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 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

The rate of tax deduction depends on the nature of the asset being rented:

• 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. It is important to note that while these individuals are exempt from Section 194-I, they may still have a TDS liability under a different provision, Section 194-IB. This separate section requires them to deduct tax at 5% if their monthly rent payment to a resident landlord exceeds ₹50,000.

Rate of TDS Under Section 194I

The liability to deduct TDS under Section 194I of Income Tax Act 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. Once this liability is established, the applicable 194 I TDS rate depends on the type of asset being rented:

• For rent on plant, machinery, or equipment: The TDS rate is 2%.
• For rent on land, building, furniture, or fittings: The TDS rate is 10%.

Important Note on PAN: If the landlord (payee) fails to furnish their Permanent Account Number (PAN), the tenant (deductor) is obligated to deduct tax at a higher rate of 20%. Ensuring the landlord’s PAN is on record is a critical step in complying with the process of rent TDS rate.

TDS Rate on Rent Paid to an NRI

The rules for deducting TDS us 194I change significantly when the landlord is a Non-Resident Indian (NRI). The process becomes more complex with a higher tax rate. The rate is calculated as follows:

• Base Rate: 30%
• Surcharge: This is added if the NRI’s total income in India exceeds specific high-income slabs.
• Health and Education Cess: A 4% cess is levied on the total tax (base rate + surcharge).

Therefore, the effective TDS rate is 31.2% (30% base + 1.2% cess), plus any applicable surcharge.

Payments Covered Under Section 194I

Section 194-I of the Income Tax Act defines ‘rent’ in a very broad sense, extending its reach far beyond simple house rent. It establishes an obligation on certain payers to deduct tax from a wide range of payments made for the use of assets.

This obligation applies to all business entities (companies, firms) and also to individuals or HUFs who are subject to a tax audit. For these payers, the duty to deduct TDS is applied when the rent for a financial year exceeds ₹2,40,000.

TDS under this section is applicable to payments made for the use of the following assets, regardless of the name given to the payment or the nature of the agreement:

• Land and Buildings: This is the most common category, covering any payment for the use of land or buildings. It includes residential, commercial, and industrial properties, as well as associated land like parking lots. TDS for this category is deducted at 10%.
• Plant, Machinery, or Equipment: Payments for leasing any type of machinery, plant, or equipment also fall under the definition of rent. For these assets, the applicable TDS rate is 2%.
• Furniture and Fittings: Rent can also be paid for the use of furniture and fittings, either as part of a composite rental agreement for a furnished property or under a separate agreement. These payments are subject to TDS at 10%.

The deduction must be made at the time of crediting the rent to the landlord’s account or at the time of actual payment, whichever is earlier. The deducted amount must then be deposited with the government, and the tenant is required to issue a TDS certificate (Form 16A) to the landlord as proof of tax payment. This system ensures transparency and timely tax collection on rental income.

Section 194I – Exemption and Deduction at Lower Rate

While Section 194-I mandates TDS on rent, there are specific conditions where this obligation is either completely waived or can be legitimately reduced. Understanding these exceptions is crucial for both tenants and landlords to ensure compliance without unnecessary deductions.

Scenarios Where TDS is Not Applicable

TDS under Section 194-I is not required in the following specific situations:

• No TDS is necessary if the total rent paid or payable during the financial year does not exceed ₹2,40,000.
• Rent paid to any government or local authority is fully exempt from TDS under this section.
• If the tenant is an individual or a Hindu Undivided Family (HUF) who is not required to undergo a tax audit, they are not liable to deduct TDS under Section 194-I.
• In certain business models, such as film exhibitions where a theater owner and distributor share revenue from ticket sales, the payment is not classified as rent.

TDS Without Service Tax

Service tax is only applied to Tax Deducted at Source (TDS) on rent if the total rent received from all sources in a financial year exceeds ₹10 lakh. This service tax usually includes cess. It is important to remember that service tax is calculated based on the rent earned, not on the amount of TDS paid.

Mechanism for Nil or Lower TDS Rate

A landlord whose total income is expected to be below the taxable limit can request a nil or lower deduction using one of the following methods:

• Submission of Form 15G/15H: If the landlord’s estimated total tax liability for the year is nil, they can furnish a self-declaration to the tenant using Form 15G (for individuals below 60 and HUFs) or Form 15H (for senior citizens). Upon receiving this form, the tenant should not deduct any TDS.
• Obtaining a Lower Deduction Certificate (Form 13): A landlord can file an application with their Income Tax Assessing Officer using Form 13. If the officer is satisfied that the landlord’s income warrants a lower or nil tax deduction, they will issue a certificate specifying the rate. The tenant is then obligated to deduct tax at this certified lower rate.

Special Considerations under Section 194I

Beyond the standard rules of rates and thresholds, Section 194-I has several nuanced applications that address specific business arrangements. Understanding these special cases is crucial for accurate compliance.

Here are some key considerations:

• Payments made for using warehousing or godown facilities are treated as rent for a ‘building’ under the Income Tax Act. Consequently, these warehousing charges are fully liable for TDS.
• A refundable security deposit is treated as a liability for the landlord, not income. Therefore, it is exempt from TDS. The moment a deposit is adjusted against outstanding rent, it becomes income for the landlord at that point and is immediately subject to TDS.
• Payments made to use co-working spaces or serviced business centers are also considered ‘rent’ and are liable for TDS.
• The payment for a hotel for accommodation is treated as rent, and TDS must be deducted.

Conclusion

Understanding the rules of Tax Deducted at Source (TDS) on rent under Section 194I is a fundamental aspect of financial compliance for a wide range of individuals and businesses. Staying compliant is not merely about fulfilling a statutory duty; it is about safeguarding your business from avoidable interest and penalties and ensuring smooth financial operations for both the tenant and the landlord. By maintaining diligent records, communicating clearly, and staying informed about the regulations, you can handle your TDS obligations with confidence and precision. When in doubt, consulting a tax professional is always a prudent step to ensure complete accuracy.

FAQs on Section 194I of Income Tax Act