Income Tax Taxation

TDS on Rental Income: Section 194I of the Income Tax Act, 1961

Section 194-I of the Income Tax Act, 1961 was inserted vide Finance Act, 1994 for the imposition of tax on rent paid or payable by an assessee. This section deals with “TDS on Rent.” The government has introduced the provisions of this section in order to cover income by way of rent, and the same has been included in the scope of Taxation. This provision makes rental income taxable in India.

In India, many individuals purchase property for the purpose of investment. Such property is purchased with the intention to sell in the future with appreciated value or offer for rental to earn additional income in the form of rent. It is, therefore, apparent that the rental income forms a major source of income in India. It is for this reason that the Finance Ministry felt the need for the introduction of Section 194I^[1] in order to include rental income in the scope of taxation.

In the budget of 2019, the Finance Minister has introduced an amendment in the provisions of the applicability of TDS on Rental Income. Earlier, TDS on the rent was deducted by only professionals or business houses. However, with the new amendment, salaried employees are also now required to deduct TDS on rental income. Section 194-I, along with its amendments, is discussed comprehensively henceforth.

Section 194-I of the Income Tax Act, 1961

Section 194-I of the Income Tax Act, 1961 governs the provisions for deduction of TDS on Rent paid. This section also defines the treatment of TDS on Rent. This section applies to the taxpayers whose primary source of income is earned by way of renting or subletting their property.

Income in the form of rent received from the property is treated as an additional income in the hands of the salaried employee or businessmen and is subjected to TDS. Tax is deducted in the form of TDS from rental income in case the amount paid/received in any financial year is INR 180000 or more.

Applicability of Section 194-I of TDS on Rental Income

Following payments are applicable for the deduction of TDS on rental income:

• Income by way of letting the factory building: Income in the form of rent received by renting the factory building is said to be “Business Income” in the hands of lessor or owner of the building.
• Income in the form of Surcharge: Any service charge paid to the business is covered under the definition of rent & therefore, it comes under the purview of this section.
• TDS in case of renting by separate persons: The person receiving the rent is subjected to deduct TDS under section 194-I in the case where the building is let out by one person & its furniture and fixture are rented by some different person.
• TDS in case if rent is not paid monthly: Section 194-I does not mandate on a monthly deduction of TDS. In the case of quarterly payments, TDS can also be deducted every quarter. TDS is deducted once a year based on the actual payment received or credited in case the rent is paid yearly.
• Cold storage charges: Rent paid for the cold storage plants where milk, ice cream, and vegetables are stored, is covered under the purview of this section.
• Hall Rent Paid: Associations of persons are obliged to deduct TDS in case the rent paid for the use of hall exceeds INR 2,40,000.
• Payments to hotels: Section 194-I does not apply in case of the hotel charges only for catering and not for the use of its premises.  

Exception for applicability of section 194-I

Section 194-I does not apply to the following cases:

• No TDS is required to be deducted in case the rent paid does not exceed INR 2,40,000 during the financial year under review.
• No deduction of TDS is required in case the rent is paid by an Individual or HUF who is not carrying on any business that requires to be audited under the Income Tax Act.
• Income received in the form of lease for subletting film theatre under the agreement between a film distributor, and film exhibitor is not subjected to TDS as lease income is not considered as rented income.
• The payment made to the government, any statutory authority or any local authorities are exempted from the purview of this section.

Point of Deduction for TDS

The tax is deducted at source at the earliest of the following:

1. The credit of income by way of rent  in the account of the payee

OR

• Payment by way of cash, cheque, draft, or any other mode.

Due Date for deposit of TDS

The due date for deposit of TDS varies depending upon the case to case:

1. When the payment is made by or on behalf of the government:
2. Without income tax challan: on the same day
3. With Income Tax challan: within 7 days from the end of the month when the deduction is made.

• When the payment is made to anyone other than the government:
• In case the amount is paid in March: on or before 30^th April

• In any other case:
• Within 7 days from the end of the month in which deduction is made.

Rate of TDS

Following are the rates of deduction of tax at source:

1. Rent paid on Plant, machinery & equipment: TDS @ 2%
2. Rent paid on land & building: TDS @ 10%
3. Rent paid on furniture & fittings: TDS @10%

In case of joint ownership of the property; TDS on rent is required to be paid by such owner whose share exceeds INR 180000 in any Financial Year.

Issue of TDS certificate

Following is the time limit for the issuance of TDS certificate in case of deduction of TDS on rent:

In the case of Non-Government Deductions:

1. For the quarter of April to June: within 30^th July
2. For the quarter of July to September: within 30^th October
3. For the quarter of October to December: within 30^th January
4. For the quarter January to March: within 30^th May

In the case of Government deductions:

1. For the quarter of April to June: within 15^th August
2. For the quarter of July to September: within 15^th November
3. For the quarter of October to December: within 15^th February
4. For the quarter January to March: within 30^th May

A TDS certificate is issued in Form 16A every quarter as per Income Tax Act.

Key points for understanding Section 194-I

Following are the key points for better understanding about section 194-I

• Any person other than an individual or HUF who makes the payment of rent to any resident is liable to deduct tax at source under this section.
• With the introduction of the budget in 2017 effective from 1^st June 2017, all the individual or HUF who make the payment of rent to a resident of more than INR 50,000 per month is subjected to deduct TDS at the rate of 5%.
• With effect from Financial Year 2019-20, an aggregate amount of the payment made or credited to any resident exceeds INR 2,40,000 is covered under the provisions of this section.
• No TDS is deducted on any security payment or advance payment made by the tenant with a condition to return such a security deposit at the time of vacating the premises.
• In case the advance is received without any condition of returning or refunding the same, then such payment is subjected to TDS.
• The surcharge is involved in case of rent paid to exceed INR 1 Crore, and it involves any foreign company.
• No TDS is charged in case the tenant pays municipal taxes.