As per Section 194I, rent is defined as any payment made for the use of land, building, machinery, plant, equipment, furniture, fittings, or land related to a building, whether or not the payer is the owner. It also includes sub-letting as rent.
Rent is a significant part of many people's income and is subject to taxation. To ensure the successful payment of TDS on rent, it must be paid on time as per the Income Tax Act provisions.
What is TDS on Rent?
As per Section 194I, anyone paying rent must deduct tax at the source when the tax amount to be paid or received during the financial year exceeds Rs. 180000.
Generally, HUFs and individuals must deduct TDS at a rate of 5% if the rent exceeds Rs. 50000. Rent paid to government agencies or bodies is exempt from TDS.
Objective of TDS u/s 194I
- Section 194I was introduced in the Finance Act of 1994 to outline the tax deduction from rent.
- The provision was designed to bring rental income under TDS deductions.
- In several countries, rental income is already subject to TDS deductions.
Importance of Section 194I
In India, many individuals and HUFs invest in properties with the goal of selling them later at a higher price or renting them out. Rent income is thus a vital source of earnings for many.
Due to this, Section 194I was introduced to include tax deductions for rental income in the Income Tax Act. Additionally, in other nations, rental income is subject to TDS.
This led to the introduction of Section 194I.
Who Has to Deduct TDS Under Section 194I?
Under Section 194I, TDS must be deducted if the total rent paid to a landlord exceeds Rs. 1.80 lakhs in a financial year and the amount has already been or is likely to be debited.
Note that this does not apply to individuals or HUFs.
Rate of TDS Under Section 194I
TDS is deducted when rent income is credited to the landlord's account. If the rent is paid by cash, cheque, or draft, TDS is deducted when payment is made. Here is the TDS rate on rent:
- TDS on rent for plant, machinery, or equipment is 2%.
- TDS on rent for land, building, or both is 10%.
- TDS on rent for furniture or fittings is charged at 10%.
Payments Covered Under Section 194I
TDS is deducted at different rates depending on the type of assets, such as furniture, factory, building, or hotel, among others.
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1) Rent from Factory Building |
When renting a factory building, the lessor is responsible for paying the rent, which is typically treated as property income. The lessor must pay advance tax on this rental income, as tax is deducted at source. |
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2) Rent from Cold Storage |
Cold storage facilities for goods like milk or vegetables are classified as plants and are not subject to rent deductions for buildings. |
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3) Two People Renting from a Building or Furniture |
When a building and furniture are rented by two different entities, TDS is deducted only on the rent for the building. |
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4) Hall Leased to an Organization |
TDS is deducted when the rent for leasing a hall exceeds Rs. 1,80,000. |
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5) Hotel Room Rental for Seminars with Meals |
TDS is deducted for hotels that only charge for food or catering, not for using the facilities. Catering is covered under Section 194C. |
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6) Tax Reduction Based on Rent Period |
Taxes are not always deducted on a monthly basis. The deduction depends on the rental period, so for annual rents, the TDS deduction is also annual. |
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7) Service Fees to Business Centers |
Service fees paid to business centers are considered rent under TDS. |
Note that Section 194I requires TDS to be deducted based on the rental period, whether monthly, quarterly, or annually.
However, there are specific exceptions under Section 194I where no tax is deducted at source. These exceptions should be considered when following the process.
Section 194I – Exemptions and Lower Rate Deduction
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Exemptions
TDS on rent does not apply in the following circumstances:
- If the total amount paid or payable in a fiscal year is less than Rs. 180000.
- When rent is paid to a government entity.
- In the case of earnings shared by a film exhibitor and distributor who jointly own a cinema theatre.
- If the tenant is an individual or an HUF.
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TDS Without Service Tax
Service tax applies to TDS only when the total rent from all sources in a financial year exceeds Rs. 10 lakh. Typically, service tax includes cess.
Note that service tax is computed on the rent earned and not the service tax paid.
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Nil or Reduced TDS Deduction
Individuals who receive rent as income with no tax liability can file Form 15G or 15H to avoid TDS on rent.
Entities can also claim TDS returns while filing their ITR. The tax payee must claim the tax deducted at source as credit and pay any balance tax due, or they can request a refund if the TDS deducted exceeds the computed tax.
TDS on Advance Rent Payments
Advance rent payments to the landlord are subject to TDS deductions. However, there are certain exceptions that apply to TDS calculations, as outlined below:
- If the advance rent extends into the next financial year, TDS will be proportionate to the earnings based on Form 16 issued for the total advance rent paid.
- If an asset is sold or transferred to another person, TDS credit is not available until the transfer is credited to the new owner.
- In the event of a rent agreement cancellation after the advance rent payment and TDS deduction, the remaining amount will be refunded to the tenant. The landowner must report this cancellation in the ITR form for TDS.
- For non-salary payments, a TDS certificate must be issued every quarter in Form 16A.
Consequences of Failing to Pay TDS Under Section 194I of the Income Tax Act
Taxpayers who fail to pay taxes on time will be required to pay interest at the rate of 1% per month from the due date of tax deduction until the date of payment.
Taxpayers who deduct TDS but fail to deposit it with the government must pay interest at the rate of 1.5% per month, calculated from the date the tax was due to the date of TDS deposit.
Deadline for TDS Payment
Here are the time limits for depositing TDS in different cases:
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When TDS is paid by or on behalf of the government
Such payments must be made immediately without using any challan form on the same day.
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When TDS is paid by entities other than the government
TDS payments must be made either on or within a week after the end of the month during which the deduction occurred.
Given the numerous facets of Section 194I of the Income Tax Act, entities must be diligent in understanding these provisions. This ensures better handling of TDS on rent payments and simplifies the payment and refund processes.