Section 194I - TDS on Rent

As per Section 194I, the word rent can be described as a payment categorised as a lease, sub-lease, tenancy, or any agreement to use – land, building, machinery, plant, equipment, furniture, fittings, or land adjunct to a building. Regardless of whether the payee owns it or not. Also, sub-letting is considered a rent payment. 

Being an essential component of income for many individuals, rent is subject to taxation. To streamline the payment of TDS on rent successfully, individuals need to pay it on time and as per the provisions of ITA. 

What is TDS on Rent?

According to Section 194I, an individual who pays rent is subject to tax deduction at the source. One must note that TDS can be deducted when the amount of tax to be paid or received in a given fiscal year is over Rs. 180000. 

Typically, HUFs and individuals are liable to pay TDS at the rate of 5% of the total rent that is collected when the rent is more than Rs. 50000. One must note that the rent that is paid out to government agencies or bodies is exempted from TDS. 

Objective of TDS u/s 1941

  • The Finance Act, 1994 inserted Section 1941, on basis of deduction of tax from rent. 
  • The government established the provision to cover the income by way of rent under TDS.
  • In other countries, such income is subject to deduction of TDS.

Importance of Section 194I

In India, a lot of people, including individuals and HUFs, buy properties for investment needs. Here the primary motive was to sell the property at an appreciated rate in the future or rent out the property for getting rent. Thus, the rent collected is one of the most important components of income for a lot of people, including individuals and HUFs in the country. 

Due to this, the finance minister has considered the need to introduce Section 194I, which would have the tax deduction from the rent in the Income Tax Act. Another reason for being is that in other countries, income from renting property is already subject to TDS.

All these reasons had brought about Section 194I.

Who Has to Deduct TDS Under Section 194I?

Based on Section 194I of the Income Tax Act, a person is eligible for a TDS deduction if they will be paying their landlord a total of Rs 1.80 lakhs in rent in a financial year and have already debited that amount or are likely to do so.

Note that neither a person nor a HUF may be the subject of this sentence.

Rate of TDS Under Section 194I

TDS is deducted when the payee credits ‘income by way of rent’ to the landlord’s account. One must note that if rent is paid through cash, cheque, or draft, then TDS is deducted at the time of payment. Here is the TDS rate on rent-

  • TDS on rent paid on plant, machinery, or equipment is to be charged at 2%.
  • TDS on the rent paid on land, building, or both of it is to be charged at 10%.
  • TDS on the rent paid on furniture or fitting is charged at 10%.

Payments Covered Under Section 194I

Tax is deducted at varied rates for different assets such as furniture, factory, building, hotel, and more.

1) Rent from Factory Building

When a factory building is rented, the lessor or factory owner is required to pay the rent. The Lessor may occasionally receive it as property-related income.

In these circumstances, the lessor will be required to pay an advance tax and return the rent income since the tax will be deducted at the source because the rent is regarded as business income.

2) Rent from Cold Storage

Cold storage facilities that hold milk, vegetables, or ice cream are regarded as plants and are not subject to building rent.

3) Two people renting from a building or piece of furniture

When the building and furnishings are rented out by two distinct people, the tax is only subtracted from the rent for the building.

4) Hall Leased to an Organization

In the event that an association hires a hall, tax is subtracted if the rent is more than Rs. 1,80,000.

5) Hotel room rental for seminars with meals

Tax is withheld at the source when hotels simply charge for food or catering and not for utilizing the facilities. At the same time, Section 194C is used for catering.

6) Tax Reduction Depending on the Rent Period

Taxes are not always withheld on a monthly basis by law. It is determined by the rental time and is subtracted accordingly. For instance, if the rent is paid annually, the tax deduction is also made annually.

7) Servicing Fees Owed to Business Centers

Rent is often regarded as the service fees paid to business centres.

One must take note that Section 194I mandates that TDS has to be deducted on the basis of the rental period and for each month. Naturally, if rent is paid yearly or quarterly, then it will also be paid out accordingly.

However, under Section 194I of ITA, there are a few cases where no tax is deducted at the source. One must become aware of those exceptions and streamline the process accordingly.

Section 194I – Exemption and Deduction at Lower Rate

  • Exemptions 

TDS on rent is not applicable in the following cases –

  1. When the amount to be paid or has been paid is less than Rs. 180000 in a fiscal year.
  2. Then the rent is paid to a government agency.
  3. When the earnings are shared by a film exhibitor and distributor who own a cinema theatre.
  4. In case it is an individual tenant or HUF
  • TDS without Service Tax

Service tax is applied on TDS only when the aggregate rent from one or more sources in a given fiscal year is more than Rs.10 lakh. Ideally, service tax includes cess.

It has to be noted that service tax is calculated on the rent accrued and not on the amount of service tax that is paid.

  • Nil or Lower TDS Deduction

Entities can file Form 15G or 15H to avoid TDS on rent if individuals with nil tax receive rent as income.  

Other than these, entities can claim TDS returns while filing ITR. To do so, the tax payee has to claim tax deducted at source as credit and must pay the difference between tax payable and the deduction that was made on rent. Also, a TDS refund can be claimed if the amount of tax deducted at the source was more than what was computed. 

Tax Deducted at Source on Advance Rent

In the case of advance rent that is paid to the landlord, the payment is subject to TDS deduction. Regardless, there are a few exceptions that are factored in for TDS calculations, as discussed below–

  • In case the advance rent crosses over to the next financial year, the tax deducted at source will be in proportion with earnings based on Form 16 that is issued for aggregate rent paid in advance.
  • When an asset is sold or transferred to another individual, the tax deducted at source credit has been unavailable until the transfer has to be credited to its new owner.
  • In case of cancellation of rent agreement after the payment of advance rent and deduction of TDS, the balance will be refunded to tenants. Notably, the landowner has to mention such cancellation in the ITR form submitted for TDS deduction.
  • For payment besides salary, a TDS certificate has to be issued every quarter as Form 16A

Implications of Not Paying TDS under Section 194I of the Income Tax Act

Taxpayers who fail to pay taxes on the due date are liable to pay interest at the rate of 1%. One must note that taxpayers have to pay the interest every month from the date on which tax is to be deducted until the date it is. 

On the other hand, taxpayers who have deducted but failed to deposit it to the government are required to pay interest at the rate of 1.5%. However, such an interest has to be paid from the date of tax-deductible until TDS is deposited.

What is the Time Limit of Depositing TDS?

These pointers highlight the TDS on rent limit of time for TDS deposit in different cases.

  • When TDS is paid either on behalf of the government or by the government

Such payment has to be made without using any challan form on the same day itself.

  • When TDS is paid by an entity other than the government

TDS has to be paid either on or at least a week from the end of the month when a deduction will be made. 

Since there are a lot of aspects of Section 194I of the Income Tax Act, entities must make it a point to find out about them. This will help them to account for TDS on rent payment better and further allow them to streamline the process of payment and to claim refunds with more convenience.

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