Section 194I of Income Tax Act

Section 194I of the Income Tax Act deals with deducting Tax Deducted at Source (TDS) on the amount paid to resident Indians as rent. The Indian government has created numerous rules and guidelines for Indian citizens and other eligible entities to ensure that they deduct TDS from amounts they pay to other individuals and entities. The deduction of TDS, which is then deposited with the Indian government, ensures that the amount is used for legitimate purposes and there is no tax evasion. Similar to other types of payments, rent is something paid every month by a tenant to the landlord for personal or commercial use. Under section 194I of the Income Tax, some specific types of taxpayers are required to deduct TDS from the payable rent amount.

If you are a taxpayer and pay rent regularly, you may be subject to the provisions of section 194I of the Income Tax Act. This blog will help you understand everything you need to know about section 194I of the Income Tax Act to better comply with Indian taxation laws.

What is section 194I?

Section 194I of the Income Tax is a section included in the Income Tax Act 1961 that requires a person paying rent to an Indian resident to deduct TDS from the rent amount before making the payment. However, the provisions of section 194I do not apply to individuals and Hindu Undivided Families (HUFs). This means that persons other than individuals and HUFs need to deduct TDS from the rent amount they are liable to pay to a resident Indian and deposit the amount with the Indian government. However, if the individuals and HUFs are subject to a tax audit, they are required to deduct TDS under this section. The TDS rate under this section is 10% of the rent amount paid in a financial year.

Furthermore, the provisions of section 194I of the Income Tax Act only apply to persons (other than individuals and HUFs) if the total amount of rent paid in a financial year is higher than Rs. 2,40,000. As there can be various types of rent, the meaning and type of rent are defined under section 194I of the Income Tax Act.

Also read: 44AD of Income Tax Act

What is the reason for the introduction of TDS u/s 194I?

Section 194I was included in the Income Tax Act 1961 through the Finance Act 1994. One of the main aims of inserting the section was to ensure that rent payments above Rs. 2,40,000 per annum come under TDS compliance and that the government can monitor such transactions. By deducting tax at source, the government ensures that tax is collected before the income reaches the recipient, reducing the risk of tax evasion. Furthermore, the TDS deduction at 10% also increases the tax collection for the Indian government, helping it have more funds for various developmental activities.

Also read: Section 140A of Income Tax Act

What is the meaning of ‘Rent’ in reference to section 194I?

Under section 194I of the Income Tax Act, rent is defined as any payment made to an Indian resident related to an agreement, lease, sub-lease, or tenancy for the use of:

• Land

• A building which has a factory building

• Land appurtenant to a building which has a factory building

• Machinery

• Plant

• Equipment

• Fittings

• Furniture

• The provisions of section 194I are also applicable in the case the above assets are not owned fully by the payee but are being sub-let.

• No TDS is required to be deducted if the landlord has taken advance payment or security, which is refundable at the time of vacating the property.

• If the landlord has taken advance rent, which is non-refundable, the payer is liable to deduct TDS. Additionally any rent credited into a ‘Suspense Account.’ is also liable for a TDS deduction under section 194I of the Income Tax Act.

What payment is covered u/s 194I?

Section 194I of the Income Tax Act makes it mandatory for persons other than individuals and HUFs to deduct TDS at 10% from the rent amount they pay to a resident Indian in case the annual rent exceeds Rs. 2,40,000. However, the definition of rent may differ and is listed below as the payments covered under section 194I:

Rent from factory building and service charges

When a person who owns a building rents it out, the rent income received is considered business income. It can also be deemed as income from property, making both situations liable for TDS deduction under section 194I of the Income Tax Act. Furthermore, service charges payable to business centres are also liable for TDS deduction under section 194I.

TDS requirement for separate rentals of building and furniture

If a person has rented out only the building and the tenant has rented furniture from another person, the TDS deduction under section 194I of the Income Tax Act is only liable for the rent received for the building. The payer is required to deduct TDS for the rent paid for furniture under section 194C.

Frequency of TDS deduction for rent not paid on a monthly basis

Under the provisions of section 194I of the Income Tax Act, TDS is not required to be deducted from the monthly rent amount. Hence, if the rent is credited quarterly or annually, the payer is liable to deduct TDS according to the rent credit frequency. The TDS must be deducted at the time of credit or actual payment, whichever comes first.

Charges for use of cold storage facility

Cold storage facilities are generally used to store perishable products such as vegetables and milk. Such cold storage facilities are deemed plants and the rent paid is considered to be paid for renting a plant and not a building. Hence, the payer of rent is not liable to deduct TDS under section 194I. However, the TDS deduction is liable for rent paid for plants under section 194C.

TDS obligation for association hall rent exceeding Rs. 2,40,000

The provisions of section 194I are not applicable to individuals and HUFs. However, if rent is paid by an association for renting a hall, it is deemed eligible for deducting TDS under section 194I. This is because an association is considered a group of persons and not an individual.

