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Section 194-IB of the Income Tax Act, 1961 mentions that tax @ 5% or 3.75% should be deducted for all the transactions by the Tenant/ Lessee/ Payer of the property at the time of making payment of rent (to Landlord / Lessor/ Payee). The government account should be credited with the deducted tax through any authorized bank branches.
TDS on rent comes under Section 194-IB, as per Finance Act, 2017. Rental income received from renting of land, building, plant & machinery, furniture & fittings, etc. is subject to Tax Deduction at Source (TDS).
Continue reading this article to know about TDS on rent – right from the definition to the calculation.
As per section 194I, any person (not being an individual or HUF) paying rent to a resident person is liable for tax deduction at source on rent @ 10% if the annual rent exceeds Rs. 2.4 lakhs.
Earlier, this TDS limit for deduction of tax on the rent was Rs. 1.8 lakhs. However, it was increased to Rs. 2.4 lakhs with effect from the financial year 2019-2020.
Many people often consider only the rent of a house when they think about the TDS deduction. However, there is more to the definition of rent when it comes to the Income Tax Act. Section 194-I give an elaborate definition of rent as a payment for the following things:
Currently, a person who is not an individual or a HUF is liable to deduct TDS on rent of more than Rs. 2.4 lakhs.
In case you belong to the Individual or HUF category, you can deduct the TDS at 5% if the rent that you are giving exceeds Rs. 50,000 per month.
The Government of India has offered relief in the TDS rates. The new rates will be applicable for the period from 14.05.2020 to 31.03.2021.
|S. No||Income Tax Act||Nature of Payment||Existing TDS Rate||Revised TDS Rate from 14/05/2020 to 31/03/2021|
|1||Section 194-I (a)||Rent for Plant & Machinery||2%||1.5%|
|2||Section 194-I (b)||Rent for Land or building or furniture or fitting||10%||7.5%|
|3||Section 194 – IB:||Rent paid by an individual or HUF not covered under section 194I (w.e.f from 01.06.2017)||5%||3.75%|
Note: This benefit of the revised rates is applicable only if you are an Indian resident.
Moving forward to exceptions, there are certain conditions in which TDS is not deductible under Section 194-I. These include:
|Coverage Under Section 194I||Not Covered Under Section 194I|
|Category of Tenant/Payer||Any Person Making Rent Payment|
|When Rent Payer is Individual/HUF||Individual/HUF whose sales, turnover or gross receipts is more than the limit mentioned under section 44AB (a) or section 44AB (b)||Other Individual/HUF|
|Rent Payment||Rent paid to a Resident Indian||Rent paid to a non-resident person not who is covered under section 194-I|
As per Section 194I of Income Tax Act 1961 all rent payments above Rs. 2.4 lakhs to an individual or HUF in a financial year are liable for a tax deduction at source (TDS). If the total amount is more than Rs. 1 crore, you should add a surcharge to the TDS as well. Here are all those types of payment on which TDS on rent payment is charged under section 194I:
If you have let out a factory building you can receive the rent on it as the income from property, or as a business income. In the case of business income, you will pay the advance tax on this rental income. However, your rent receipts will be subject to TDS under Section 194I in both cases.
If you are the owner of a business centre, then the service charges that you receive shall be included in the rent. Hence, these will also be treated as rent and shall be subject to TDS under Section 194I.
If the building and furniture are rented out by two different owners, the TDS shall be deducted only from the building rent.
The most common mode of rent payment is monthly. However, sometimes you may receive rent in any other mode than a monthly basis. If you receive rent as per different rental periods, TDS shall be deducted as per that period.
If you provide cold storage facilities, your unit shall be treated like a plant and TDS shall not be deducted as per the building rent. This condition will not apply to buildings that have been rented out to a cold storage operator for rendering the services.
If your property or hall has been rented out by an association the TDS will apply if the rental value exceeds Rs 2.4 lakhs for the financial year. The limit was Rs 1.8 lakhs before FY 2019-20.
As a banquet hall or hotel which is being used for seminars and lunch, the charge is usually for catering/meals only. In such a case, TDS under section 194I will not apply. Instead, section 194C for TDS on contractual payments will be applicable.
Now, coming back to the eternal question – how can one calculate the TDS on rent? Let us understand this with a simple example.
