Section 194I - TDS on Rent

Individuals and HUFs subject to tax audits must also deduct TDS on rent payments. TDS must be deducted when rent is credited to the payee's account or at the time of payment, whichever is earlier.

Additionally, individuals and HUFs not under audit must deduct TDS under Section 194IB if they pay Rs.50,000 or more in rent per month. Rent paid to government bodies is exempt from TDS. Section 194I was introduced by the Finance Act of 1994 to ensure rental income is taxed at the source, improving tax collection and compliance. The limit for TDS was increased from Rs.1,80,000 to Rs.2,40,000, effective FY 2022-23, with no surcharge unless the rent exceeds Rs.1 crore.

Meaning of 'Rent' in Reference to Section 194I

'Rent' includes payments under any lease, sub-lease, or tenancy for the use of land, buildings, machinery, plant, equipment, furniture, or fittings. This applies whether the assets are owned by the payee and covers sub-letting.

Security or advance payments refundable at the end of the tenancy are not taxable, but advance rent is subject to TDS. Rent credited to a 'suspense account' is also subject to TDS.

Terms and Conditions of TDS on Rent

1. The landlord or rent recipient must provide their PAN to the payer.

1. If PAN is not provided, TDS is deducted at 20% under Section 206AA.

1. TDS on rent does not include Education Cess.

1. TDS on rent also excludes Secondary and Higher Education Cess.

1. There is no surcharge levied on TDS on rent except where a foreign company is involved and the payment is above Rs.1 crore.
2. If the tenant pays ground rent, municipal taxes, etc., there is no TDS charged on those amounts.
3. For hotel accommodation, where payment is made on regular basis, TDS is levied.

TDS on Rent by Individuals if Tax Audit is Not Applicable

When an individual or Hindu Undivided Family (HUF) is not subject to a tax audit, the TDS provisions under Section 194I and Section 194IB differ as follows: 

Section 194-I

1. Applicability: TDS under Section 194I applies to rent paid by individuals or HUFs if they were subject to a tax audit in the previous financial year, as well as to any other person.

1. Limit: The TDS threshold limit is Rs.2,40,000 per annum. No TDS is required if the annual rent paid does not exceed this amount.

1. Rate:
   1. 2% on rent for plant, equipment, and machinery.
   2. 10% on rent for land, buildings, or furniture.

Section 194-IB

1. Applicability: Section 194IB applies specifically to rent paid by individuals or HUFs who are not subject to tax audit in the previous financial year.

1. Limit: The threshold for TDS is Rs.50,000 per month. If the monthly rent exceeds this amount, TDS is applicable.

1. Rate: The rate of TDS is 5% on the rent for land, building, or both.

TDS Rates under Section 194I

Rates of tax deduction depends on the nature of payment and is given below:

Payments Are Covered Under Section 194I for TDS

1. Rent from Factory Building:
   1. When renting out a factory building, the rent received is typically classified as business income for the lessor. Even if the income is considered property income in some cases, TDS must still be deducted at the source. The lessor must account for this income and pay advance tax accordingly.

1. Rent from Furniture and Building by Different Owners:
   1. If a building and its furniture or fixtures are leased out by different parties, TDS should be deducted only from the rent paid for the building. The rent for furniture or fixtures does not require TDS under Section 194I if the two payments are made to different individuals.
2. Rent from Cold Storage Facility:
   1. Payments for using a cold storage facility are generally categorized as charges for the use of a plant rather than a building. Since cold storage is considered a plant, the relevant provisions for TDS might differ, and Section 194C may apply instead.
3. Rent for Hotels Holding Seminars with Meals:
   1. When hotels charge for the use of their premises for seminars or events but also provide catering services, the payment for using the premises is subject to TDS under Section 194I. However, the charges for catering or meals are considered service charges and fall under Section 194C, not Section 194I.
4. Service Charges to Business Centres:
   1. Payments made to business centres for services are covered under the definition of rent for TDS purposes. These service charges are considered part of the rent and are subject to TDS under Section 194I.
5. Tax Deduction Based on Rent Period:
   1. TDS on rent does not necessarily have to be deducted on a monthly basis. The timing of the TDS deduction depends on the payment or credit of the rent. For instance, if rent is paid or credited quarterly or annually, TDS should be deducted accordingly.
6. Hall Rented by an Association:
   1. If an association rents a hall and the rent exceeds Rs.2,40,000, TDS must be deducted. The previous threshold was Rs.1,80,000, which was revised for the FY 2024-25.

