Section 194-I outlines the rules for deducting tax at source (TDS) on rent payments. This provision primarily applies to individuals earning income through rental agreements or subletting properties. As rental income constitutes an additional earning for businesses, salaried individuals, and others, it is subject to TDS.

This guide is intended for those making rent payments for various assets, including land, buildings, plant and machinery, furniture, and fittings.

Understanding Section 194I

Any person (excluding an individual or HUF) responsible for rent payments must deduct tax at source. The TDS threshold for rent deductions is set at Rs. 2,40,000 for the financial year 2024-25, whereas the limit was Rs. 1,80,000 until FY 2018-19. Additionally, individuals and HUFs who undergo a tax audit are obligated to deduct TDS on rent. The tax deduction occurs at the time of crediting rent income to the payee’s account or upon actual payment through cash, cheque, draft, or any other method, whichever comes first.

Purpose Behind the Introduction of Section 194I

Inserted by the Finance Act, 1994, Section 194I mandates tax deduction on rental income to ensure taxation at the source. Similar provisions exist in various countries where rental income is subject to TDS.

Conditions for TDS on Rent

To deduct TDS, the landlord’s PAN must be provided. If unavailable, TDS is deducted at 20% under Section 206AA. Additionally, TDS on rent does not attract Education Cess or Secondary and Higher Education Cess.

Definition of Rent under Section 194I

The term ‘Rent’ encompasses any payment made under a lease, sublease, tenancy, or other arrangements for the use of:

• Land
• Buildings, including factory buildings
• Land adjacent to buildings, including factory buildings
• Machinery
• Plants
• Equipment
• Furniture
• Fittings

Ownership of the above assets by the payee is not mandatory, meaning subletting is also included. However, security deposits or advance payments that are refundable upon vacating the property are not considered rental income and are exempt from TDS. Advance rent that is non-refundable is subject to tax deduction. Additionally, rent credited to a suspense or other account is also subject to TDS.

TDS Rates on Rent

Type of Payment	TDS Rate
Rent for Plant, Equipment, and Machinery	2%
Rent for Land, Building, Furniture, or Fittings	10%

Payments Covered under Section 194I

• Factory Building Rent: If a factory building is rented, the received rent is usually considered business income. However, it is still subject to TDS.
• Service Charges as Rent: Service charges paid to business centers fall within the definition of rent.
• Separate Owners for Building and Furniture: If different entities own the building and furniture, TDS must be deducted separately for each.
• Non-Monthly Rent Payments: TDS deductions are not required monthly but must align with the rent payment schedule (quarterly, annually, etc.).
• Cold Storage Rent: Payments for using cold storage facilities are considered payments for plant usage and fall under Section 194C.
• Hall Rent for Associations: Associations, being taxable entities, must deduct TDS if rent payments exceed Rs. 2,40,000.
• Hotel Payments for Seminars: When hotels charge only for catering and not premises usage, Section 194C applies instead of 194I.

Entities Required to Deduct TDS

Any entity (excluding individuals and HUFs) paying rent to a resident must deduct TDS. However, individuals and HUFs who are subject to tax audits must also deduct TDS if rent payments exceed Rs. 2,40,000 annually. As per Budget 2017, individuals or HUFs not covered under tax audits but paying rent exceeding Rs. 50,000 per month must deduct TDS at 5% under Section 194-IB.

No Deduction or Lower Deduction under Section 197

A payee may apply in Form 13 to the Assessing Officer for a lower or nil TDS deduction. If approved, the officer will issue Form 15AA, instructing the payer to deduct tax at the specified lower rate or not at all.

Instances Where TDS under Section 194I is Not Required

• Rent Below Rs. 2,40,000 Annually: No TDS is deducted if the annual rent is within this threshold.
• Rent Paid by Non-Audited Individuals/HUFs: If an individual or HUF does not require a tax audit, no TDS is deducted.
• Revenue Sharing in Film Exhibitions: When film distributors and exhibitors share proceeds, payments are not categorized as rent.

TDS on Advance Rent

When advance rent is paid, it is subject to TDS deduction except in the following cases:

• If advance rent spans multiple financial years, TDS is deducted proportionally.
• If a property is sold or transferred, TDS credit is available only to the new owner.
• If a rental agreement is canceled after TDS deduction, the tenant receives a refund, and the landlord must disclose the cancellation in the ITR.
• For non-salary payments, Form 16A must be issued quarterly.

Deadline for TDS Deposits

• Government Payments: TDS must be deposited on the same day without a challan.
• Other Payments: TDS must be deposited within 7 days from the month-end.
• March Payments: TDS must be deposited by April 30.
• All Other Cases: Deposits must be made within 7 days after the deduction month.

Consequences of Failing to Deduct or Deposit TDS

• Non-Deduction of TDS: Interest at 1% per month applies from the date TDS is due until it is deducted.
• Non-Deposit of Deducted TDS: Interest applies if deducted tax is not deposited with the government.

(FAQs) related to Section 194I – TDS on Rent:

1. What is Section 194I of the Income Tax Act?

Section 194I deals with the Tax Deducted at Source (TDS) on rent. It mandates that individuals or businesses paying rent to a landlord must deduct TDS and remit it to the government.

2. Who is required to deduct TDS under Section 194I?

Any person, including an individual, Hindu Undivided Family (HUF), company, or firm, who pays rent for the use of land, building, plant, machinery, or equipment is required to deduct TDS under Section 194I.

3. What is the rate of TDS on rent under Section 194I?

The TDS rate on rent paid for:

• Land or building: 10%
• Rent for plant, machinery, or equipment: 2%

If the payee does not provide their PAN, the TDS rate increases to 20%.

4. What is the threshold limit for TDS deduction under Section 194I?

TDS under Section 194I is applicable if the annual rent exceeds ₹2,40,000. If the rent is below this threshold, no TDS needs to be deducted.

5. Is the TDS on rent applicable to both individuals and companies?

Yes, both individuals and companies are liable to deduct TDS on rent payments if they meet the conditions under Section 194I.

6. What types of rent are covered under Section 194I?

Section 194I applies to rent paid on:

• Land or building
• Plant or machinery
• Equipment

7. When is the TDS on rent required to be deposited?

TDS deducted on rent should be deposited with the government within 7 days from the end of the month in which the deduction is made. For March, the due date is April 30th.

8. How is the TDS on rent paid?

The TDS on rent can be paid online through the Income Tax Department’s e-payment portal or through designated banks.

9. Can the landlord claim the TDS deducted on rent?

Yes, the landlord can claim the TDS deducted as a credit while filing their income tax return. The TDS is reflected in Form 26AS.

10. What happens if TDS is not deducted or deposited?

Failure to deduct or deposit TDS under Section 194I may result in penalties and interest charges. The defaulter may be liable to pay a penalty of 1.5% per month of the amount that should have been deducted or deposited.

11. Is TDS applicable to advance rent payments?

Yes, TDS is applicable to advance rent payments if the total annual rent exceeds the prescribed threshold of ₹2,40,000.

12. Can TDS on rent be deducted at a lower rate?

Yes, a lower TDS rate may apply if the landlord has provided a certificate under Section 197, allowing a reduced rate of TDS.