Section 194i of the Income Tax Act is related to the TDS on rent. The provisions of Section 194i define how the TDS on rent is to be treated. Let us study in detail Section 194i of the Income Tax Act. This Section is primarily for the people who are earning from renting or subletting their property. The rent received on property is subject to tax deduction at source as it is an additional income earned by individuals like salaried people, businessmen etc. Let us now understand this Section in detail.
What is Section 194i of the Income Tax Act?
Under Section 194i a person (other than Individuals and Hindu Undivided Family) who is paying rent is liable for Tax deduction at source. The tax can be deducted at source when the total amount of rent to be received or paid in a particular financial year is more than Rs. 1,80,000. While Individuals and Hindu Undivided Families who come under the purview of the taxation are also liable for tax deduction at source, the aggregate limit was previously Rs.1,80,000 but now with effect from 1st June 2017 the rule of the payments has changed. Now both Individuals and Hindu Undivided Family are obligated for tax deduction at source at 5% of the rent collected given the rent exceeds Rs 50,000.
Why is Section 194i a part of Income Tax Act?
In India, many persons including individuals and HUFs buy properties for investment purpose. Here the primary aim is selling the property at an appreciated rate in the future or renting out the property for receiving rent. Thus Rent collected is one of the major components of income for many persons including individuals and HUFs in India. So due to this, the Finance Ministry felt the need to introduce Section 194i which will be pertaining to tax deduction from rent in the Income Tax Act. Another reason being that in other countries income from renting of property is already subject to tax deduction at source. So due to all these reasons the finance ministry decided to include Section 194i in the Finance Act, 1994.
Define Rent under Section 194i?
While studying Section 194i we ought to understand what all is included and is considered as rent with reference to Section 194i. The definition of rent can be stated as under:
‘Rent’ means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any:
- Land or
- Building (including factory building) or
- Land appurtenant to a building (including factory building) or
- Machinery or
- Plant or
- Equipment or
- Furniture or
- Whether solely owned by the payee or not.
Sub-letting is also considered and included.
Who is responsible to deduct TDS under Section 194i?
The person who will be paying/has credited/is likely to credit an aggregated rent of Rs 1.80 lacs in a financial year to his/her landlord is liable for TDS deduction under Section 194i of the Income Tax Act. Please note that the person here cannot be an individual or HUF.
When to do deductions of TDS?
Tax is to be deducted at source when payee credits the income by way of rent to the account of the landlord. In case the rent payment is done by way of cash or by cheque or by draft then the tax deduction is done at the time of actual payment.
Rates of Tax deductions
TDS on rent paid on Plant, Machinery or equipment to be charged at 2%.
TDS on rent paid on land, building or both to be charged at 10%.
TDS on rent paid on furniture or fittings to be charged at 10%.
Kindly note if the any of the assets are jointly held by more than one person then under Section 194i of the Income Tax Act, the TDS on rent is required to be paid only if the share of any one such owner exceeds Rs 1.80 lacs in a financial year.
TDS deductions under Section 194i of the Income Tax Act
As we know the Tax deducted at source is charged on the income received as rent but there are certain examples where indirect rent payments come under the purview of Section 194i. Following is the list of payments that are not rent per-se but are covered under Section 194i of the Income Tax Act on which TDS is charged.
- Payment done to hotels: When meetings are held in hotels and that includes lunch but the hotels do not charge for the premises but only for catering then in such cases Section 194c for the catering payments would apply.
- Payments done to cold storage facility: When cold storage facility is used to preserve perishable items like vegetables, milk etc. then the payment is done for the cold storage facility and not for the building of cold storage. So TDS is applicable for the payment done for use of the facility i.e. cold storage and not for the building of cold storage.
- Hall rent payment done by association: When an association of persons and not individual or HUF rent a hall then TDS is payable on the rent paid by the association if the rent of the hall exceeds Rs.1.80 lacs.
- Rent received by letting out of factory building: When rent is received by renting the factory building then the income received is generally considered as income from business for the owner of the factory. But even for such payment TDS is applicable. Also in such cases the owner of the factory will have to pay advance tax as the income is considered as business income for the factory owner.
- Service Charge paid to business center: The service charge paid to business center falls under the category of income and are considered as rent.
- Rent on building and rent on furniture: When a building is rented by one person and the furniture and fixture are provided by another person then in such cases the payee should deduct TDS for the rent paid for the building.
