Section 194-I of the Income Tax Act mandates the deduction of income tax at source (TDS) by certain entities responsible for paying rent to residents. Here’s an elaborate breakdown of its provisions:
What is Rent for understanding section 194I?
Rent includes payments under lease, sub-lease, tenancy, or any other agreement for the use of
- Land or
- Building or
- Machinery or
- Plant or
- Equipment or
- Furniture or fittings whether owned by the payee or not.
Applicability and Rates of TDS:
- The section applies to any payment made as rent to a resident, excluding individuals and Hindu Undivided Families (HUFs).
- TDS is to be deducted – At 2% for payments related to the use of machinery, plant, or equipment.
- At 10% for payments related to land use, building (including factory building), land appurtenant to a building (including factory building), furniture, or fittings.
When TDS on Rent Isn’t Required: Key Scenarios Explained
There are specific scenarios where TDS on rent isn’t needed, mainly depending on the amount, the type of tenant, and the nature of the agreements.
- No TDS for Rent Under Rs 2,40,000: No TDS is required if the total rent paid or credited during the financial year does not exceed Rs. 2,40,000 for each payee.
- Tenants Who Are Individuals or HUFs: Only if their turnover from business exceeds Rs. 1 crore or Rs. 50 lakhs from the profession in the financial year.
- Film Exhibition Contracts: In a deal between a film distributor and a film exhibitor (like a cinema owner), the exhibitor’s share isn’t considered rent. It’s treated as payment for composite services, so TDS on rent doesn’t apply since the distributor isn’t leasing the cinema building.
Exception for Real Estate Investment Trusts (REITs):
Under Section 194I, there’s an exception for Real Estate Investment Trusts (REITs). Specifically, no TDS must be deducted from rent payments made to a REIT. This exception applies to any real estate owned directly by the REIT.
When to Deduct TDS on Rent: You need to deduct TDS on rent either when you credit the rent amount to the payee’s account or when you pay it (whether it’s in cash, by cheque, draft, or any other method) – whichever happens first.
Here are some scenario-based examples for TDS under Section 194I:
- Scenario 1: Office Rent
Company ABC Pvt. Ltd. pays a monthly rent of ₹50,000 for its office space to Mr. Joy. Since the annual rent exceeds ₹2,40,000, ABC Pvt. Ltd. must deduct TDS at 10% of the rent paid. So, each month, they will deduct ₹5,000 as TDS and pay the remaining ₹45,000 to Mr. Joy.
- Scenario 2: Machinery Rent
XYZ Ltd. rents machinery from Mr. Kumar for ₹30,000 per month. The total annual rent is ₹3,60,000. XYZ Ltd. must deduct TDS at 2% on the rent paid for machinery. Therefore, each month, they will deduct ₹600 as TDS and pay ₹29,400 to Mr. Kumar.
- Scenario 3: Furniture Rent
PQR Ltd. rents furniture from Ms. Anjali for ₹25,000 per month. The annual rent is ₹3,00,000. PQR Ltd. must deduct TDS at 10% of the rent paid for the furniture. Each month, they will deduct ₹2,500 as TDS and pay ₹22,500 to Ms. Anjali.
- Scenario 4: Mixed Rent
LMN Ltd. rents a building and furniture from Mr. Rajesh for ₹1,00,000 per month. The annual rent is ₹12,00,000. LMN Ltd. must deduct TDS at 10% of the rent paid for the building and furniture. Each month, they will deduct ₹10,000 as TDS and pay ₹90,000 to Mr. Rajesh.
- Scenario 5: Rent Paid by Individual
Mr. Ramesh, an individual subject to a tax audit, pays ₹60,000 monthly rent for his business premises. The annual rent is ₹7,20,000. Mr. Ramesh must deduct TDS at 10% of the rent paid. Each month, he will deduct ₹6,000 as TDS and pay ₹54,000 to the landlord.
These examples should help clarify how TDS under Section 194I works in different scenarios. If you have any specific cases or further questions, feel free to ask!