Illustration:

XYZ Corporation leases a commercial property from Mrs. Victoria, who is an individual. The monthly rent for the property is Rs.30,000. As per Section 194I of the Income Tax Act, if the total rent paid or payable during the financial year exceeds Rs.2.4 lakh, TDS must be deducted at the rate of 10% on the rent for land or building. 

Calculation of Rent:

1. Monthly Rent: Rs.30,000

1. Total Rent for the Financial Year: 12 months × Rs.30,000 = Rs.3,60,000

Since the total annual rent of Rs.3,60,000 exceeds the threshold limit of Rs.2.4 lakh, XYZ Corporation must deduct TDS on this rent.

TDS Calculation:

1. Rate of TDS: 10% of the rent amount

1. Total TDS Amount: 10% × Rs.3,60,000 = Rs.36,000

When to Deduct TDS:

The TDS should be deducted at the time the rent is either paid or credited to Mrs. Victoria's account. XYZ Corporation has the option to deduct the TDS either on a monthly, quarterly, or yearly basis, depending on when the rent payments are made or credited.

Example Scenario:

1. Monthly Payment: Each month, XYZ Corporation will pay Mrs. Victoria Rs.30,000.

1. TDS Deduction: At the time of each payment, XYZ Corporation will deduct TDS of Rs.3,000 (10% of Rs.30,000).

1. Total Annual TDS Deduction: The total TDS to be deducted over the year is Rs.36,000 (12 months × Rs.3,000).

Compliance:

1. Deposit of TDS: XYZ Corporation must deposit the total TDS amount of Rs.36,000 with the government on behalf of Mrs. Victoria.

1. TDS Certificate: XYZ Corporation should provide a TDS certificate to Mrs. Victoria, reflecting the amount of TDS deducted and deposited.

By adhering to these requirements, XYZ Corporation ensures compliance with Section 194I and helps Mrs. Victoria correctly account for her rental income in her tax returns.

TDS on Advance Rent

In cases where advance rent is paid to the landlord, TDS will be deducted. However, there are certain exceptions for TDS calculations such as:

1. When the advance rent crosses over one financial year, the TDS charged is in proportion with the income based on the Form 16 issued for the total advance rent.
2. In case of asset transfer or it being sold to another individual, the TDS credit on rent that has not been availed till the transfer or sale is made, should be credited to the new owner.
3. In case the advance rent is already paid and TDS deducted and later there is a cancellation of the rent agreement, the balance amount is refunded to the tenant. The CBDT has stated that in such cases, the landlord should mention the cancellation of rent agreement in the ITR form submitted for TDS deduction.
4. TDS certificate in case of payments apart from salary must be issued every quarter in the form of Form 16A.

What are certain cases not deductible under TDS Section 194I

There are certain cases where there is no tax deduction at source, they are:

1. Amount paid or payable not more than Rs.1,80,000 in the fiscal year: If the amount of rent paid to the landlord or lessee in the financial year is not higher than Rs.1,80,000, no tax is deductible.
2. Paying a Government Agency: Section 196 states that no tax is required to be deducted at source when any amount is paid to a government agency. According to Section 10 (20A), an amount charged for housing accommodation or development, planning or improvement of towns, villages and cities in the country is exempt of any tax deduction at source. If rent of any kind is payable to a government agency, local or statutory authorities, tax deduction at source is not applicable as per clause (20) or (20A) of Section 10.
3. Individual Tenant or Hindu Undivided Family: Section 194I claims no tax deduction from amount payable or to be paid by an H.U.F. or an individual if the individual or H.U.F. is not involved in any profession/business or if the individual or H.U.F was not liable to tax audit in the preceding financial year.
4. When Proceeds are shared by a Film Exhibitor and Distributor owning a Cinema Theatre: According to Section 194I, when proceeds are shared between a film exhibitor and distributor who own a cinema theatre, there are no such charges levied. Reason being that the cinema hall is not being let out by the exhibitor to the distributor and that the exhibitor's share is from composite services.

