Section 194I of the Income Tax Act outlines the rules for deducting TDS on rent. This provision primarily applies to those paying rent for properties, machinery, or other assets, ensuring compliance and streamlining tax collections. Whether you are a business entity, salaried individual, or involved in sub-letting.
Let’s break down the key elements of Section 194I for easier understanding.
What is Considered ‘Rent’ Under Section 194I?
The definition of ‘rent’ in this section goes beyond typical payments for property use. It includes payments under any lease, sub-lease, tenancy, or similar agreements for using.
It is divided into two key subcategories based on the nature of the rented asset:
- Section 194I(a): Rent for Plant & Machinery
- Section 194I(b): Rent for Land, Building & Furniture
The term applies even if these assets are sublet. Refundable security deposits are not taxable, but advance rent (unless refundable) is subject to TDS.
Who Needs to Deduct TDS Under Section 194I?
Under Section 194I, anyone responsible for paying rent, other than individuals and HUFs not subject to a tax audit, must deduct TDS. The provision applies when the annual rent exceeds ₹2,40,000 for the financial year 2024-25.
Even individuals and HUFs not under tax audit come under this provision if the monthly rent payment is ₹50,000 or more, as outlined in Section 194IB.
TDS must be deducted either when the payment is credited to the recipient’s account or when it is made in cash, cheque, or any other mode—whichever happens first.
Why Was Section 194I Introduced?
Section 194I was added through the Finance Act of 1994 to bring rental income under the tax net. By ensuring that tax is deducted at the time of payment, this provision helps prevent evasion and brings transparency to the taxation of rental earnings.
TDS Rates Applicable Under Section 194I
The rates for TDS under this section vary based on the type of asset:
| Section | Type of Rental Payment | TDS Rate |
| 194I(a) | Rent for plant, machinery, or equipment | 2% |
| 194I(b) | Rent for land, buildings, furniture, or fittings | 10% |
For payments to non-resident Indians (NRIs), the rate is 30%, with an additional surcharge and cess, irrespective of the amount.
Key Features and Coverage of Sections 194I(a) & 194I(b)
- Factory Buildings: Rent received from factory buildings is often treated as business income by the lessor. However, TDS must still be deducted at the applicable rate.
- Service Charges: Payments labeled as service charges, such as those for business centers, are considered rent and attract TDS.
- Cold Storage Payments: Payments for cold storage facilities are treated as contractual payments under Section 194C, not rent.
- Event Hall Rentals: TDS applies to hall rentals if the annual payment exceeds ₹2,40,000.
Exceptions to TDS Deduction
TDS under Section 194I is not required in the following scenarios:
- The annual rent amount does not exceed ₹2,40,000.
- The payer is an individual or HUF not liable for tax audit (except under Section 194IB for higher rent payments).
- Payments in specific contracts, such as revenue sharing between film exhibitors and distributors, are not classified as rent.
TDS Payment Deadlines
- For Government Payments: TDS must be deposited on the same day for Book Entry transfer.
- For Other Payments: Deposits are due by the 7th day of the following month.
- For March Payments: The deadline extends to April 30.
Consequences of Non-Compliance
Failing to deduct or deposit TDS on time can lead to penalties:
- Non-Deduction of TDS: Interest of 1% per month from the due date of deduction.
- Non-Deposit of TDS: Interest of 1.5% per month from the deduction date until the deposit is made.
Practical Illustration
Here’s an example to clarify:
ABC Pvt. Ltd. rents a building at ₹25,000 per month, totaling ₹3,00,000 annually. Since this exceeds the ₹2,40,000 threshold, the company must deduct TDS at 10%. This means ₹2,500 (10% of ₹25,000) must be deducted each month and deposited with the government.