Handling TDS on Rent Payments Under Section 194I and Its Impact on Your ITR Filing
- Dipali Waghmode
- Jun 2
- 9 min read
Section 194I of the Income Tax Act mandates the deduction of Tax Deducted at Source (TDS) on rent payments. It primarily affects individuals, companies, and other entities making rent payments above the specified threshold. The section lays down the rules regarding who should deduct TDS, the rates applicable, the deposit process, and how it impacts the Income Tax Return (ITR) filing. Understanding this provision is crucial for tenants, landlords, and business owners to avoid penalties and ensure timely and correct compliance. Lets explore Section 194I, providing a clear explanation of the process, penalties for non-compliance, and its impact on ITR filing.
Table of Contents
What is Section 194I and Who Needs to Deduct TDS on Rent Payments?
Section 194I governs the deduction of TDS on rent payments. The law requires any person, other than an individual or Hindu Undivided Family (HUF) not subject to a tax audit, to deduct TDS if the monthly rent payment exceeds ₹50,000. This provision applies to companies, firms, Limited Liability Partnerships (LLPs), and individuals or HUFs who were subject to tax audit in the previous financial year. It is essential to note that rent, in this context, refers not only to payments for land or buildings but also for machinery, equipment, and furniture under any lease, sub-lease, or tenancy arrangement. Tenants who are required to deduct TDS under this section must ensure proper compliance to avoid issues in their ITR filing and other legal complications.
TDS Rates and Thresholds Under Section 194I
The TDS rates for rent payments under Section 194I depend on the nature of the rented asset:
For Rent of Land, Building, or Furniture: The TDS rate is 10%.
For Rent of Plant and Machinery: The TDS rate is 2%.
The critical point to note is that the threshold for TDS deduction has been updated. As of April 2025, TDS must be deducted if the monthly rent exceeds ₹50,000. This is a significant change from the previous annual threshold of ₹2,40,000. The change makes compliance more frequent, requiring deductions every month for rental payments that surpass the ₹50,000 threshold. For individuals or HUFs not subject to tax audits, Section 194IB applies, which mandates a TDS rate of 5% for rent exceeding ₹50,000 per month.
When and How to Deduct and Deposit TDS on Rent
The process of deducting and depositing TDS on rent payments follows a clear timeline and steps:
When to Deduct TDS: TDS should be deducted at the earliest of the credit of the rent payment or when the payment is made.
How to Deduct TDS: Tenants are required to deduct the applicable TDS at the time of paying rent to the landlord. The deducted amount should be deposited with the government.
How to Deposit TDS: The tenant must deposit the TDS within 30 days from the end of the month in which the deduction was made. This can be done through the Income Tax Department’s e-filing portal, by selecting the option for e-pay tax and using Form 26QC.
Issuing TDS Certificates: After depositing the TDS, tenants must issue Form 16C, a TDS certificate, to the landlord within 15 days of filing Form 26QC. The form provides evidence of the TDS deducted and can be used by landlords when filing their own ITR.
Penalties for Non-Compliance with TDS on Rent
Failure to comply with Section 194I’s TDS requirements can lead to significant financial and legal consequences:
Interest on Late Deduction or Deposit: Under Section 201(1A), interest is charged if TDS is not deducted or deposited on time. The rate of interest is 1% per month or part of the month on the amount of TDS that should have been deducted or deposited.
Disallowance of Rent as an Expense: If TDS is not deducted or deposited properly, the payer may not be allowed to claim rent as a valid expense in their tax return, leading to a higher tax liability.
Late Filing Penalties: Late filing of Form 26QC incurs a fee of ₹200 per day, subject to the total TDS amount that should have been paid. These penalties can quickly escalate, increasing the overall cost of non-compliance.
Impact of TDS on Rent Payments on ITR Filing
TDS on rent payments affects both the tenant and the landlord’s Income Tax Returns:
For Tenants (Deductors): Tenants must report the TDS they have deducted and deposited in their ITR. Non-compliance with TDS rules can result in rent being disallowed as an expense, leading to higher taxable income and, therefore, a higher tax liability. Proper reporting and deduction of TDS ensure that no additional penalties are imposed during ITR filing.
