TDS on rent – Detailed explanation on Section 194I
TDS on rent - Section 194I in detail
In this post, we discuss TDS on rent under Section 194I in detail. Let’s go through each session in detail:
- What is TDS on Rent u/s 194I?
- Introduction to Section 194I:
- What is ‘Rent’ in reference to Section 194I?
- Payments Covered u/s 194I:
- Circumstances of TDS u/s 194I is not deductible
- What are Indirect Rent Payments Under Section 194-I?
- Persons Liable to Deduct TDS u/s 194I:
- TDS on Advance Rent
- Important Points Related to Rent Income Covered Under Section 194I
- FAQ
What is TDS on Rent u/s 194I?
An individual who pays rent is subject to tax deduction at the source under Section 194I. TDS can be deducted when the amount of tax to be paid or received in a given fiscal year exceeds Rs. 180000.
When the rent exceeds Rs. 50000, HUFs and individuals must pay TDS at the rate of 5% of the entire rent received. It is important to note that rent paid to government entities or bodies is free from TDS.
Introduction to Section 194I:
The Finance Act, 1994 inserted Sec. 194-I, regarding deduction of tax from the payment of rent.
The Government felt that an item of income which is necessary to cover within the scope of deduction of income-tax at source is the income by way of rent.
In a number of countries also such income is subject to deduction of income-tax at the source.
What is ‘Rent’ in reference to Section 194I?
‘Rent’ means any payment made for the use of the following:
- Land or
- Building (including factory building) or
- Land appurtenant to a building (including factory building) or
- Machinery or
- Plant or
- Equipment or
- Furniture or
- Fittings
Whether or not the payee owns any or all of the above.
Here, any lease, sub-lease, tenancy or any other agreement or arrangement (either separately or together) comes under “Rent”. Sub-letting also comes under “Rent”.
Non-deduction case: The landlord collects security or advance payment at the time of letting out a building. The condition is that the deposit will be refunded at the time of vacating the building. In this case, such a receipt is not in the nature of income and, therefore, tax is not to be deducted at source u/s 194I.
However, advance rent (not in the nature of refundable security deposit) paid is, subject to the tax deduction. Moreover, where any such rent credited to ‘suspense account’ or any other account shall be liable to TDS.
Payments Covered u/s 194I:
Income from letting out of factory building
- If a factory building is given out on rent by one person, the rent received is generally an income from the 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 will be subject to tax deduction at source or TDS. This is even though it 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. This is an unnecessary burden on both taxpayer and the tax administrator because the collection of the tax will take place as TDS from the lessor without much delay.
Rent includes service charges
- Service charges payable to business centres cover under the definition of rent, as they cover payments by whatever name is called.
TDS requirement where building and furniture, etc., let out by separate persons
- Consider a case in which a building is given out on rent by one person and the furniture, fixtures, etc., given out by another person. The payee has to deduct tax under Section 194I only from the rent paid/credited for the hire of the building.
TDS requirement where rent not payable on a monthly basis
- Sec. 194-I does not mandate that the tax deduction should be on a month-to-month basis.
- If the crediting of the rent is done on a quarterly basis then deduction at source should be made on a quarterly basis only. Where the rent paid on a yearly basis deduction also should be once a year on the basis of actual payment or credit.
Charges regarding cold storage facility
- In the case of cold storage where there is the storage of milk, ice cream, vegetables, etc.. The payment may style as charges for use of plants and not for use of the building. Cold storage is a plant.
Hall rent paid by an association for use of it
- The association is assessed as an association of persons and not as an individual or HUF. Hence, the obligation of tax deduction will be there, provided payment for the use of hall exceeds Rs. 1,80,000
Payments to hotels for holding seminars including lunch
- However, hotels do not charge for use of premises but charge for catering/meal only, the provisions of Sec. 194I would not apply. Hence, Sec.194C would apply for the catering part.
Circumstances of TDS u/s 194I is not deductible
The amount payable/paid not exceeding Rs.1,80,000 for the financial year.
No tax from the amount payable in respect of rent is deductible. The amount of such rent credited or paid or likely to be credited or paid during the financial year. Payment to the payee landlord or lessee does not exceed Rs.1,80,000.
A tenant is an individual or Hindu Undivided Family:
- The deduction is not necessary under Section 194I if the amount paid or payable by an individual or Hindu Undivided Family.
- The individual/HUF is not carrying on any business/profession or
- The individual/HUF not liable to tax audit u/s 44AB in the preceding year.
Sharing or proceeds of film exhibition between a film distributor and a film exhibitor owning a cinema theatre:
- Distributors and exhibitors owning cinema theatre representations share the proceeds of the film exhibition. With regard to, the applicability of the provisions of Section 194I of the Income Tax Act. The Board examines the matter, it is of the view that the provisions of Sec.194-I would not attract such payment because:
- The exhibitor does not let out the cinema hall to the distributor. Generally, the share of the exhibitor is on account of composite services.
- Also, the distributor does not take cinema building on lease or sub-lease or under an agreement of similar nature.
