TDS on Rent: Explore Section 194I, Applicability, Limit, Rate
Tax deduction at source (TDS) on rental income is an important compliance factor under the Income Tax Act, which is specifically mentioned in Section 194I This section makes tax deduction at source mandatory from any income derived from the rental or lease of property. It covers a range of assets, including land, buildings, plant and machinery, and furniture and fixtures.
This article serves as an important help for both tenants and property owners, explaining in detail the process, implications and important considerations to comply with the TDS rules for rent Our goal is to simplify these legal requirements and ensure that you comply with tax laws, avoiding any potential penalties or legal issues.
Table of Content
Section 194I: TDS on Rent
Section 194I of the Income Tax Act, introduced by the Finance Act, 1994. It defines the provisions of TDS on rental payments. This section was introduced to systematically collect tax on income from various forms of property-renting and, thus, bring India within the scope of international practice where such income is also collected by TDS. The purpose is to make the taxing process easy and prevent rampant evasion of income tax in the guise of rental income.
Why has TDS on Rent been introduced?
The rationale for TDS on rent is that it ensures that taxes on rental incomes are collected upfront and hence unlikely to be evaded. It is a simple tax administration process, and it spreads tax liability throughout the year on the payee's account. Further, capturing such transactions at source improves compliance and ensures a steady flow of revenues to the government.
Features of Section 194I
Scope: This section applies to all payers other than individual or Hindu Undivided Families who are not liable to tax audit. TDS needs to be deducted for all the prayers for all forms of rental payments. For individuals and HUF under tax audit, it needs to be deducted whenever such rent is paid.
Threshold Limit: The threshold limit for TDS on rent is INR 2,40,000 for the year 2024-25. It was INR 1,80,000 till F.Y. 2018-19.
TDS Deduction and Rates:
TDS needs to be deducted at the time at which the rent is credited to the account of the payee or at the time of payment, whichever is earlier.
Rates for tax deduction depend on the nature of the property for which rent is paid:
2% for plant, equipment, and machinery.
10% for land, building, furniture, or fittings.
Special Provision under Section 194IB: Individual or HUF who do not fall within audit but who pay more than INR 50,000 per month in rent needs to deduct TDS under this section.
Documentation: PAN of the payee landlord needs to be furnished by the payer to avoid higher rate of deductions. In the absence of such PAN, the TDS rate would be 20% under Section 206AA, which is the rate specified.
Exclusions:
No TDS needs to be deducted for security deposits if they are fully refundable and not considered rent unless they are adjusted against rent.
Advance rent: The advance rent not in the nature of refundable security deposit paid is entitled to tax deduction subject to a tax deduction. However, if at the time of letting out a building to a tenant on the condition that deposit shall be refunded at the time of vacating the building, the landlord receives security or advance payment, then receipt in such a case is not in the nature of income, and, therefore, no deduction of tax at source under Section 194I is to be made.
Meaning of Rent under Section 194I
Under Section 194I, 'rent' is defined very widely to include any payment made under any lease, sub-lease, tenancy, or other arrangements. It includes payments for land, buildings, even factory buildings, land appurtenant to buildings, machinery, plant, equipment, furniture, and fittings whether owned by the payee or not.
Rate of TDS on Rent under Section 194I
Following are the rates of TDS on rent depending on its nature:
Types of Rent as per Section 194I
Income from letting out of factory building: Where a factory building is let out, the rent received generally is income from business in the hands of the lessor or the owner of the factory. Only in a few cases, it is income from property in the lessor's hands. But such payment also, which is business income in the hands of the lessor and for which he will necessarily be paying advance tax and finally be returning the rental income, will be subject to tax deduction at source or TDS.
Service Charges Paid to Business Centre: Service charges payable to business centers are covered under the definition of rent, as they cover payments by whatever name is called.
Rent from Letting Out Building or Furniture: In the case where a building is let out by one person and furniture and fixtures are let out by another person, then the payee is required to deduct tax under Section 194I from the rent paid/credited for the hire of the building and hire of the furniture.
TDS Deduction if Rent is not Paid on a Monthly Basis: Section 194I does not mandate that the tax deduction should be made on a month-to-month basis. Therefore, if the crediting of the rent is done on a quarterly basis, the deduction at the source will have to be made on a quarterly basis only. Where the rent is paid on a yearly basis, deduction also will have to be made once a year on the basis of the actual payment or credit.
Who is Liable to Deduct TDS under Section 194I?
Tax Deduction at Source (TDS) on rent is regulated by two specific sections of the Income Tax Act: Section 194I and Section 194IB. These provisions define who has to deduct TDS on rent, the conditions under which the deduction needs to be made, and when the deduction should be taken.
