helps in broadening the tax base and reduces the burden of tax collection on the government by making the process more efficient. This system also encourages transparency in rental transactions, ensuring proper compliance with tax laws.
Also read about: What is direct tax code
Importance of Section 194I
Section 194I is crucial for ensuring that rental income, which is a significant source of earnings for many individuals and businesses, is taxed properly. By mandating the deduction of TDS on rent payments, it promotes timely tax collection and transparency in the rental market. This provision is particularly important as it helps prevent tax evasion, as TDS is deducted at the source before the rent is paid to the landlord. It also encourages compliance among tenants and landlords, reducing the chances of underreporting rental income. The section supports the government's effort to broaden the tax base and collect taxes in a more efficient manner. Additionally, it ensures that landlords do not evade tax on their rental income, ultimately contributing to the overall health of the country’s economy by ensuring proper taxation in the real estate sector.
What is the reason for the introduction of TDS u/s 194I?
Section 194I was included in the Income Tax Act 1961 through the Finance Act 1994. One of the main aims of inserting the section was to ensure that rent payments above Rs. 2,40,000 per annum come under TDS compliance and that the government can monitor such transactions. By deducting tax at source, the government ensures that tax is collected before the income reaches the recipient, reducing the risk of tax evasion. Furthermore, the TDS deduction at 10% also increases the tax collection for the Indian government, helping it have more funds for various developmental activities.
Also read: Section 140A of Income Tax Act
What is the meaning of ‘Rent’ in reference to section 194I?
Under section 194I of the Income Tax Act, rent is defined as any payment made to an Indian resident related to an agreement, lease, sub-lease, or tenancy for the use of:
- Land
- A building which has a factory building
- Land appurtenant to a building which has a factory building
- Machinery
- Plant
- Equipment
- Fittings
- Furniture
- The provisions of section 194I are also applicable in the case the above assets are not owned fully by the payee but are being sub-let.
- No TDS is required to be deducted if the landlord has taken advance payment or security, which is refundable at the time of vacating the property.
- If the landlord has taken advance rent, which is non-refundable, the payer is liable to deduct TDS. Additionally any rent credited into a ‘Suspense Account.’ is also liable for a TDS deduction under section 194I of the Income Tax Act.
Payments covered under section 194I
Section 194I of the Income Tax Act mandates that entities, excluding individuals and Hindu Undivided Families (HUFs), must deduct Tax Deducted at Source (TDS) at the rate of 10% on rent payments made to resident Indians. This provision applies when the annual rent exceeds Rs. 2,40,000. The purpose of this section is to ensure that the government receives its due tax from rental transactions, reducing the risk of tax evasion and promoting transparency in the rental market.
The section primarily focuses on the rental payments made by business entities, companies, firms, and other organizations to resident landlords. Individuals and HUFs are exempt from this deduction, which means that if a tenant is an individual or an HUF, they are not required to deduct TDS under Section 194I, even if the rent exceeds the prescribed limit.
The rent subject to TDS under Section 194I can be paid for various types of properties, including residential, commercial, and industrial properties. The provision also covers any payment made for the use of land or building, which includes office space, warehouses, or any premises used for business or commercial purposes. It is important to note that the term "rent" under Section 194I is not limited to traditional rental agreements but extends to payments made for the use of movable properties as well.
According to Section 194I, rent is defined to include payments made for the following:
- Land or Building: Rent paid for the use of land, buildings, or any part of a building, whether used for residential, commercial, or industrial purposes.
- Machinery, Plant, or Equipment: Rent for the use of machinery, equipment, or other movable assets used in business operations.
- Furniture and Fixtures: Any payment made for renting furniture, fixtures, or other similar assets, which are not part of the real estate but are leased for specific usage.
- Parking and Storage Spaces: Payments made for renting parking or storage spaces, which may not always be attached to the rental of a building.
- Lease Agreements: Payments made under any type of lease arrangement, which may include long-term or short-term agreements for the use of assets.
The TDS deduction of 10% must be made at the time of payment or credit, whichever is earlier. The deducted TDS is to be deposited with the government, and the tenant must provide the landlord with a TDS certificate for the amount deducted. This system ensures that the rental income is properly taxed and that there is a record of tax payment, making it easier for the government to track income from the rental sector.
Rent from factory building and service charges
When a person who owns a building rents it out, the rent income received is considered business income. It can also be deemed as income from property, making both situations liable for TDS deduction under section 194I of the Income Tax Act. Furthermore, service charges payable to business centres are also liable for TDS deduction under section 194I.
TDS requirement for separate rentals of building and furniture
If a person has rented out only the building and the tenant has rented furniture from another person, the TDS deduction under section 194I of the Income Tax Act is only liable for the rent received for the building. The payer is required to deduct TDS for the rent paid for furniture under section 194C.
Frequency of TDS deduction for rent not paid on a monthly basis
Under the provisions of section 194I of the Income Tax Act, TDS is not required to be deducted from the monthly rent amount. Hence, if the rent is credited quarterly or annually, the payer is liable to deduct TDS according to the rent credit frequency. The TDS must be deducted at the time of credit or actual payment, whichever comes first.
Charges for use of cold storage facility
Cold storage facilities are generally used to store perishable products such as vegetables and milk. Such cold storage facilities are deemed plants and the rent paid is considered to be paid for renting a plant and not a building. Hence, the payer of rent is not liable to deduct TDS under section 194I. However, the TDS deduction is liable for rent paid for plants under section 194C.
