Section 194I of the Income Tax Act: TDS on Rent

Section 194I of the Income Tax Act, 1961, mandates the deduction of Tax Deducted at Source (TDS) on rent payments. This section is highly significant as it applies to a wide array of rental transactions, ensuring that tax on rental income is collected at the very source, contributing significantly to the government's direct tax revenue.

Applicability of Section 194I

Section 194I applies to any person, other than an individual or a Hindu Undivided Family (HUF), who is responsible for paying to a resident any income by way of rent. This generally includes companies, firms, LLPs, trusts, societies, and government bodies.

Specifics on Deductor's Applicability:

• Individuals and HUFs as Deductors: An individual or a HUF is required to deduct TDS under Section 194I only if their total sales, gross receipts, or turnover from business or profession exceeds the limits specified under Section 44AB (Tax Audit) in the immediately preceding financial year. If their accounts are not subject to tax audit, they are generally exempt from deducting TDS under this section.
• Specific Provision for High Value Rent by Individuals/HUFs (Section 194-IB): It is crucial to note that for individuals and HUFs *not* covered by the Section 44AB audit criteria, a separate section, Section 194-IB, was introduced to cover TDS on rent payments exceeding ₹50,000 per month.

What Constitutes 'Rent'?

"Rent" is defined broadly under this section to mean 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:

1. Land
2. Building (including factory building)
3. Land appurtenant to a building (e.g., parking space, common areas)
4. Furniture or Fittings
5. Plant, Machinery, or Equipment

This includes cases where a composite payment is made for the use of multiple assets, even if the payment for services or other facilities is intertwined with the rent.

TDS Rates under Section 194I

The TDS rates under Section 194I depend on the nature of the asset being rented:

• For Plant, Machinery, or Equipment: **2%**
• For Land or Building (including factory building), or Furniture or Fittings: **10%**

Higher Rate for Non-PAN: If the payee (landlord/lessor) does not furnish a valid Permanent Account Number (PAN), TDS will be deducted at a higher rate of **20%**, as per Section 206AA, irrespective of the normal rates (2% or 10%).

No Surcharge or Health & Education Cess is applicable on this TDS rate.

Threshold Limit for Deduction

TDS under Section 194I is required only if the aggregate amount of rent paid or credited, or likely to be paid or credited, to the payee during the financial year **exceeds ₹2,40,000 (Rupees Two Lakh Forty Thousand)**. If the total rent payment is less than or equal to this amount in a financial year, no TDS is required under this section.

Time of Tax Deduction

The deductor must deduct TDS under Section 194I at the earliest of the following two events:

• At the time of credit of such rent to the account of the payee (receiver/landlord).
• At the time of payment of such rent in cash, by cheque, draft, or by any other mode.

Even if the amount is credited to a "suspense account" or any other account in the books of the person liable to make the payment, it is still considered as credited to the payee's account, and the TDS provisions will apply.

Exemptions from TDS under Section 194I

TDS is not required in the following scenarios:

• If the aggregate rent paid or credited during the financial year does not exceed the threshold of **₹2,40,000**.
• If the payee is the Government (Central or State).
• Payments made by individuals or HUFs whose accounts are *not* subject to tax audit under Section 44AB in the immediately preceding financial year (such payments may fall under Section 194-IB if the rent exceeds ₹50,000 per month).
• Payments made by a company to a port authority for the use of a wharf or similar facility.
• Rent paid in respect of premises used for the business of hotel where the agreement is for lodging and other services, and not merely for the use of property.
• Where the payee obtains a certificate from the Assessing Officer (AO) for lower or nil deduction of TDS under Section 197 and submits it to the deductor.

Responsibilities of the Deductor

The person responsible for deducting TDS under Section 194I has several critical compliance obligations:

• Obtain TAN: Must possess a Tax Deduction and Collection Account Number (TAN).
• Deduction of Tax: Deduct TDS at the correct rate (2% or 10%, or 20% if PAN is not provided) and at the appropriate time (credit or payment, whichever is earlier).
• Deposit of Tax: Deposit the deducted TDS to the credit of the Central Government within the prescribed due dates.
  • For tax deducted in March: By April 30 of the immediately following financial year.
  • For tax deducted in any other month: By the 7th day of the next month.
• Filing of TDS Returns: File quarterly TDS returns in Form 26Q within the specified due dates.
• Issuance of TDS Certificates: Provide a TDS certificate in Form 16A to the payee within the stipulated time, detailing the amount of tax deducted and deposited.

Penalties for Non-Compliance: Failure to comply with the provisions of Section 194I (e.g., not deducting TDS, late deduction, late deposit, or non-filing of returns) can lead to severe consequences, including:

• Interest under Section 201(1A) for delay in deduction (1% per month) or delay in deposit (1.5% per month).
• Penalty equal to the amount of TDS not deducted or paid (Section 271C).
• Disallowance of 30% of the rent expenditure from business income under Section 40(a)(ia) if TDS is not deducted or deposited.
• Late filing fees for TDS returns (₹200 per day).

Taxability for the Payee (Landlord/Lessor)

The rent received, even after TDS deduction, remains taxable income in the hands of the payee. This income is typically taxable under the head "Income from House Property" (for land/building) or "Profits and Gains from Business or Profession" or "Income from Other Sources" (for plant, machinery, equipment, furniture, if it's not part of a business or profession of leasing). The payee must report the gross rent received when filing their Income Tax Return (ITR). The TDS deducted can then be claimed as a credit against their final tax liability, provided the PAN furnished is correct and the TDS reflects in Form 26AS.

Conclusion

Section 194I is a pivotal TDS provision impacting businesses and individuals engaged in rental transactions. Understanding the different TDS rates based on the asset type, the threshold limits, and the specific rules for individuals and HUFs (especially in light of Section 194-IB) is essential for proper compliance. Both deductors and payees must diligently follow the procedures for deduction, deposit, and reporting to avoid stringent penalties and ensure accurate tax management.