TDS or Tax Deducted at Source is a mechanism used by the Income Tax Department to collect income tax in India. In accordance with the requirements of this law, the person accountable for making payments such as salary, fees, interest, TDS on rent, etc. is expected to deduct a certain percentage of tax before making such payments to the receiver.
As per Section 194-I of the Income Tax Act, any person (other than an individual and HUF) who needs to pay to a resident of India any income which is in the nature of rent, is liable to collect TDS once the total amount of such income paid/credited or expected to be so, during a particular financial year is more than Rs. 1.8 Lakhs.
HUFs and individuals, who are liable for tax audit as per Section 44AB, during the financial year just before the year in which such rent was paid or credited, also have the responsibility to deduct tax while making such payments.
(The current limit of Rs. 1.8 Lakhs has been in effect since 1st July 2010. Prior to that, the limit was Rs. 1.2 Lakhs.)
The term “rent” refers to any payment, whatever be the name used, given for using the services as a tenant, lessee, sub-lessee or any such arrangement or agreement. It is applicable in the following cases:
- Building or Land Appurtenant thereto (Both of them could be including Factory Building)
- TDS on rent will be deducted even if the payee does not own such assets. It also includes sub-letting.
- In case the landlord has collected any amount in the name of security or an advance deposit which is to be refunded at the time the tenant vacates the building, then such amount is not considered as an income, and hence does not require any tax deduction.
- In case an advance rent has been paid (other than security deposit which is refundable) to the owner or landlord, it is liable for deduction of tax at the time of making the payment. If advance rent has been paid for more than one financial year, then the TDS credit has to be permitted in the proportion in which the income is presented for the purpose of tax assessments in various years. In case the rental asset is transferred or sold to another person, the value of TDS credit, which is yet to be availed, up till the transfer, shall be provided to the new owner. Also, in case the agreement for rent comes to an end anytime in the future or the rented property is passed on to another person via a transfer of deed and the balance advance is refunded to the lessee/tenant, as the case may be, the entire balance of TDS which has not been given credit, shall be allowed in the year of termination.
- Such rent is also liable for deduction of tax, if it is deposited in a “Suspense Account” or to any such account.
- In case the property is a joint ownership or owned by multiple people, and the share of each co-owner is definite and ascertainable, the limit of Rs. 1,80,000 will be applicable to each co-owner separately.
- Surcharge is not levied on TDS collected on rent. However, if such payment has been given to a foreign company for any amount more than Rs. 1 Crore, then surcharge will be levied according to the rates applicable.
- Education Cess does not need to be charged additionally on the amount of tax deducted from the value of rent.
- As the landlord or the owner only acts as an intermediary for collection of service tax, on behalf of the government, therefore, the TDS amount collected as per Sec. 194-I of the IT Act is required to be calculated on the basis of rent paid or payable without including the service tax.
- In the case of proceeds, from renting out a factory building, the rent so received is generally considered as “income from business” for the factory’s owner or the lessor. Only in some cases it is treated as “Income from property” for the lessor. But such business income will also be under the purview of TDS, though the lessor would be paying advance tax also on the same.
- In cases where building and its paraphernalia, such as fixtures and furniture, are let out by separate people, then the payee needs to deduct tax only from the portion of rent paid for the building’s use.
- In case where the rent is not paid on a monthly basis, the frequency of tax deduction will be the same as that of rent payment. As per Sec 194-I, it is not mandated that tax deduction has to be made on a monthly basis only.
- In case of seminars or business conferences, where a hotel charges for stay and catering only and does not charge for use of premises, then Section 194I will not be applicable. The necessary provisions (Sec 194 C) would be applicable to the catering part.
- The definition of rent also includes service charges which are paid to business centers.
- Rent for using a hall, which has been taken by an association, is eligible for tax deduction provided the payment amount is above Rs. 1,80,000. This is so because an association is considered as a group of people. It is neither an individual nor a HUF.
- Cold storage is to be considered and treated as a plant. Hence, any payment made towards its use should not be taken as rent as there is no use of a building in this scenario.
- Payments for hotel accommodation, when regular in nature, will come under the ambit of TDS from the point of rent income.
The rent so received is taxable under the category of “Income from House Property”. Applicable deductions are allowed from that income.