For Landlords (Deductees): The landlord can claim the TDS deducted by the tenant as a credit against their tax liability. The TDS details will be available in Form 26AS, which landlords can use to reconcile the TDS credit in their ITR. It’s important for landlords to ensure that their PAN is correctly quoted, as failure to do so could lead to higher TDS rates and mismatches in the tax credit.
How TaxBuddy Simplifies TDS on Rent Compliance
TaxBuddy simplifies TDS compliance through its intuitive platform. The app guides tenants through the process of calculating, deducting, and depositing TDS on rent. It also ensures that Form 26QC is filed accurately and on time, while Form 16C is generated for landlords. For landlords, TaxBuddy tracks the TDS credit reflected in Form 26AS and helps incorporate it into the ITR filing. With personalized reminders, easy document uploads, and integration with the Income Tax Department’s portal, TaxBuddy ensures seamless tax compliance and makes the TDS process hassle-free.
Conclusion
Handling TDS on rent payments under Section 194I is vital for tenants and landlords to ensure compliance and avoid penalties. The process, from deduction to deposit, requires careful attention to detail, particularly with the updated threshold of ₹50,000 per month. Both tenants and landlords must understand their responsibilities to ensure smooth ITR filing and avoid unnecessary financial consequences. For anyone looking for assistance in tax filing, it is highly recommended to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
1. Who is required to deduct TDS on rent under Section 194I?
Under Section 194I of the Income Tax Act, any person or entity, other than individuals or Hindu Undivided Families (HUFs) who are not subject to a tax audit, is required to deduct TDS on rent payments if the rent exceeds ₹50,000 per month. This includes companies, firms, LLPs, and individuals or HUFs who are subject to tax audit in the previous financial year. Rent refers to payments made for land, buildings, plant, machinery, equipment, and furniture, under a lease or similar arrangement. Therefore, businesses and professionals renting office spaces, equipment, or other assets must ensure that TDS is deducted if the rent exceeds the threshold.
2. What is the TDS rate on rent for buildings and machinery?
The TDS rates under Section 194I are differentiated based on the type of rented asset:
For Rent of Land, Building, or Furniture: The TDS rate is 10% of the rent paid or payable.
For Rent of Plant and Machinery: The TDS rate is 2% of the rent paid or payable.
These rates are applicable when the rent exceeds ₹50,000 per month. For individuals or HUFs not subject to a tax audit, Section 194IB applies, which mandates a TDS rate of 5% on monthly rent exceeding ₹50,000.
3. How and when should TDS on rent be deposited?
TDS on rent must be deducted at the time the rent is paid or credited to the tenant's account, whichever occurs earlier. After deduction, TDS must be deposited with the government within 30 days from the end of the month in which the deduction was made. The process for depositing TDS is as follows:
Log in to the Income Tax e-filing portal.
Choose 'e-pay tax' and select Form 26QC.
Enter details such as tenant and landlord information, rent amount, and TDS amount.
Make the payment online and ensure it is deposited in the government’s account.
After depositing the TDS, the tenant must issue Form 16C (TDS certificate) to the landlord within 15 days of filing Form 26QC.
Timely deduction and deposit of TDS are necessary to avoid penalties and interest.
4. What happens if TDS is not deducted or deposited on time?
Failure to deduct or deposit TDS on rent within the prescribed time results in several consequences:
Interest Under Section 201(1A): If TDS is not deducted or deposited on time, interest is charged at 1% per month or part of the month on the amount of TDS that should have been deducted.
Disallowance of Rent Expense: The payer (tenant) may not be allowed to claim rent as a business expense in their tax return, leading to an increased tax liability.
Penalties for Late Filing of Form 26QC: Late filing of Form 26QC attracts a ₹200 per day penalty until the form is filed, subject to the total TDS amount.
These penalties make it crucial for tenants to comply with the TDS requirements to avoid unnecessary financial burden.