Section 194I: TDS on Rent
Who Should Deduct: Section 194I applies to all taxpayers except individual or Hindu Undivided Families (HUF) who are not under a tax audit. This comprises corporate entities, partnership firms, and individuals or HUFs who are liable to undergo tax audit (those whose business turnover or professional receipts exceed the monetary threshold laid down under the Income Tax Act for carrying out a tax audit).
When to Deduct: TDS under Section 194I should be deducted either at the time the rent is credited to the account of the payee or at the time of payment - whichever is earlier. This includes cash, cheque, draft, or any other form of payment.
Threshold for Deduction: The threshold limit for TDS under Section 194I is INR 2,40,000 per financial year. This means that if the amount of rent paid during the year is above this amount, then TDS must be deducted.
Section 194IB: TDS on Rent by Individuals and HUFs
Who Should Deduct: Section 194IB is targeted specifically at individuals and HUFs not liable to tax audit under Section 194I. This section was introduced to bring under tax net high-value rental transactions undertaken by small taxpayers. This is applicable where such individuals or HUFs pay a monthly rent of more than INR 50,000.
When to Deduct: In contrast to Section 194I, the deduction under Section 194IB should be made only at the end of the financial year or at the time of termination of the rental agreement, whichever is earlier. The TDS should be deducted from the last month's rent of the financial year or the last payment, covering the entire amount paid during the year.
No PAN Required: The deduction under Section 194IB does not require the deductor (tenant) to apply for TAN (Tax Deduction and Collection Account Number), and that makes it easier to comply. However, the PAN of the landlord must be provided to avoid deduction at a higher rate.
Example of TDS on Rent
XYZ Corp. is a company that operates from a rented office space paying a monthly rent of INR 30,000 to the owner of the property, Ms. Rita, a person. This case scenario is presented to offer a more realistic example of Section 194I of the Income Tax Act, which mandates deducting TDS on rent paid.
Calculation of Total Rent and Applicability of TDS:
Monthly Rent: XYZ Corp. pays INR 30,000 per month and aggregates to INR 3,60,000 per year.
TDS Threshold: Section 194I mandates the deduction of TDS on rent paid to be made by any entity other than an individual or HUF which is not subjected to a tax audit paying rent more than INR 2,40,000 per year.
Rate of TDS: Renting of a building mandates TDS at 10%.
Calculation of TDS Amount:
TDS Deduction: XYZ Corp. should deduct TDS at a rate of 10% while making the monthly rent payment to Ms. Rita.
Monthly TDS Amount: The monthly TDS deduction from the rent payable is INR 3,000 (10% of INR 30,000), which needs to be deducted and paid to the government while making the monthly payment.
Paying TDS:
XYZ Corp. needs to ensure that the TDS deducted is paid to the government by the 7th of the following month. For example, rent paid in March, the TDS should be paid by April 30.
They are also required to issue a TDS certificate to Ms. Rita using Form 16A quarterly, mentioning TDS deducted and paid.
Deducting TDS on Rent at Lower Rate or No Deduction of TDS
Taxpayers, particularly those with lower taxable income, can request for reduction in the TDS rate of their rent receipt. They can make a request to the Assessing Officer using Form 13 for permission for either no deduction or deduction at a lower rate. Upon being approved on the basis of his or her total income, the Assessing Officer will issue a certificate in Form 15AA, which the taxpayer is required to provide to the payer or deductor so that the amount of TDS can be adjusted accordingly.
TDS on Advance Rent
Advance rent payments are also subject to TDS deductions. However, certain special aspects are to be considered as follows:
Where the advance rent is related to rent, which falls due in a future financial year, TDS has to be calculated accordingly with respect to the proportion of rent which relates to each financial year.
Where the property is transferred or sold, the TDS credit cannot be claimed until the transfer is registered in the name of the new owner.
Advance rent refund on contract cancellation should be debited in the TDS returns of the landowner because TDS adjustments will be proper in this manner.
What is the Time Limit of Depositing TDS?
TDS by Government: If the payer is either the government or an agency or body of state, then TDS will be paid on the same day without resorting to a challan.
TDS by others: If the payer is anyone other than the government or an agency or body of state, then the TDS deducted in any month shall be paid by the 7th of the following month. If the TDS is deducted in March, then it will be paid by 30th April.
Consequence of Not Deducting TDS/Not Depositing TDS
The consequences of not deducting the TDS or not depositing the TDS are as follows:
No deduction: If TDS is not deducted, then interest will be charged at 1% per month from the date of deduction till the date of actual deduction.
No payment: The deductor will be liable to pay interest at 1.5% per month from the date of deduction till the date of payment.
