Section 194I of Income Tax Act

section 194i tds on rent — (Source: legodesk)

Section 194I of the Income Tax Act concerns tax deducted at source (TDS) on rent. The provisions of this particular section define how TDS on rent should be treated. This section is primarily for individuals earning from rent or subletting their property. The rent received on a property is subject to TDS since it is an additional income earned by businessmen, salaried people, etc.

Let’s dive in to gain a detailed insight into section 194I of the Income Tax Act.

What Is Section 194I of the Income Tax Act?

Section 194I came into effect under the Finance Act, 1994. Under this section, a person (except an Individual and a HUF) paying rent is liable for TDS. The tax can be deducted at the source when the total rent amount payable or receivable is greater than a certain threshold value in a particular financial year.

The threshold limit was ₹180000 until FY 2018-19. It rose from this value to ₹240000 for FY 2019-20. Moreover, there exists no surcharge unless the amount is higher than ₹1 crore. Besides this, note that TDS under Section 194I is not applicable for the rent payable to government bodies or agencies.

Presently, both HUF and Individuals have to pay TDS at 5% of the total rent, provided it is greater than ₹50,000.

To develop a better understanding, one must know what comes under rent according to this section. Rent comprises payments under sub-lease, lease, tenancy, or any other arrangement or agreement for any of the following uses (either together or separately) -

Machinery
Plant
Equipment
Furniture
Land
Building (including factory building)
Land appurtenant to a building (including factory building)
Fittings

One should note that the above statement is applicable, notwithstanding if the payee is the sole owner of all or any of the above-mentioned entities. Also, sub-letting gets covered here.

Payments Covered Under Section 194I

Following are various payments included under Section 194I -

Income from Letting Out of Factory Building

When a factory building is let out, the rent received is income from business in the hands of the factory’s owner or lessor. Only in some circumstances, it is income from property in the hands of the lessor. But business income in the lessor’s hands and payment for which they will necessarily be paying advance tax and finally returning the rental income is also subjected to TDS.

This turns out to be an unnecessary burden for both the tax administrator and taxpayer because tax collection would take place as TDS from the lessor without delay.

TDS Requirement When Rent is not Payable Monthly

Tax deduction is not mandatorily applicable on a monthly basis under Section 194I.

For instance, if rent is credited quarterly, TDS deduction will take place on a quarterly basis. Conversely, when individuals receive rent yearly, the deduction will also take place on the actual credit payment once a year.

Rent Covers Service Charges

Service charges payable to business centres also fall under ‘rent’. It is because these cover payments by whatever name called.

TDS Requirement in the Case Where Furniture, Building, etc., Are Let Out by Separate Persons

Where furniture and fixtures are let out by one person and a building is let out by another person, the payee needs to deduct tax under this section only from the rent credited or paid for the hire of the building.

Charges Related to a Cold Storage Facility

For cold storage, taxable payment will include charges for plant usage and not for the use of the building.

Hall Rent Paid by an Association for its Usage

The association is assessed as an association of persons and not as HUF or an individual. Therefore, the obligation of tax deduction remains there, considering payment for the hall usage is more than ₹240000 from FY 2019-20 onwards.

Payments to Hotels for Holding Seminars (Including Lunch)

Provisions of this section are not applicable for cases where hotels do not charge for usage of premises but for meal/catering only. However, it would be applicable for the catering part.

Rent TDS Rates Applicable Under Section 194I

TDS is applicable when the payee credits ‘income by way of rent’ to the landlord’s account. Note that if you receive rent through cheque, draft or cash, this tax will be deducted during the time of payment.

The table given below provides an insight into the 194I rent TDS rate based on the payment type.

This includes the rates applicable under 194I (a) and 194I (b) TDS on rent.

Payment Type	TDS Rate For Individuals/Company	TDS Rate For Invalid or No PAN
Rent on building, furniture, land, or fittings	10%	20%
Rent paid on machinery and plant	2%	20%

Circumstances When TDS Under Section 194I Is Not Deductible

Here are some cases when TDS on rent under section 194I does not get deducted -

Amount Paid/Payable Not Exceeding ₹240000 During the Financial Year - No tax is applicable if rent is not more than ₹240000 from FY 2019-20 onwards (earlier, the 194I rent limit was ₹1, 80,000).
Where a Tenant is HUF or Individual - This section applies no deduction when an Individual or HUF not carrying on a business under income tax law pays rent.
Sharing of Film Exhibition Proceeds Between a Film Exhibitor and a Film Distributor Owning a Cinema Theatre - For a film distributor and film exhibitor contract, the exhibitor’s share is on account of composite services. A distributor does not take cinema building on sub-lease, lease, tenancy or under an agreement of similar nature. The payment done is not rental in nature.
In the Case When the Payee is the Government at Agency - Under Section 194I, a person making payment to the Government need not deduct tax at source. Also, tax is not applicable on payments to local and statutory authorities.

Time Limit Within Which Tax Needs to be Deposited

Given below is the 194I TDS limit within which individuals need to deposit tax -

For Payment by Entities Other Than the Government: On or before 7 days from the end of a month of deduction, where tax is paid along with an income tax challan
For Payment by or on Behalf of the Government: On the same day (without the usage of any challan form)
If the Amount Is Paid or Credited in March: On or before 30th April
For Any Other Case: On or before 7 days from the end of a month of deduction.

Entities must keep in mind all above-mentioned aspects of section 194I of the Income Tax Act. It will be helpful for them to account for TDS on rent better. Furthermore, it will allow them in streamlining the payment procedure and also claim a refund conveniently.

Frequently Asked Questions

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On what amount should TDS deduction under Section 194I take place if the rentals include ground rent, municipal tax, etc.?

TDS under Section 194I is applicable on income by way of rent. Rent denotes any payment under any tenancy, agreement, lease, etc., for any building or land usage. Therefore, if a tenant bears ground rent, municipal taxes, etc., no tax will be applicable on such a sum.

Is TDS applicable on security deposit of rent?

No, TDS is not applicable on security deposits of rent, given the landlord refunds this deposit. However, TDS is deductible if the landlord adjusts security deposit against rent.