TDS on Rent – Section 194I of the Income Tax Act, 1961

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TDS (tax deducted at source) is a system for collecting income tax or dividends. The payer is liable to deduct any tax due before they pay the remainder to the payee. Tenants must deduct TDS from rent before they pay the amount. This deduction is made under Section 194I, which is only for TDS on rent. Let’s find out how TDS on Rent is calculated and deducted in India.

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What is Section 194I of The IT Act?

TDS (tax deducted at source) is a system for collecting income tax or dividends. The payer is liable to deduct any tax due before they pay the remainder to the payee. Tenants must deduct TDS from rent before they pay the amount. This deduction is made under Section 194I, which is only for TDS on rent. Let’s find out how TDS on Rent is calculated and deducted in India.

The provisions relating to TDS on rent limits are defined in Section 194I (the Income Tax Act). This is especially important for Indian citizens who rent out or sublet their homes to make a rental income.

TDS is deducted from the rent received under Section 194-1[1], as it is an additional income for property owners.

Section 194-I states that renters are liable to deduct TDS if the rent paid or expected to be paid exceeds Rs. 2.4 lakh.

Other important facts about TDS on rent limit and Section 194I

  • Individuals and Hindu Undivided Family (HUFs), whose annual turnover exceeds the limits set out in the section (Rs. 1 crore for business, and Rs. 50 Lakhs for profession) are also subject to TDS.
  • From the financial year 2019-20, the threshold for deducting TDS on rent has been raised from Rs.1.8 lakh a Rs.2.4 lakh.

What is ‘Rent?

Section 194I defines rent as any payment made to an individual in accordance with a lease, sub-lease or tenancy agreement.

Land

  • Building, which could be of a factory
  • Land adjoining an establishment
  • Machinery, equipment or plants
  • Furniture
  • Fittings

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This definition applies regardless of whether the payee owns all the options described above, as covered by Section 194-I.

Other important terms that relate to rental income and TDS on rent limits include:

  • It also covers subletting properties.
  • A landlord’s receipt of a refundable security deposit or an advance payment while renting out a building is not considered income. Therefore, there is no TDS due to rent payments.
  • TDS applies to non-refundable advance rent received by a payee, at the TDS rate for rent.

What are the TDS rates for Rent Deductions?

TDS is not only charged on house rent, but also indirect rent payments. Below is a list of TDS-exempt payments, but not rent per se:

  • Hotel payments for official meetings, even though they only charge for the catering service and not the premises.
  • Payments for cold storage facilities to preserve perishable items.
  • Rent received when a factory building was offered to a tenant.
  • Service charges for different business centers
  • Rent for furniture and building construction.

Who deducts TDS from Rent under Section 194-I

Except for individuals or HUFs, any person who has paid rent exceeding Rs. Rent of more than Rs. 2.4 lakh per financial year is subject to TDS deduction.

Budget 2017 stipulated that an individual/HUF, other than those listed in section 194I, pays rent exceeding Rs. Rent payments exceeding Rs. 50,000 per month are subject to TDS. The amendment to Section 194I regarding TDS comes into effect on June 1, 2017. The rent rate is 5%.

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What is the TDS on Rent?

TDS on rent is taken at source when rent amounts are credited to landlord’s accounts. If rent is paid by cash, cheque, draft or bank transfer, TDS is deducted at source.

What are the exceptions to TDS on Rent Deductions?

TDS under Section 194I cannot be deducted in these circumstances:

  • If the rent amount is more than Rs. 2.4 lakh.
  • Section 194I does not require the deduction of TDS from rent payments if the tenant are an individual or HUF with a turnover not exceeding Rs. 1 crore for business, and Rs. 50 lakh for professions during the financial year.
  • The business of a film exhibitor who owns cinema theatres is not liable for the film exhibition’s proceeds. The film distributor is not a tenant and neither the exhibitor can rent out the cinema. The business is therefore not subject to TDS rent.
  • Rent deducted from rent is not necessary if the payee of the payment is the government, statutory or local authority.

What is a TDS Certificate?

Each person who charges TDS on rent must, according to Section 203 of IT Act, provide a certificate acknowledging tax deduction to the payee. This is called a TDS certificate.

Important Points Regarding Rent Income Covered under Section 194I

  • The payee must provide a PAN number in order to deduct TDS on rent. If the landlord or person transacting on his behalf doesn’t provide a PAN number, the TDS rate on rent will be 20%

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  • Rents above Rs 1 crore are subject to a surcharge. If the foreign company is involved, a surcharge on TDS is levied.
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