Difference between Section 194I and Section 194IB
Following are the points of differences between Section 194I and Section 194IB:
TDS on Rent paid to Non Resident Indians (NRIs)
Rental payment to an NRI is governed by certain guidelines, which differ from the ones followed in rent payments made to residents. The following are a few of the important points concerning TDS on rent paid to NRI:
Key Points on TDS Deduction for Rent Paid to NRI are as follows:
TDS Rate: The TDS rate on rent paid to an NRI is 30%. This is very high as compared to the rate of TDS on payment to a resident. This rate is the approach of the tax authorities in ensuring that the taxation obligations of non-residents as far as income received from the sources within India are fulfilled.
Cess and Surcharge: Surcharge: There exists an added charge, commonly referred to as a surcharge, which is levied on the base TDS rate based on the income of the NRI. The rate of surcharge is decided on the income brackets defined by the tax laws.
Health and Education Cess: There is an additional 4% health and education cess imposed on the TDS, (subject to any applicable surcharge). This cess would be used in funding health and education programs in the country.
No Threshold Limit: The rules governing TDS on rent paid to NRIs differ from the rules governing rent payments made to residents, which may include thresholds, such as INR 2,40,000 per annum under Section 194I. No threshold limit applies to rent paid to NRIs. TDS should be deducted from the very first rupee of rental.
Certificate for Lower or No Deduction: If the NRI landlord's total income in India is below the basic exemption limit, he or she can make an application to the Income Tax Department using the appropriate forms, and upon approval of such an application, a certificate would be issued, which the tenant can use to reduce the TDS accordingly.
Compliance and Documentation: Tenants paying rent to NRI should deduct the rightful amount of TDS and deposit it with the Indian tax authorities. Tenants need to get the PAN of the NRI landlord, as without this, they will pay TDS deducted at a higher rate.
Depositing TDS: The deducted TDS needs to be deposited by using the Challan 26QB, a TDS certificate in Form 16A needs to be given to the NRI landlord on a quarterly basis.
Deductions Timelines: TDS deducted needs to be deposited by the 7th of the next month, for that month's rent paid. For the month of March, the timeline for deposit is by the 30th of April.
FAQ
Q1. What is TDS on rent?
TDS on rent means the amount which is deducted at the source from the person who is paying rent if the amount paid for rent exceeds the prescribed levels as per the Income Tax Act.
Q2. Who needs to deduct TDS on rent?
TDS on rent should be deducted from the amount paid for rent by individuals or HUFs who are under tax audit and by all companies, partnership firms, etc., subject to the provision that the annual rent paid exceeds INR 2,40,000.
Q3. At what rate should TDS on rent be deducted?
TDS is 10% for rent of land, building, or furniture, and 2% for plant and machinery under Section 194I. For rent payments to NRIs, TDS is 30% plus applicable surcharge and cess.
Q4. Is there a limit for TDS to be deducted for rent paid to an NRI?
There is no threshold limit for TDS to be deducted for rent paid to an NRI. TDS has to be deducted on the entire amount from the first rupee.
Q5. What should I do if the landlord does not provide a PAN?
If the landlord does not provide a PAN, TDS on rent has to be deducted at 20%, in accordance with Section 206AA.
Q6. How can I claim a lower deduction or no deduction of TDS on rent?
The landlord can apply to the Income Tax Department to obtain a lower deduction or no deduction certificate in Form 13. If they receive a certificate, they will have to provide it to the tenant.
Q7. What should I do if I pay more than INR 50,000 in rent every month as an individual or HUF not under tax audit?
Under Section 194IB, individuals or HUFs under tax audit and paying rent more than INR 50,000 per month will have to deduct TDS at 5% at the end of the financial year or at the end of the tenancy, whichever is earlier.
Q8. How should TDS on rent be paid to the government?
TDS deducted on rent has to be paid in either Form 281 for corporate tenants or Form 26QB for individual tenants and has to be done by the 7th of the following month.
Q9. When to issue a TDS certificate for rent?
Corporate tenants will be issued a TDS certificate in Form 16A quarterly. In the case of individual tenants covered under Section 194IB, Form 16C will be issued within 15 days from the due date of depositing the TDS.
Q10. Is there any specific rule for deducting TDS on advance rent?
Yes, TDS has to be deducted on the advance rent paid as well. If the tenancy is terminated, and the advance rent is refunded, the TDS which was previously deducted may be adjusted subject to conditions.
Q10. What happens if TDS on rent is not deducted or deposited on time?
Non-deduction or non-deposition of TDS on rent attracts interest charges at 1% per month for non-deduction and 1.5% per month for non-deposition, from the date TDS was due until it is deposited.
Q10. Can TDS on rent be adjusted against other income?
No, TDS deducted on rent has to be specifically accounted for and cannot be adjusted against other income taxes or refund claims.
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