TDS - Exclusive of Service Tax

Service Tax on TDS is applicable only if the total amount being received from more than one sources in the financial year is greater than Rs.10 lakh. The Service Tax will be inclusive of Cess. However, it is important to remember that service tax will only be computed on the actual rent and not on the service tax to be paid.

Refund from TDS

While filing income tax return, the tax payee can claim TDS as credit and pay only the difference between the actual amount of tax payable as calculated based on the income tax slab rates and the TDS deduction made on rent. However, you can always claim for a tax refund in case the TDS deducted was more than computed.

Form 15G - Nil/Lower TDS Deduction

At the 2016 budget, an amendment was introduced where in cases there is Nil Tax applicable on the individual's income who is receiving rent as income, Form 15G or Form 15H for non-deduction of TDS can be filed.

No Deduction or Deduction at Lower Rate under Section 197

Condition: If a payee believes they should not have TDS deducted, or should have it deducted at a lower rate, they can apply to the Assessing Officer using Form 13. The Assessing Officer will review the application to determine if the total income justifies a lower deduction or no deduction. If the officer is satisfied, they will issue a certificate in Form 15AA directly to the payer, instructing them to deduct TDS at the specified lower rate or not at all.

Example: Imagine Mrs. Sharma, who receives rental income from a commercial property. She believes that her total income justifies a lower TDS rate or no TDS. She applies for a certificate using Form 13. Upon reviewing her application, the Assessing Officer agrees and issues a Form 15AA certificate. This allows the payer to deduct TDS at a lower rate or not deduct TDS at all, as specified.

Under What Circumstances TDS Under Section 194I Is Not Deductible

1. Rent Below the Threshold:

TDS is not applicable if the total rent paid or payable during the financial year is Rs.2,40,000 or less. The threshold was Rs.1,80,000 up until the FY 2018-19. 

1. Example: ABC Ltd. rents office space from Ms. Patel for Rs.20,000 per month. The total annual rent amounts to Rs.20,000 x 12 = Rs.2,40,000. Since this is at the threshold limit, no TDS is required. If the total annual rent were Rs.2,39,000, it would be below the threshold, and no TDS would apply.

2. Rent Paid by Individual or HUF:

If the rent is paid by an individual or Hindu Undivided Family (HUF) that is not involved in a business that requires a tax audit, they are not required to deduct TDS under Section 194I. This applies only if the individual or HUF is not subject to a tax audit under income tax laws.

1. Example: Mr. Kumar, an individual, rents an apartment from Mr. Singh for Rs.15,000 per month. Since Mr. Kumar is not running a business subject to a tax audit, he is not required to deduct TDS under Section 194I. With a total rent of Rs.15,000 x 12 = Rs.1,80,000 for the financial year, which is below the threshold, no TDS is applicable.

3. Revenue from Film Exhibition:

TDS is not required on the revenue shared between a film distributor and a film exhibitor owning a cinema theatre. The payment is considered part of composite services rather than rental income. Since the film distributor does not lease or sub-lease the cinema building, it does not fall under the rental provisions of Section 194I.

1. Example: FilmE, a film distributor, and Cine Ltd., a cinema theatre owner, have a revenue-sharing agreement where Cine Ltd. keeps a portion of ticket sales. Since FilmE is not leasing the cinema but sharing revenue from film exhibitions, these payments are not considered rent under Section 194I. Therefore, TDS does not apply.