5. Can a landlord claim TDS credit in the ITR?
Yes, a landlord can claim the TDS deducted by the tenant as a credit against their tax liability when filing their Income Tax Return (ITR). The TDS amount is reflected in the landlord's Form 26AS, which acts as proof of the TDS deducted and deposited by the tenant. During ITR filing, the landlord can claim the credit for the TDS amount from Form 26AS, reducing their overall tax liability. However, it is crucial for landlords to ensure that their PAN is correctly mentioned to avoid issues with TDS credit and ensure the proper rate of TDS is applied.
6. What is the threshold for TDS deduction on rent payments?
The threshold for TDS deduction on rent payments under Section 194I has been updated as of April 2025. TDS must be deducted if the monthly rent exceeds ₹50,000. This is a significant change from the previous annual threshold of ₹2,40,000. The revised monthly threshold requires tenants to deduct TDS if the monthly rent paid to the landlord exceeds ₹50,000. Tenants must be diligent in tracking monthly rent payments to ensure timely deduction and compliance with the updated threshold.
7. Can tenants file Form 26QC online for TDS?
Yes, tenants can file Form 26QC online for depositing TDS on rent. This can be done through the Income Tax e-filing portal. The process is straightforward and involves logging into the portal, selecting the 'e-pay tax' option, filling in the required details (tenant and landlord information, rent amount, TDS deducted), and making the payment online. After the payment is made, tenants must download Form 16C and provide it to the landlord as proof of TDS deduction. The online filing system simplifies the process and ensures accurate documentation.
8. What penalties apply if TDS is deducted incorrectly?
Incorrect deduction of TDS on rent can result in various penalties:
Interest Under Section 201(1A): If the TDS is incorrectly deducted, such as at the wrong rate or on the wrong amount, interest will be charged at 1% per month or part of the month on the shortfall amount.
Late Filing Fees: If Form 26QC is filed late, a fee of ₹200 per day is applicable, subject to the total TDS amount.
Disallowance of Rent Expense: Incorrect deduction of TDS may result in the disallowance of the rent expense claimed by the tenant, leading to an increase in taxable income and higher tax liability.
Ensuring the correct TDS deduction at the right rate is essential to avoid these penalties.
9. Is TDS applicable to rent payments for plants and machinery?
Yes, TDS is applicable to rent payments for plants and machinery under Section 194I. The TDS rate for rent payments for plant and machinery is 2%, provided the rent exceeds ₹50,000 per month. Tenants must deduct the applicable TDS rate and follow the same process for deposit and reporting as they would for other types of rent, such as for land or buildings. Failure to deduct TDS for rent of plant and machinery can lead to penalties and disallowance of the rent expense in the tenant's ITR.
10. How can TaxBuddy assist with TDS on rent compliance?
TaxBuddy simplifies the process of managing TDS on rent by offering an intuitive and user-friendly platform. Tenants can use TaxBuddy to:
Calculate and deduct the correct TDS on rent payments based on the nature of the rented property.
File Form 26QC directly through the platform, ensuring accurate details and timely payment.
Generate Form 16C for landlords, ensuring proper documentation.
Track TDS deposits and credits, making it easy for landlords to claim the TDS credit in their ITR.
TaxBuddy also provides reminders, easy access to documents, and personalized assistance, making it an ideal tool for managing TDS compliance efficiently.
11. What is Form 16C and how does it affect landlords?
Form 16C is a TDS certificate issued by the tenant to the landlord. It serves as proof of the TDS deducted and deposited by the tenant on the rent payment. The landlord can use Form 16C to claim the TDS credit while filing their Income Tax Return (ITR). The form contains details such as the amount of rent, TDS deducted, and the tenant’s details. Landlords should ensure that the information in Form 16C matches their records and is reflected correctly in Form 26AS to avoid discrepancies while filing their ITR.
12. What should I do if the rent payment exceeds ₹50,000 per month?
If the rent payment exceeds ₹50,000 per month, tenants are required to deduct TDS under Section 194I. The first step is to calculate the correct amount of TDS based on the type of asset being rented. Next, the tenant must ensure timely deposit of TDS using Form 26QC. After the payment, Form 16C should be issued to the landlord. It’s crucial to follow the prescribed timeline for deduction, deposit, and documentation to avoid penalties and ensure accurate reporting in the tenant’s and landlord’s ITRs.
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