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 194 Iwe 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.