TDS obligation for association hall rent exceeding Rs. 2,40,000
The provisions of section 194I are not applicable to individuals and HUFs. However, if rent is paid by an association for renting a hall, it is deemed eligible for deducting TDS under section 194I. This is because an association is considered a group of persons and not an individual.
Payments to hotels for seminars (TDS applicability)
If a person, other than an individual and HUF, has paid rent to a hotel for catering or meals and not for the building, no TDS deduction is applicable under section 194I of the Income Tax Act. However, TDS must be deducted for the catering part under section 194C. Furthermore, TDS must be deducted from the rent paid to a hotel for holding a seminar that includes lunch if the total rent amount is higher than Rs. 2,40,000.
Also read about: Difference Between Income Tax Act and Direct Tax Code
Who is liable to deduct TDS u/s 194I?
Here are the persons liable to deduct TDS under section 194I of the Income Tax Act:
- Any person other than individuals and HUFs who pays rent to a resident Indian.
- Individuals and HUFs who are subject to a tax audit paying rent to a resident Indian.
- If the annual amount of rent paid by eligible persons exceeds Rs. 2,40,000 in a financial year.
What is the point of deduction of TDS?
The main point of deduction of TDS from the rent payment is to ensure that TDS has been deducted at the time of credit of income by way of rent. Section 194I of the Income Tax Act mandates that payers must deduct TDS from the rent payment in case the amount exceeds Rs. 2,40,000 in a financial year. The obligation is for rent payments paid through any modes such as account payee draft, cheque, or electronic modes such as UPI, RTGS, NEFT, etc.
Also read: 234C of Income Tax Act
What is the rate of TDS?
Here is the rate of TDS under section 194I of the Income Tax Act:
| Payment type | TDS rate |
| Rent for plant and machinery | 2% |
| Rent for land, building, furniture, or fitting | 10% |
Example
Here is a detailed example to understand section 194I of the Income Tax Act:
LMN Ltd., a tech firm, rents warehouse space from Mr. Kumar, an individual, at a monthly rental fee of Rs. 45,000. Under section 194I, companies need to deduct 10% TDS on rent payments for land, buildings, or furniture when the total annual rent exceeds Rs. 2.4 lakh.
In this scenario, the total rent paid by LMN Ltd. over the year is 12 x Rs. 45,000 = Rs. 5,40,000. Since this exceeds Rs. 2.4 lakh, LMN Ltd. must deduct TDS at a rate of 10% from the total rent and deposit it with the government on behalf of Mr. Kumar.
Also read: Income Tax Return Extended Date for FY 2024-25
No deduction or deduction at lower rate under sec. 197
Under section 197 of the Income Tax Act, a person getting rental income can request that no or less tax be deducted from the payable rent amount under section 197 of the Income Tax Act. For this, the payee must submit a filled-out Form 13 for the Assessing Officer to get the request. After review, the AO may give the payer Form 15AA mandating that the no or less TDS deduction must be made from the amount paid as rent.
Under what circumstances TDS u/s 194I is not deductible
Here are the circumstances under which TDS is not deductible under section 194I of the Income Tax Act:
- No TDS is deductible if the annual rent paid is lower than Rs. 2,40,000.
- Individuals and HUFs are not liable to deduct TDS from the rent payment if they are not subject to a tax audit.
- If the rent payment is made to statutory authorities, local authorities, or the Indian government, the payer is not liable to deduct TDS from the rent.
What is the time limit on depositing TDS?
Here is the time limit for depositing TDS:
- If the rent payment has been made by or for the Indian government, the TDS must be deposited on the same day.
- In other cases, TDS must be deposited on or before seven days from the last date of the month in which TDS is deducted. The amount should have the Income Tax Challan. However, just for the month of March, the time limit is on or before April 30.
Also read: Section 56 of Income Tax Act
Consequences of non-deduction/non-payment of TDS
If an eligible person fails to deduct and deposit TDS before the due date, the following consequences under section 194I may follow:
- The payer may be required to pay 1% interest per month from the due date to the date of the TDS's actual deduction if the payer has failed to deduct TDS on the rent amount.
- If the payer has deducted TDS but has not deposited it with the government, an interest penalty of 1.5% is applicable per month from the date of the TDS deduction to the date of the actual TDS deposit.
TDS on rent by individuals
Although the provisions of section 194I of the Income Tax Act do not generally apply to individuals, they may be required to deduct TDS on rent payments if they are subject to a tax audit. On the other hand, if an individual is subject to a tax audit but the annual rent payment has not exceeded Rs. 2,40,000 in the previous financial year, the individual is not liable to deduct TDS under section 194I of the Income Tax Act.
Also read: Section 89 of Income Tax Act
Special Considerations under section 194I
Certain payments are specifically considered under Section 194I for TDS applicability:
- Payments made as warehousing charges are subject to TDS under Section 194I.
- Security deposits given to the owner of an asset are exempt from TDS under Section 194I if they are refundable. However, if any portion of the deposit is adjusted as rent, it becomes subject to TDS under this section.
- Payments for leasing or renting business centers fall under the scope of TDS in Section 194I.
- Regular accommodations in hotels (i.e., under an agreement) also attract TDS as per this section. However, if an employee or individual representing a company makes the payment, and it is later reimbursed, then no TDS is deducted.
Conclusion
Tax Deducted at Source is one of the most common types of tax levied by the Indian government. Rent payments are also included among the various payments it is levied on. Under section 194I of the Income Tax Act, a person, apart from an individual and HUF, is liable to deduct TDS at 2% or 10% from the rent payments if the total annual rent payments have exceeded Rs. 2,40,000. However, individuals and HUFs are also required to deduct TDS on rent payments under the section if they are subject to a tax audit.