Mahesh pays a rent of around Rs 40,000 to his landlord every month. Now, as per the new revised TDS rate, Mahesh will have to deduce 7.5% of the total amount.
But for April and May 2020, old TDS rates will apply.
Here’s how much he’ll need to deduct:
TDS deduction on rent simply reflects on the owners ITR and a deduction on total tax liability follows. So, TDS deducted by tenant reduces your overall income tax liability.
As a tenant, however, you need to be careful with the deducted money and ensure that you can deposit this money to the revenue department. This deduction does not add to your taxable income, so there is no change in your usual tax liability.
TDS deduction doesn’t affect your tax liability much. So, you will still need traditional modes of saving taxes. With proper tax planning, you can also reduce the burden of taxes while maximizing savings. There are plenty of tax-saving instruments that ensure liquidity and better returns.
Here are some options for tax saving under the Income Tax Act:
It is by far the most popular section to save tax and plenty of investment options to use. The section offers to reduce your taxable income by up to Rs 1.5 lakh. Some of the most useful tax-saving instruments include:
Click here to use - Income Tax Calculator
There are certain indirect rental payments apart from house rent. These shall also come under Section 194I. Here is the list of payments that are not rental payments but shall be subject to TDS on rent payment:
After the budget of year 2017, every taxpayer is expected to deduct TDS on rent payments when the payment is eligible for it. The limits of TDS eligible payments differs for different taxpayers:
Any person, other than an individual or HUF, who has paid or is likely to pay the rent to a resident Indian should deduct TDS. The maximum TDS free amount is Rs. 2.4 lakhs in one financial year (effective from the financial year 2019-20) under section 194I.
However, in case the monthly rent exceeds Rs 50,000, even the individual and HUF tenants should deduct TDS under sec 194IB. TDS rate in this case will be 5% of the rent paid.
Following payment shall be exempt from TDS on rent payment under Section 194I of the Income Tax Act:
Given below are the timelines for deduction of TDS on rent payment u/s 194I:
|Case||The Time Limit for Deduction of TDS u/s 194I||Income Tax Challan Required|
|If the payment is done by or on behalf of the Government-||The same day (without any challan)||No|
|If the payment is done by anyone except the Government-||On or before 7 days from the end of the month of TDS deduction||Yes|
|If the TDS amount is credited or paid in March||On or before April 30||Yes|
|Any other case||On or before 7 days from the end of the month of TDS deduction||Yes|
TDS deduction from eligible payments and timely deposit is a legal requirement as per the Indian Tax laws. Non-deduction of TDS or non-payment of TDS can lead to the following consequences:
Here are some important instructions regarding deduction of TDS on Rent under section 194I:
No, service tax does not form a part of the income for the owner of the property. Hence, TDS on rent payment shall be deducted under Section 194I without including the service tax.
No, if you have paid rent to government agencies and entities, you need not apply TDS on the payment. However, eligible rent payments to private owners must have a TDS application.
If the monthly rent is more than Rs 2 lakhs, yes you should apply TDS to the payment. If the annual rent payment is Rs 2 lakh TDS will apply only if the amount exceeds Rs 2.4 lakhs as per section 194I of the Income Tax Act.
If you do not deduct TDS on eligible rental payments or do not deposit the deducted TDS in time, you may face the following penalties:
a) Late Deduction: You will need to pay interest at the rate of 1% per month, from the legal date of deduction till the date of actual deduction of TDS.
b) Late Deposit: You must deposit the collected TDS every quarter. In case of a delay, you are expected to pay interest at 1.5% per month from the date of TDS deduction to the date of deposit.
c) The total amount of penalty must not exceed the amount of TDS that has been delayed for deduction or deposit.
Yes, section 194I defines the TDS conditions and rates applicable for rental payments for using a part of land or building. Rent payment for use of land and building is subject to 10% TDS on the rent amount paid.
However, if you are paying the rent as an individual or HUF, the TDS on land and building will be 5% of the eligible amount.
No, service tax does not form part of the income of the owner of the property. Thus, you should apply TDS only on the land or building rent as per section 194I without including the service tax.
While TDS is just one more transaction in your rental deal, saving income tax is more compelling cause for your attention. So, deduct TDS or receive rent do not miss out on the tax-saving investments to grow your wealth.
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