- For rent of plant, machinery or equipment, TDS is applicable a rate of 2%
- For rent of land, building, furniture or fittings, the applicable TDS % is 10%
No TDS or Lower TDS
An application can be made to the Assessing Officer of the Income Tax Department for no TDS or TDS to be collected at a lower rate. In case the Assessing Officer is convinced that the total income of the applicant justifies tax to be collected at lower rate or no tax to be collected, he/she will provide a certificate (Form No. 15AA) stating the same to the concerned payer directly.
Importance of PAN
With effect from 1st April 2010, where the deductee or owner fails to provide his/her PAN details or furnishes incorrect details, the deductor is liable to collect TDS at a rate of 20% or at rates specified under the IT Act or rates in force, whichever are higher.
Also, as per Sec. 206AA (4), with effect from 1st April 2010, no certificate under Sec. 197 for deduction of tax at Nil rate or lower rate will be granted, unless the application that has been made contains the correct PAN details of the applicant.
- When the amount paid or payable to the landlord/lessor, during a particular financial year does not go beyond Rs. 1,80,000.
- No tax needs to be deducted at source, when the payment for rent is made or to be made, by an individual or a HUF provided that (i) No business or profession is being carried out by them (ii) they did not fall under the ambit of tax audit in the previous year
When the government or its agencies are the payee
- As per Section 196, no TDS is applicable when the rent is given to the Government
- As per Section 10 (20A), income of any authority that has been formed with the objective of working on housing accommodation needs or with the objective of planning, developing or improving the condition in villages, towns, cities, etc., is not subject to income tax and TDS
Similarly, as per Section 10(20), income of Local or statutory authorities that is chargeable as “Income from other sources” or “Income from house property” is exempted from income tax and TDS
- For certain entities, whose income is unconditionally exempt under Sec. 10 and who are not required to file return under Section 139, there will not be any tax deducted at source.
- Many representations were received regarding the applicability of Sec 194I to the sharing of proceeds from film exhibition between a distributor and the exhibitor owning the cinema or theatre hall. However, it has been ruled that Sec 194I would not be applicable in this case as the exhibitor does not let out or rent out the hall to the distributor through a lease or any such agreement.
The correct time for collecting TDS on rent is at the time when the property owner’s account is credited with the amount of the rent or at the time of the payment itself, whichever event takes place earlier. The mode of such payment can be cash, cheque, demand draft, etc.
Timelines for depositing TDS
- When the payment for rent is made by the Government or by someone on its behalf, TDS needs to be deposited on that day itself, with no challan form being used.
- When the payment for rent is made using a challan, by the government or by someone on its behalf and for other payments i.e. made by someone other than the Government, it needs to be deposited within seven days within the end of tax deduction month except if the amount is paid or credited in the month of March. In that case, it can be deposited by 30th April.
In cases of payments, except salaried payment, TDS certificates need to be given on a quarterly basis. Form 16A should be used for this purpose. This certificate needs to be generated through the central TIN website and needs to be authenticated using digital or manual signature.
For the period of April and December, this certificate needs to be given or issued by the 30th of the month after the end of the quarter (by deductors except government) and 15th of the month after the end of the quarter (by government deductors). For the last quarter of the financial year, ending in March, the date for issuing the certificate is 30th May for all deductors.
Budget 2017 – Changes Introduced
With the objective of implementing stricter governance and exerting higher degree of control over significant rental income which remains unaccounted, the Government has sought to introduce some changes. Certain amendments have been proposed in the Budget 2017 regarding the applicability of the TDS on Rent and the rates at which the same has to be deducted.
In compliance with the current applicable laws, HUFs and individuals (except those eligible for tax audits) were excluded from the coverage of Section 194-I, which talked about TDS deduction on Rent.
The government has announced a new clause, Sec 194 IB, in order to widen the scope of tax deduction at source. Henceforth, with effect from 1st June, 2017, HUFs and individuals earlier exempted, will also be required to collect TDS, if the rent paid to a resident, exceeds Rs. 50,000 per month or part thereof. TDS in this case is to be deducted at 5% of the rent payable or paid.
Another proposal suggested is that when tax needs to be collected at source, in accordance with Section 206AA, the amount so collected will not be higher than the rent amount for the previous year’s last month or last month of occupancy, whichever event takes place earlier.
Also, with the objective of simplifying the compliance process and making it more tax-payer friendly, the amount so collected needs to be deposited annually, with a challan-cum-statement. The deductor or payee, is not required to apply for a TAN for this purpose. Also, for these payments, he/she will need not to file any additional TDS returns as well.