Section 194I of Income Tax Act

What is Section 194I of Income Tax Act?

Section 194-I of the Income Tax Act is the foundational provision that governs the deduction of tax at source(TDS) on rental income. TDS on rent income specifically mandates that any person making a rent payment is responsible for deducting a certain percentage of that rent as tax before paying the landlord.

Here is a breakdown of the key components of Section 194-I:

Applicability: Who is Required to Deduct TDS?

This section applies to specific categories of tenants (payers):

• All business entities that include companies, firms, LLPs, trusts, and other associations of persons.
• Individuals and Hindu Undivided Families (HUFs) whose gross receipts exceed ₹50 lakh in the preceding financial year.

Threshold Limit: When is Deduction Necessary?

The obligation to deduct tax arises only if the aggregate rent paid or payable during the financial year is likely to exceed ₹2,40,000. If the total annual rent is below this threshold, no TDS needs to be deducted.

TDS Rates

• 2% on payments for plant and machinery.
• 10% on payments for land, building (including factory building), or furniture and fittings.

It is important not to confuse this with Section 194-IB. Individuals and HUFs who are not covered by the tax audit requirement (and thus not under Section 194-I) have a separate obligation to deduct TDS under Section 194-IB, if their monthly rent payment exceeds ₹50,000.

What is TDS on Rent?

Section 194-I of the Income Tax Act establishes the legal framework requiring the deduction of tax at source (TDS) on payments made in the form of rent. The obligation to deduct TDS comes into effect only when the total amount of rent paid, credited, or expected to be paid during a financial year exceeds ₹2,40,000.

HUFs are also subjected to tax audits. They must deduct TDS at 5% if their monthly rent payment exceeds ₹50,000.

Objective of TDS u/s 194I

Understanding the why behind a law often clarifies its application. Here are the key objectives of TDS under Section 194I:

• Section 194-I was formally introduced into the Income Tax Act by the Finance Act of 1994.
• The core purpose behind its enactment was to bring rental income, which forms a significant stream of revenue for many, under the purview of Tax Deducted at Source (TDS).
• This provision aligns with a common global tax administration practice, where a withholding tax is often applied to rental income to ensure better compliance and prevent revenue leakage.

Importance of Section 194I

Section 194-I is a strategic pillar in India’s tax collection framework. Given that real estate is a primary investment vehicle for many individuals and families, rental income represents a substantial and widely distributed source of earnings across the country.

Recognizing this, the government introduced this provision to address several key objectives:

• The primary goal was to formalize the taxation of this widespread income source. By bringing rent under the TDS mechanism, the law ensures that tax is captured at the point of payment, significantly reducing the scope for under-reporting or non-reporting of rental income by landlords.
• It places the responsibility of tax deduction on the payer (tenant), creating a more streamlined collection process for tax authorities compared to tracking millions of individual filings.
• Every TDS deduction is linked to the PAN of both the tenant and the landlord, creating an official record in Form 26AS. This transparency makes it simple for the Income Tax Department to cross-verify income declarations and deter non-compliance.

In essence, Section 194-I was established to ensure that this significant component of the nation’s economy contributes fairly and transparently to tax revenue.

Who is Liable to Deduct TDS u/s 194I?

The responsibility to deduct TDS under Section 194-I is assigned to certain categories of payers (tenants) and does not apply to everyone paying or receiving rent.

The following entities are liable:

• All Persons (other than certain Individuals/HUFs): This includes all business and corporate entities such as companies, firms, trusts, and LLPs.
• An individual or a Hindu Undivided Family (HUF) must deduct TDS under this section if they are required to have their accounts audited. This generally applies if their business turnover in the preceding financial year was over ₹1 crore or their gross professional receipts exceeded ₹50 lakh.

Who is Exempt from Section 194-I?

• Individuals and HUFs who are not subject to a tax audit are exempt from deducting TDS under this section.
• While these individuals are exempt from Section 194-I, they may still have a TDS liability under a different provision, Section 194-IB (if monthly rent exceeds ₹50,000).

Rate of TDS Under Section 194I

The liability to deduct TDS under Section 194I arises at the time of crediting the rent to the landlord’s account or at the moment of actual payment (via cash, cheque, or any other mode), whichever is earlier. The applicable TDS rate depends on the type of asset being rented:

• 2% for rent on plant, machinery, or equipment
• 10% for rent on land, building, furniture, or fittings

Important Note on PAN: If the landlord (payee) fails to furnish their PAN, the tenant must deduct tax at a higher rate of 20%.

TDS Rate on Rent Paid to an NRI

• Base Rate: 30%
• Surcharge: Added if NRI’s income exceeds slabs
• Health and Education Cess: 4%

Effective rate is 31.2%, plus surcharge (if applicable).

Payments Covered Under Section 194I

Section 194-I defines ‘rent’ broadly and applies to payments made for use of the following assets (if annual rent exceeds ₹2,40,000):

• Land and Buildings: Includes residential, commercial, and industrial property. TDS rate is 10%.
• Plant, Machinery, or Equipment:TDS rate is 2%.
• Furniture and Fittings: TDS rate is 10%.

The deduction must be made at the time of credit or payment (whichever is earlier). A TDS certificate (Form 16A) must be issued to the landlord.

Section 194I – Exemption and Deduction at Lower Rate

Scenarios Where TDS is Not Applicable

• Total rent does not exceed ₹2,40,000 in a financial year
• Rent paid to government or local authority
• Tenant is an individual/HUF not under tax audit
• Revenue-sharing in movie halls is not considered rent

TDS Without Service Tax

Service tax is only applicable if the total rent received exceeds ₹10 lakh. It’s calculated on rent, not on TDS.

Mechanism for Nil or Lower TDS Rate

• Form 15G/15H: Submitted by landlords with no taxable income
• Form 13: For obtaining a certificate for nil or lower deduction from the Assessing Officer

Special Considerations under Section 194I

• Rent for warehouse/godown use is considered rent on building
• Refundable security deposits are not subject to TDS unless adjusted against rent
• Co-working spaces and serviced offices are treated as rent
• Hotel room accommodation may be treated as rent and attract TDS

Conclusion

Understanding the rules of TDS on rent under Section 194I is essential for compliance. It safeguards businesses from penalties and promotes smooth landlord-tenant relations. Keeping proper records and consulting a tax professional ensures correct TDS handling.

FAQs on Section 194I of Income Tax Act