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What is Section 194I and How to Calculate TDS on Rent?

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What is Section 194I and How to Calculate TDS on Rent?
January 25, 2023

Table of Content

 

The Income Tax Act outlines the rules and regulations based on which individuals must pay taxes. Various sections of the Act deal with tax deductions and exemptions. Let’s look at the sections of the Income Tax Act that deal with rent payments and their deductions.

What is Section 194I?

Section 194I of the Income Tax Act outlines the rules for deducting tax at source on rental payments. Any person (other than individual and HUF) who pay rent in excess of INR 2, 40,000 per year must deduct tax at source (TDS) first. Also, individuals and HUFs to whom tax audit is applicable are liable to deduct tax at source.

Understanding Rent for Section 194I

As per Section 194I, rent refers to any lease, sub-lease, tenancy or agreement or arrangement for the use of land, buildings, factories, machinery, plants, equipment, fittings or furniture. The rent amount does not include any deposit or advance that the landlord intends to return to the renter when they vacate the premises. However, an individual who pays advance rent must deduct the tax amount before making the payment.

What Falls Under Section 194I?

The following TDS on rent payments fall under the purview of Section 194I:

  • Factory Building

    When factory buildings get leased, the rent amount is often income from business for the owner. In very few situations, the rental amount is viewed as income from property. However, business income and returning rental income also have TDS rules.

  • Non-Monthly Payments

    Rent collected quarterly or annually will be subject to TDS guidelines as outlined under Section 194I.

  • Service Charges

    All service charges paid to business centres also fall under the rent bracket, so they are subject to TDS.

  • When Furniture and Building Are Let Out by Separate Individuals

    Some individuals may rent a building or property from one person and the furniture from another. In such situations, they only need to deduct TDS against the rent paid for the building.

  • Cold Storage Facilities

    When renting out a cold storage facility, the TDS is for the plant usage and not for using the building.

  • Hall Rent by an Association

    A group of individuals, but not an HUF, may rent a hall and should deduct TDS if the rental for an entire year is over INR 2, 40,000.

  • During a Seminar at a Hotel Including a Meal

    Very often, hotels get rented for seminars. However, when they also provide a meal, they charge for their meal or catering service, so there’s no TDS involved under Section 194I. The TDS gets covered under Section 194C instead.

What Are the Exemptions to Section 194I?

No TDS payment is required in the following situations:

  • When the aggregate amount paid in a financial year does not exceed the minimum threshold of INR 2, 40,000.
  • When the individual or HUF paying rent is not liable to a tax audit as per Section 44 (AB) clause (a) or (b).
  • When Government agencies lease the property and receive rent payments.
  • When film distributors and exhibitors pay cinema owners while sharing proceeds, since the payment is not for rent.

Rate of Tax Deducted at Source (TDS) for Rentals under Section 194I

A person must deduct 2% TDS when they lease any machine, plant or equipment from the owner. They must deduct 10% TDS while leasing land, a building, furniture or fittings. If the landlord does not provide their PAN, the TDS amount increases to 20%, regardless of what is being rented.

Is There TDS Under Section 194I for Security Deposits?

Many landlords collect a security deposit before letting out a property. There’s no TDS deduction required on these deposits if they get returned to the renter. However, when the amount gets adjusted as part of the rent, then individuals must deduct TDS.

When Does TDS Need to Be Paid?

Section 194I outlines four timelines for TDS payments:

  • For Non-Government Entities

    All entities must pay tax on or before seven days from the end of a month when tax gets deducted. Renters must pay the tax amount and receive an income tax challan.

  • Payments By or On Behalf of Governments

    TDS should be deposited on the same day without the use of challans.

  • For Amounts Paid in March

    On or before 30th April.

  • In all Other Cases

    On or before seven days from the end of a month when TDS is deducted.

What Happens When TDS is not deducted?

When the tenant or renter does not deduct TDS, they become liable to pay an interest of 1% per month from the date the tax was to be deducted until the amount gets deducted. When the tenant deducts the tax but does not deposit the amount to the government, they have to pay interest of 1.5% per month from the date of deducting the tax until the date of depositing the same.

Understanding Tax-Saving Instruments

Every year, people scramble to find ways to reduce their tax burden and save some money. Although you must deduct the right TDS on rent, you can invest in products like life insurance plans to reduce your tax liability. Life insurance products like Unit-Linked Insurance Plans or ULIP plans and Savings Plans provide tax benefits of up to INR 1, 50,000 per year against premiums paid for these policies. You can educate yourself on Section 80C of the Income Tax Act# and minimise your tax liability.

Understanding Section 194I and TDS on rent helps you make informed decisions about your rent payments. It encourages you to deduct the correct TDS amount and deposit the same to the government to avoid unnecessary penalties.

ARN - ED/01/23/31318

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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Disclaimer

#Tax Laws are subject to change from time to time.

# This material has been prepared for information purposes only, should not be relied on for tax or accounting advice. The customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law

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