Tax Deducted at Source (TDS) on rent is applicable when a person is responsible for paying rent to a resident exceeding a specified threshold. Section 194I of the Finance Act, 1994, governs provisions related to TDS on rental payments. The government introduced this section to cover income earned through rent under TDS. This type of income is usually subject to TDS in other countries as well.
According to Section 194I, the person (not an individual or HUF) who has to pay rent is legally obliged to deduct tax at source. The TDS on rent limit for the financial year 2020-2021 was ₹2.40 Lakhs.
For instance, an organisation rents an office for ₹90,000 per month. Since the yearly rent exceeds the threshold, the company credits ₹81,000 every month to the owner after a 10% tax deduction. The remaining amount needs to be remitted to the government.
According to Section 194I, ‘rent’ is any payment made under any lease, sublease, tenancy, or agreement to use any of the following properties:
Land or building (including factory buildings)
Land belonging to a building (including factory buildings)
Note that you do not have to deduct the TDS from the deposit money. Since it is always given back at the time of vacating the building, it’s not regarded as an income. Therefore, TDS is not deducted on deposits as per Section 1941. However, non-refundable advance rents are subject to tax deductions.
Section 194Ib explains the TDS on rent paid by individuals or HUF. Under this section, an individual or HUF paying rent exceeding ₹50,000 per month to a resident is liable to deduct TDS.
Nature of Payment
TDS on rent of machinery, plant, or equipment
TDS on rent of land, building, or furniture
Depending on the asset, like furniture, factory, building, or hotel, tax is deducted at a different rate.
This includes rental agreements where a factory building is leased out and the tenant is obligated to pay rent. In certain cases, the lessor receives the rent as income from the property and this is considered business income. Hence, the lessor will have to pay advance tax and return the rental income since TDS is applicable.
If rent is paid for both furniture and building by two different individuals, the aggregate amount of rent is considered for TDS calculation. This ensures that the combined value of rent, whether for furniture or building, is taken into account.
Payments made as rent for a cold storage facility, where goods are stored at controlled temperatures, fall under Section 194I. TDS is applicable on such rental payments.
If a hotel does not charge rent on the space occupied for an event and only for catering or food, then TDS is applicable. In the case of catering, Section 194C is applicable.
When service charges are paid to business centres for renting office space or related services, TDS is applicable. This ensures that TDS covers not just the basic rent but also additional service charges.
TDS is applicable on rent payments regardless of the frequency, whether it's paid monthly, annually, or through any other periodic schedule. The taxation is based on the total amount paid as rent during the specified period.
If an association rents a hall for its activities or events, TDS is applicable on the rental payments made. This extends to any organised group or entity renting a hall for various purposes.
If a landlord is paid advance rent, TDS will be deducted. However, there are some exceptions for TDS calculations:
TDS is charged in proportion to the income based on Form 16 issued for advance rent payment.
TDS credit on the rental amount is made until the sale or transfer is completed. It is then credited to the asset’s new owner.
If the advance rent has already been paid with a TDS deduction, the remaining amount is transferred to the tenant as a refund. In this case, the landlord must mention the rental agreement’s cancellation in the income tax return form submitted for TDS.
When paying rent, it is imperative to calculate whether the amount falls under the TDS on rent income bracket. If the yearly amount surpasses ₹2.40 Lakhs, the payee needs to calculate the TDS rate for rent and reduce it accordingly.
For example, XYZ Enterprises pays ₹35,000 for plant and machinery every month. The yearly rent goes up to ₹4.20 Lakhs. Therefore, the payee must reduce 2% TDS from their rent, i.e. ₹700 each month.
The responsibility of deducting TDS falls on the payer. If they fail to do so, the payer is liable to pay an interest of 1% each month from the date the tax is deductible to when the tax is deducted.
In case the payer deducts TDS and doesn’t remit it to the government, the penalty is increased. Here, they will be subject to 1.5% interest per month from the day the tax is deducted to the day it is deposited.
Yes. According to Section 194I, the payee is responsible for deducting tax as per the predetermined TDS on the rent rate.
As per Section 194Ib, an individual or a HUF, paying rent over ₹50,000 per month to a resident is liable to deduct TDS.
Check the exemptions and tax rates on rent. In case your rent exceeds the threshold, reduce 2% or 10% according to the nature of your rent.
A person (not an individual or a HUF) paying over ₹2.4 Lakhs per year is liable to deduct TDS. In case you’re an individual or a HUF, you need to deduct the TDS only if the rent is ₹50,000 per month or more.
You can remit the TDS deducted from rent to the government through authorized banks or the online portal (https://www.tin-nsdl.com/).