In India, rental income is a major source of revenue for many individuals and entities. To ensure transparency and efficient tax collection, the Income Tax Department has implemented provisions for Tax Deducted at Source (TDS) on such payments. One of the key sections in this regard is Section 194I of the Income Tax Act, which deals specifically with TDS on rent.
Let’s understand in detail what this section means, who it applies to, how much TDS is deducted, and the rules that govern this provision.
What is Section 194I?
Section 194I requires any person (except individuals or HUFs not liable to audit under the Income Tax Act) to deduct TDS if the annual rent payment exceeds ₹2.4 lakh. Importantly, "rent" is not limited to residential properties—it includes payments made for leasing or using:
Land
Buildings
Machinery
Furniture
Equipment
For instance, if a company pays ₹50,000 per month as office rent, totaling ₹6,00,000 annually, TDS must be deducted as per Section 194I.
Why Was Section 194I Introduced?
The primary purpose of this provision is to prevent tax evasion from rental income. Since such receipts can be substantial, TDS ensures that a portion of the tax is collected at source, promoting timely reporting and better compliance. This mechanism helps the government receive revenue upfront and reduces the chances of income being hidden or unreported.
Who is Required to Deduct TDS under Section 194I?
Section 194I applies to:
Companies
Firms
LLPs
Individuals or HUFs liable to audit under Section 44AB
If you are just a salaried person or a small business owner not required to maintain audited books, this section does not apply to you — even if you pay rent above the limit.
What Qualifies as Rent under Section 194I?
The law defines "rent" broadly. It includes payments under lease, sub-lease, tenancy, or similar agreements for:
- Land or building (including factory buildings)
- Machinery or equipment
- Furniture and fittings
- Plant and tools
So, even if you're leasing out a warehouse or paying for heavy equipment rentals, the rent paid comes under this section.
TDS Rates Applicable under Section 194I
The rate of TDS varies depending on the nature of the rented asset:
- 2% for rent on plant, machinery or equipment
- 10% for rent on land, building, furniture or fittings
If the PAN of the landlord is not available, the TDS rate rises steeply to 20%.
Threshold Limit for Applicability
TDS under Section 194I becomes applicable only when the total rent paid or payable in a financial year exceeds ₹2,40,000 to a single payee. If the total rent is below this threshold, there is no requirement to deduct tax.
Timing of TDS Deduction
TDS must be deducted at the time of crediting the amount to the landlord’s account, or at the time of actual payment, whichever is earlier. Even if you make a partial advance payment, the tax must be deducted at that point.
TDS Deposit and Return Filing Deadlines
Once deducted, the TDS must be deposited to the government by the 7th of the following month. For March, the deadline is 30th April.
In addition, the deductor must file quarterly TDS returns in Form 26Q, with these deadlines:
Q1 (Apr–Jun): 31st July
Q2 (Jul–Sep): 31st October
Q3 (Oct–Dec): 31st January
Q4 (Jan–Mar): 31st May
Are There Any Exceptions?
Yes. TDS under Section 194I does not apply in the following cases:
Rent paid by individuals or HUFs not covered under tax audit
Total annual rent paid is ₹2,40,000 or less
Payment is made to government or specified exempt institutions
Lower or nil deduction certificate obtained by payee under Section 197
Penalties for Non-Compliance
Failing to deduct or deposit TDS can lead to:
Interest: 1% per month for late deduction, 1.5% per month for late deposit
Penalty: Equal to the amount of tax not deducted/deposited
Disallowance: The rent expense may be disallowed under Section 40(a)(ia), increasing the taxable income of the payer
Conclusion
Section 194I plays a crucial role in ensuring that rental income is taxed efficiently. It’s important for businesses and professionals who pay rent above the threshold to understand and comply with this provision. Deducting and depositing TDS on time not only ensures legal compliance but also builds credibility with tax authorities.
FAQ's About TDS on Rent
1. What is Section 194I of the Income Tax Act?
Section 194I mandates deduction of TDS (Tax Deducted at Source) on rent paid for land, buildings, machinery, or equipment, if the annual rent exceeds ₹2.4 lakh.
2. Is TDS applicable if the rent is below ₹2.4 lakh per year?
No. TDS under Section 194I is not applicable if the total rent paid or payable during a financial year is ₹2,40,000 or less.
3. When should TDS be deducted on rent payments?
TDS must be deducted at the time of credit or payment, whichever is earlier. Even if an advance payment is made, TDS should be deducted at that time.
4. Should TDS be deducted on the GST portion of rent?
No. If GST is mentioned separately in the invoice, TDS should be deducted only on the rent amount excluding GST, as per CBDT Circular No. 23/2017.
5. How and when should TDS be deposited?
TDS should be deposited to the government by the 7th of the following month. For March, the deadline is April 30.
