What is Section 194I of the Income Tax Act?
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. The rent paid on a property is subject to TDS since it is an additional income earned by counter party such as businessmen, salaried people, etc.
Let’s dive in to gain a detailed insight of 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, any person (except an Individual and a HUF) paying rent to a resident is liable for TDS. The tax can be deducted at the source when the total rent amount payable is greater than a certain threshold limit in a particular financial year.
The threshold limit was ₹180000 until FY 2018-19. It rose from this value to ₹240000 from 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 to a business trust, being a real estate investment trust, in respect of any real estate asset, referred to in clause (23FCA) of section 10, owned directly by such business trust.
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. In some circumstances, it is income from house 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 on Monthly Basis
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 are called by whatever names.
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
CBDT Circular No.1/2008 dated 10.1.2008 provides clarification regarding applicability of provisions of section 194-I to payments made by the customers on account of cooling charges to the cold storage owners.
The main function of the cold storage is to preserve perishable goods by means of a mechanical process, and storage of such goods is only incidental in nature. The customer is also not given any right to use any demarcated space/place or the machinery of the cold store and thus does not become a tenant.
Therefore, the provisions of 194-I are not applicable to the cooling charges paid by the customers of the cold storage. However, since the arrangement between the customers and cold storage owners are basically contractual in nature, the provision of section 194C will be applicable to the amounts paid as cooling charges by the customers of the cold storage
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.
TDS Rates Applicable Under Section 194I Rent
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 property 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 in general is not applicable to Individual or a Hindu undivided family except whose total sales, gross receipts or turnover from the business or profession carried on by him exceed one crore rupees in case of business or fifty lakh rupees in case of profession during the financial year immediately preceding the financial year in which such income by way of rent is credited or paid.
- 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.
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 properly. Furthermore, it will allow them in streamlining the payment procedure and also claim a refund conveniently.
FAQs about Section 194I of Income Tax Act
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.