- TDS to be paid as per Rent Period: As per Section 194i it is not mandatory to deduct tax on monthly basis but as per the rent period. So if the payment of the rent is done on quarterly or yearly basis then the tax deductions are also to be made accordingly i.e. quarterly or yearly.
Following are certain scenarios where the TDS under Section 194i is not deductible:
- No tax or TDS is deducted on the amount paid as rent if such rent credited or paid or to be paid during the financial year to the landlord or lessee or payee does not exceed Rs.1.80 lacs.
TDS deduction is not required under Section 194i of the Income Tax Act if the tenant is an individual or HUF and if:
- The individual or HUF is not carrying any business or profession.
- When in the previous year the individual or HUF was not liable for tax audit.
- In case of a film distributor and a film theater owner the proceeds that are received would not attract TDS as neither the film theater owner rents out the theater to showcase the film nor is the film distributor the tenant. This business is composite in nature so the proceeds generated are out of the scope of TDS.
- No tax is required to be deducted if the amount is paid to the government agency.
- If any security deposit is done by the tenant on the condition that the landlord will pay back the security deposit or advance payment at the time of vacating the property then such deposit or advance payment is not considered as income and so no tax is deducted on such income under Section 194i of the Income Tax Act.
- But if any advance rent is received by the landlord without any condition of refunding then such payment received or advance rent received shall be subject to tax deduction.
- If any rent received is credited to suspense account or any other account then such rent will be subject to tax deduction under Section 194i of the Income Tax Act.
- Surcharge is levied on tax deducted at source on rent received when a foreign company is involved and the rent that is paid is above Rs.1 Crore.
- PAN Number is necessary for TDS deduction. The landlord or the person who is transacting on behalf of the owner or person who is receiving rent is required to provide his PAN Card Number to the tenant or the payee. If the landlord or the person receiving rent does not provide the PAN Card Number then the TDS on rent is deducted at 20%.
- No Surcharge, Education cess/ Secondary and Higher Education cess is chargeable on TDS on rent.
- If the tenant pays municipal taxes then on such amounts no TDS is charged.
- If the rent is paid to entities whose income is exempted from the purview of income tax like entities under Section 10 e.g.: government department, then no TDS is chargeable on any such income received as rent.
- Non deduction of TDS or lowering the amount of TDS on the income received as rent is possible. This can be done by applying for a certificate under Section 197 of the Income Tax Act. Applications are to be made through form no. 13 with the assessing officer. After examining and fulfilling all the requirements the assessing officer may grant you the certificate which is used for non-deduction of TDS or lowering of TDS. While applying for this application PAN number has to be provided.
- TDS will not be deductible on the rent if the person to whom the rent is being paid is a political party or a charitable trust provided that such charitable trust or political party has given a certificate of non-deduction of TDS to the payee.
- When the payment is made by or on behalf of the government without using income tax challan form then due date of payment is on the same day.
- When the payment is made by or on behalf of the government accompanied with income tax challan form then the due date of payment is on or before 7 days from end of month in which deduction is made.
- When the payments are made to other than government and where the amount is credited or paid in the month of March then the due date of depositing is on or before 30th April.
- In cases other than those mentioned above the payment is to be made on or before 7 days from end of month in which deduction is made.
TDS certificate are to be issued in form 16A on a quarterly basis. Following is the time limit for cases where TDS on rent has been deducted under Section 194i of the Income Tax Act:
- For the period April to June TDS certificate due date is 30th July.
- For the period July to September TDS certificate due date is 30th October.
- For the period October to December TDS certificate due date is 30th January.
- For the period January to March TDS certificate due date is 30th May.
- Kindly note the above stated dates are for non-government deductions while in case of government deductions the due date for issue of TDS certificate in on a quarterly basis on or before 15th August, 15th November, 15th February and 30th May.
- For the period April to June due date for filing of TDS is 15th July.
- For the period July to September due date for filing of TDS is 15th October.
- For the period October to December due date for filing of TDS is 15th January.
- For the period January to March due date for filing of TDS is 15th May.
- Kindly note the above stated dates are for non-government deductions while in case of government deductions the due date for filling of TDS is on or before 31st August, 31st November, 31st February and 15th May.
Thus above is a detailed explanation of Section 194i of the Income Tax Act.