Understanding TDS on Factory Rentals and Associated Payments
It Is Important to understand whether payments are considered rent or service charges, and knowing the applicable TDS sections can help you Deduct and pay taxes smoothly.
- Factory Building Rent: If you’re renting out a factory building, the rent is usually considered business income for the owner. However, in some cases, it can be property income. Either way, the owner must pay advance tax and file a return for this income, which is subject to tax deduction at source (TDS).
- Rent Includes Service Charges: Payments to business centres, labelled as service charges, are treated as rent, so TDS applies.
- TDS with Multiple Lessors: If one person rents out a building and the other rents out the furniture and fixtures, TDS must be deducted separately for both under Sec. 194I.
- Cold Storage Charges: Payments for using cold storage facilities are considered charges for using the plant rather than rent for a building, so Sec. 194C applies due to the contractual nature of the arrangement.
- Hall Rent by Associations: If an association uses a hall and the payment exceeds Rs 2,40,000, TDS applies since it’s assessed as an association of persons, not an individual or HUF.
- Hotel Payments for Seminars: When a hotel charges for both the use of premises and catering, Sec. 194I doesn’t apply to the catering part; instead, Sec. 194C covers it.
TDS on Advance Rent: What to Know
When you pay advance rent to a landlord, TDS must be deducted. Here are some notables to keep in mind for TDS on advance rent:
- Crossing Financial Years: If the advance rent extends into the next financial year, TDS is deducted based on the portion that applies to each year. You’ll get a Form 16 that reflects the total rent paid in advance.
- Asset Transfer: If the rental property is sold or transferred to someone else, the TDS credit doesn’t apply until the new owner is officially recorded.
- Cancellation of Agreement: If you cancel the rental agreement after paying advance rent and deducting TDS, the remaining balance will be refunded to you. The landlord needs to mention this cancellation when filing their income tax return.
- TDS Certificate: For non-salary payments like rent, a TDS certificate (Form 16A) must be issued every quarter.
TDS on Rent Paid to NRIs: What You Need to Know
keep these points in mind to make sure you’re compliant when renting from an NRI landlord!
If you’re paying rent to a non-resident Indian (NRI), you’ll need to deduct TDS under section 195 at a rate of 30%, plus any applicable surcharge and a 4% cess. Unlike rent payments to resident Indians, there’s no minimum threshold for TDS when dealing with NRIs—you have to deduct it no matter how much the rent is.
Compliance and Filing Requirements:
Ratepayers must obtain a Tax Deduction and Collection Account Number (TAN)
TDS is deposited using Form 15CA and, if required, Form 15CB must be obtained from a Chartered Accountant if the annual rent exceeds Rs. 5,00,000.
TDS returns for payments to NRIs are filed using Form 27Q.
Deadlines:
TDS must be deposited by the 7th of the following month, except for March, which has a deadline of April 30th.
Form 27Q is filed quarterly, with deadlines on the 31st of July, October, January, and May of Every Year.
When to Deposit TDS:
- Government Payments: Deposit the TDS on the same day—no need for a challan form.
- Non-Government Payments: You’ve got 7 days from the end of the month in which the deduction was made if you use an income tax challan.
- March Payments: For amounts credited or paid in March, deposit by April 30.
- General Rule: For all other cases, deposit within 7 days from the end of the month in which you deducted the TDS.
What Happens If You Mess Up:
- If TDS Wasn’t Deducted: You’ll need to pay interest of 1% per month from the date it was supposed to be deducted until you deduct it.
- If TDS Was Deducted but Not Deposited: You’ll owe interest of 1.5% per month from the date it was deducted until you deposit it.
Ref:
Circular No. 5-2002/30-07-2002
Circular No. 4/2008
Instruction No. 2/2010
Notification No. 103/2018
Circular No. 23/2017
Circular No. 3/2008
Notification No. 35/2008
Circular No. 22/2015
CIT vs. Dalmia Cement (Bharat) Ltd. (2002)
Reebok India Co. v. Assistant Commissioner of Income Tax
G.E. India Technology Centre Pvt. Ltd. vs. Commissioner of Income Tax (2010)