Payments to hotels for seminars (TDS applicability)

If a person, other than an individual and HUF, has paid rent to a hotel for catering or meals and not for the building, no TDS deduction is applicable under section 194I of the Income Tax Act. However, TDS must be deducted for the catering part under section 194C. Furthermore, TDS must be deducted from the rent paid to a hotel for holding a seminar that includes lunch if the total rent amount is higher than Rs. 2,40,000.

Also read: 234B of Income Tax Act

Who is liable to deduct TDS u/s 194I?

Here are the persons liable to deduct TDS under section 194I of the Income Tax Act:

• Any person other than individuals and HUFs who pays rent to a resident Indian.

• Individuals and HUFs who are subject to a tax audit paying rent to a resident Indian.

• If the annual amount of rent paid by eligible persons exceeds Rs. 2,40,000 in a financial year.

What is the point of deduction of TDS?

The main point of deduction of TDS from the rent payment is to ensure that TDS has been deducted at the time of credit of income by way of rent. Section 194I of the Income Tax Act mandates that payers must deduct TDS from the rent payment in case the amount exceeds Rs. 2,40,000 in a financial year. The obligation is for rent payments paid through any modes such as account payee draft, cheque, or electronic modes such as UPI, RTGS, NEFT, etc.

Also read: 234C of Income Tax Act

What is the rate of TDS?

Here is the rate of TDS under section 194I of the Income Tax Act:

Payment type	TDS rate
Rent for plant and machinery	2%
Rent for land, building, furniture, or fitting	10%

Example

Here is a detailed example to understand section 194I of the Income Tax Act:

LMN Ltd., a tech firm, rents warehouse space from Mr. Kumar, an individual, at a monthly rental fee of Rs. 45,000. Under section 194I, companies need to deduct 10% TDS on rent payments for land, buildings, or furniture when the total annual rent exceeds Rs. 2.4 lakh.

In this scenario, the total rent paid by LMN Ltd. over the year is 12 x Rs. 45,000 = Rs. 5,40,000. Since this exceeds Rs. 2.4 lakh, LMN Ltd. must deduct TDS at a rate of 10% from the total rent and deposit it with the government on behalf of Mr. Kumar.

Also read: Income Tax Return Extended Date for FY 2024-25

No deduction or deduction at lower rate under sec. 197

Under section 197 of the Income Tax Act, a person getting rental income can request that no or less tax be deducted from the payable rent amount under section 197 of the Income Tax Act. For this, the payee must submit a filled-out Form 13 for the Assessing Officer to get the request. After review, the AO may give the payer Form 15AA mandating that the no or less TDS deduction must be made from the amount paid as rent.

Under what circumstances TDS u/s 194I is not deductible

Here are the circumstances under which TDS is not deductible under section 194I of the Income Tax Act:

• No TDS is deductible if the annual rent paid is lower than Rs. 2,40,000.

• Individuals and HUFs are not liable to deduct TDS from the rent payment if they are not subject to a tax audit.

• If the rent payment is made to statutory authorities, local authorities, or the Indian government, the payer is not liable to deduct TDS from the rent.

What is the time limit on depositing TDS?

Here is the time limit for depositing TDS:

• If the rent payment has been made by or for the Indian government, the TDS must be deposited on the same day.

• In other cases, TDS must be deposited on or before seven days from the last date of the month in which TDS is deducted. The amount should have the Income Tax Challan. However, just for the month of March, the time limit is on or before April 30.

Also read: Section 56 of Income Tax Act

Consequences of non-deduction/non-payment of TDS

If an eligible person fails to deduct and deposit TDS before the due date, the following consequences under section 194I may follow:

• The payer may be required to pay 1% interest per month from the due date to the date of the TDS's actual deduction if the payer has failed to deduct TDS on the rent amount.

• If the payer has deducted TDS but has not deposited it with the government, an interest penalty of 1.5% is applicable per month from the date of the TDS deduction to the date of the actual TDS deposit.

TDS on rent by individuals

Although the provisions of section 194I of the Income Tax Act do not generally apply to individuals, they may be required to deduct TDS on rent payments if they are subject to a tax audit. On the other hand, if an individual is subject to a tax audit but the annual rent payment has not exceeded Rs. 2,40,000 in the previous financial year, the individual is not liable to deduct TDS under section 194I of the Income Tax Act.

Also read: Section 89 of Income Tax Act

Conclusion

Tax Deducted at Source is one of the most common types of tax levied by the Indian government. Rent payments are also included among the various payments it is levied on. Under section 194I of the Income Tax Act, a person, apart from an individual and HUF, is liable to deduct TDS at 2% or 10% from the rent payments if the total annual rent payments have exceeded Rs. 2,40,000. However, individuals and HUFs are also required to deduct TDS on rent payments under the section if they are subject to a tax audit.