Time Limits for Depositing TDS with Examples

For TDS deposits, the timing depends on the nature of the payer and the timing of the deduction:

1. Payments by the Government: TDS must be deposited on the same day that the deduction is made.
   1. For example, if the Government deducts TDS from a payment on April 15, the deposit must be completed on April 15 itself. This immediate deposit helps in streamlining government transactions and ensures timely compliance.

1. Payments by Non-Government Entities: When TDS is deducted by entities other than the Government, it must be deposited on or before 7 days before the end of the month in which the deduction was made.
   1. For example, if a company deducts TDS on rent on June 10, it must deposit the TDS by July 7. This rule ensures that TDS is regularly accounted for and reduces delays in tax collection.

1. March Deductions: For any TDS deducted in March, the deposit must be made on or before April 30 of the same financial year.
   1. For instance, if a business deducts TDS on a payment made on March 25, it must deposit the amount by April 30. This extended deadline helps in managing the end-of-year financial operations and aligns with the financial year-end.

1. Other Cases: In all other cases, where the TDS deduction does not fall into the categories above, it should be deposited on or before 7 days before the end of the month in which the deduction was made.
   1. For example, if a firm deducts TDS on a payment made on February 15, the deposit should be completed by March 7. This rule maintains consistency and regularity in the deposit of TDS.

Consequences of Non-Deduction or Non-Payment of TDS

1. Non-Deduction of TDS: If TDS is not deducted when it is required, the payer must pay interest at a rate of 1% per month. This interest is calculated from the date when the tax should have been deducted until the date when it is actually deducted.
   1. For example, if TDS should have been deducted starting from June 1 but was not deducted until July 15, the interest will be calculated for the period from June 1 to July 15.

1. TDS Deducted but Not Deposited: If TDS is deducted but not deposited to the government, the payer is liable to pay interest at a higher rate of 1.5% per month. This interest is calculated from the date when the tax was deducted until the date it is deposited.
   1. For instance, if TDS was deducted on February 5 but deposited only on March 20, the interest will be calculated for the period from February 5 to March 20. 

TDS on Rent Paid to Non-Resident Indians (NRI)

When rent is paid to a Non-Resident Indian (NRI), the following TDS rules apply:

1. Rate of TDS: Tax should be deducted at source at a rate of 30% plus applicable surcharge and 4% health and education cess. This rate applies regardless of the amount of rent paid, as there is no minimum limit for TDS on rent payments to NRIs.

1. No Exemption Limit: Unlike payments to residents, where TDS is applicable only if the rent exceeds a certain threshold, payments to NRIs are subject to TDS at the specified rate regardless of the total amount.

1. Certificate for Lower or No Deduction: If an NRI’s total income in India is less than the basic exemption limit, they can apply for a lower deduction or no deduction certificate. This application should be made to the Assessing Officer using Form 13. If approved, the Assessing Officer will issue a certificate in Form 15AA, allowing the payer to deduct TDS at a lower rate or not at all.

Example:

Suppose you pay monthly rent of Rs.40,000 to an NRI. The annual rent would be Rs.4,80,000. TDS at 30% plus surcharge and 4% cess should be deducted on this amount. The NRI can apply for a lower deduction if their total income in India is below the exemption limit.

Calculation of TDS

Monthly Rent: Rs.40,000 Annual Rent: Rs.40,000 × 12 = Rs.4,80,000

TDS Rate:

1. Basic Rate: 30%

1. Surcharge: Depending on the income, this is typically 10% if the total income exceeds Rs.50 lakh but does not exceed Rs.1 crore. For simplicity, we'll assume no surcharge in this example.

1. Health and Education Cess: 4% on the total TDS amount

TDS Calculation:

Calculate TDS before Cess: 

1. TDS = Annual Rent × 30%
2. TDS = Rs.4,80,000 × 30%
3. TDS = Rs.1,44,000

Calculate Health and Education Cess: 

1. Cess = TDS × 4%
2. Cess = Rs.1,44,000 × 4%
3. Cess = Rs.5,760

Total TDS:

1. Total TDS = TDS + Cess
2. Total TDS = Rs.1,44,000 + Rs.5,760
3. Total TDS = Rs.1,49,760