Where the payee is the Government at agency
- Under the provisions of Sec. 196, no tax is required to be deducted at source from any sums payable to the government. The matter with regard to the statutory authorities and the local authorities referred to above, has been examined by the Board. Sec. 190. And it provides for deduction of income tax at source as one of the modes of collection of income tax with respect of an income. And this is notwithstanding that the regular assessment in respect of such an income should be made in a later assessment year. The income of an authority constituted in India by or under any law enacted either:
- For the purpose of dealing with and satisfying the need for housing accommodation or
- For the purpose of planning, development or improvement of cities, towns, and villages is exempt from income tax under Sec. 10(20A).
- Similarly, the income of a local authority which is chargeable under the head ‘Income from house property’ or ‘Income from other sources’, is exempt from Income-tax under Sec.10(20). There is no other condition specified in these two clauses of Section 10 which is necessary to satisfy for availing the income-tax exemption. There is no requirement to deduct income-tax deducted at source on income by way of ‘rent’ if the payee is the governmental agency.
- Also, in the case of the local authorities and the statutory authorities, there will be no requirement to deduct income-tax at source from income by way of rent if the person responsible for paying which satisfies with his exempt status under clause (20) or (20A) of Sec.10 on the basis of certificate to this effect given by the said authorities.
Persons Liable to Deduct TDS u/s 194I:
- The person (not being an Individual/HUF) responsible for paying any income to a resident by way of rent is liable to deduct TDS.
- As per Budget 2017, individuals /HUF (not covered under Tax Audit) paying rent to a resident exceeding Rs 50,000 per month are also liable to deduct TDS @ 5%. This amendment will be effective from 01.06.2017.
- In case the aggregate of the amount of such income credited or paid or likely to be credited or paid during the financial year by the aforesaid person to the account of, or to payee exceeds Rs. 1,80,000/-. Then the person is also liable to deduct TDS u/s 194I.
Point of Deduction of TDS u/s 194I:
Tax is required to be deducted at source at this time:
- Credit of ‘income by way of rent’ to the account of the payee
- At the time of payment thereof in cash
- By the issue of a cheque or draft or by any other mode, whichever is earlier.
The rate of Tax Deducted At Source :
| Nature of payment | Rates of Tax Deduction |
| Rent of plant and machinery | 2% |
| Rent of land or building or furniture or fitting | 10% (5% if rent exceeding Rs 50,000 / month paid by individual/HUF who are not liable for tax audit) |
What are Indirect Rent Payments Under Section 194-I?
Along with TDS on house rent or other possessions, Section 194I also applies to certain indirect rent payments. The following payments are subject to TDS but are not considered rent:
- Payments made to hotels for official meetings regardless of the fact that the hotels only charge for food services and not for the premises).
- Payments were made in order to get a cold storage facility for the preservation of perishable commodities.
- Rent received after renting out a manufacturing building to a tenant.
- Service fees paid to different business centres.
- Paid rent for building and furniture.
Persons Liable to Deduct TDS u/s 194I:
- The person (not being an Individual/HUF) responsible for paying any income to a resident by way of rent is liable to deduct TDS.
- As per Budget 2017, individuals /HUF (not covered under Tax Audit) paying rent to a resident exceeding Rs 50,000 per month are also liable to deduct TDS @ 5%. This amendment will be effective from 01.06.2017.
- In case the aggregate of the amount of such income credited or paid or likely to be credited or paid during the financial year by the aforesaid person to the account of, or to payee exceeds Rs. 1,80,000/-. Then the person is also liable to deduct TDS u/s 194I.
TDS on Advance Rent
The payment of advance rent to the landlord is subject to TDS deduction. Regardless, a few exceptions are considered for TDS calculations, as discussed below-
- For aggregate advance rent, tax will be deducted at source when the advance rent crosses over to the next financial year.
- When an asset is sold or transferred to another person, the tax deducted at source credit becomes invalid until the transfer is credited to the new owner.
- When a rent agreement is cancelled after the advance rent has been paid and TDS has been deducted, the balance will be refunded to the tenant. Specifically, landowners must mention such cancellation on their TDS return.
- A TDS certificate, in the form of Form 16A, must be given every three months for any payment other than salary.>
Important Points Related to Rent Income Covered Under Section 194I
- The payee’s PAN number is required for TDS on rent deduction. If the landlord or the person transacting on his behalf does not give a PAN number, the TDS on rent is 20%.
- If the rent paid exceeds Rs 1 crore and a foreign business is involved, a surcharge on TDS is charged.
- Political parties and charitable trusts are not subject to TDS on rent.
FAQ
Q. Is Section 194-I regarding TDS on rent relevant for utilising a portion of any land or building?
A.Yes, it is applicable for TDS on rent as defined in the definition of’rent’ by the terms ‘any land’ or ‘any building’.
Q.Is TDS on rent deductible on the total amount (including service tax)?
A.If a tenant pays a service tax, it does not affect the nature of the property owner’s income. TDS on rent is therefore calculated on the amount of rent paid/payable less the service tax.
Q.Are payments to a hotel for reserved rooms similar to rent?
A.Regular payments for hotel stays count as rent and are subject to TDS on rent under Section 194-I.
And with that, we end our discussion on theTDS on rent under Section 194I. If you have any questions, drop them in the comment section below.
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