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Section 194-I: How to Calculate TDS on Rent?

Section 194-I: How to Calculate TDS on Rent?

calculate TDS on rent

TDS on rent comes under Section 194-I of the Income Tax Act. Rental income received from renting of land, building, plant & machinery, furniture & fittings, etc is subject to Tax Deduction at Source (TDS).

To ensure you don’t get worried with TDS next time, we have elaborated almost everything about the process, from the calculation process to life insurance plans that help save tax.

What is Section 194I- TDS on Rent?

As per the 194-I section of Income Tax Act, 1961, a person (not being an Individual or HUF) who is responsible for paying of rent is liable to deduct 10% of the annual rent as tax deducted at source, 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.

What is “Rent” as per the IT Act?

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:

i. A land
ii. Any building whether residential or commercial
iii. Machinery
iv. Furniture
v. Equipment such as computers systems, networks
vi. Plant for an industrial or manufacturing facility

Should you Deduct TDS on Rent?

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.

TDS Deduction Rates and Exceptions:

Owing to the ongoing COVID-19 and resultant lockdown, the Indian government has offered relief in TDS rates across particulars, including the TDS on rent. The new rates will be applicable for the period from 14.05.2020 to 31.03.2021.

TDS Deduction Rates

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:

a) When the annual rent amount does not exceed Rs. 2.4 lakhs.

b) When the rent is made to the government and entities whose income is exempt from income-tax under clauses (20) and (20A) of Sec.10 of the Income-tax Act.

c) When the tenant is an individual or HUF and the income from the profession does not exceed Rs. 50 lakh. This also applies to the case if they own a business having a turnover of less than Rs. 1 crore during the financial year.

d) When there is a sharing of film exhibition between the film exhibitor who owns the theatre and film distributor.

What Rent Payment is Covered under Section 194I?

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:

i. Rental Income from Factory Building

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.

ii. Rent Includes Service Charges

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.

iii. TDS where both Building & Furniture are Rented

If the building and furniture are rented out by two different owners, the TDS shall be deducted only from the building rent.

iv. TDS Requirement where Rent is not Payable on Monthly Basis

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.

v. Charges Regarding Cold Storage Facility

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.

vi. Hall Rent Paid by an Association for Use of it

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.

vii. Payments to Hotels for Holding Seminars Including Lunch

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.

How to Calculate TDS on Rent?

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:

a) TDS on rent (April 2020 and May 2020): Rs. 8,000 (10% of the rent for the first two months)

b) TDS on rent (June to March 2020): Rs. 30,000 (7.5% of the remaining 10 month’s rent)

c) Total TDS for financial year 20-21 will be: Rs. 38,000 (A + B) (You will need to deduct Rs. 38,000 from the rent of March 2020)

d) With this new revision, you too will be able to save money during the crisis. In addition to the government’s relief on TDS, you can also look for other tax saving instruments that can help you save your money legally.

1. Effect of TDS on Tenant & Owner

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.

2. Tax Saving Options

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:

Section 80C

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:

a) Unit Linked Insurance PlansGreat for long-term tax-free wealth creation, providing safety to your child’s education goals and boost your retirement corpus

b) Public Provident Fund (PPF) & Sukanya Sammriddhi Yojana (SSY) One of the safest long-term investment option

c) National Pension Scheme (NPS) Geared for retirement goal, offers equity exposure and dynamic asset allocation. But only works for retirement as lock-in period ends only when you are 60.

d) Equity Linked Savings Scheme (ELSS) Pure equity mutual funds with three-year lock-in and tax-exemption.

e) Other sections where you can save additional tax:

f) Section 24 Interest paid on a home loan up to Rs. 200,000. Helps reduce your tax from house property. So, this is an important section if you are the owner of the let-out property.

g) Section 80E You can save tax on the interest paid on an education loan.

h) Section 80G As per this section, you are eligible for a tax deduction on the amounts given as donations to social organizations and NGOs.

Click here to use - Income Tax Calculator

What are Indirect Rent Payments Under Section 194-I?

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:

a) Payments received by hotels for official meetings (even if the hotels only charge for catering, not for using the premises)
b) Payments received for allowing perishable items’ storage in cold storage facilities
c) Rent received for letting out a factory building
d) Service charges received by the business centres
e) Rent received for building and furniture

Who is Liable to Deduct TDS u/s 194I?

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:

1. Other than Individual & HUF

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.

2. Individual & HUF Taxpayers

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.

Exceptions for TDS on Rent Deduction

Following payment shall be exempt from TDS on rent payment under Section 194I of the Income Tax Act:

a) The rent amount is below Rs. 2.4 lakh

b) The tenant’s turnover is up to Rs. 1 crore in case of business and Rs. 50 lakh in case of the profession during the preceding financial year

c) Hall is let out for film exhibition, where the business of film exhibitors, who own a cinema or theatre, is composite. In this case, neither the exhibitor rents out the theatre nor the film distributor is a tenant. Hence, TDS on rent payment shall not be deducted

d) If the rented premise is owned by the government, statutory, or local authority, the person making the payment is not required to deduct TDS on rent

e) The rent paid to a government body or a government agency

Key Timelines for TDS Deductions

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

Consequences of Non-Deduction/Non-Payment of TDS

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:

a) A taxpayer who has to deduct TDS (deductor) shall be liable to pay the interest at the rate of 1% per month, from the date when tax deduction was to be done till the date of late deduction of TDS.

b) In case the tax deductor has deducted the TDS but not deposited the same to the government, s/he shall be liable to pay the interest @ 1.5% per month from the date when s/he had deducted TDS to the date of late deposit of the TDS to the government.

c) In addition, a penalty equal to the amount of non-deduction of TDS /non-payment of TDS shall be imposed on the tax deductor.

Important Points Related to Rent Income Covered Under Section 194I

Here are some important instructions regarding deduction of TDS on Rent under section 194I:

a) The PAN number of the payee is required for the deduction of TDS on rent under section 194I. In case the landlord or the person who receives rent on his behalf fails to provide the PAN number, then the TDS shall be deducted at the rate of 20%.

b) In case the rent received is exceeding Rs 1 crore and a foreign company is also involved, a surcharge shall be levied on TDS on rent under section 194I.

c) TDS on rent shall be exempt if the payee is a political party / charitable trust.

6 Frequently Asked Questions Related to TDS on Rent

1. Will tax be deducted from Service tax added to my rent?

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.

2. If my rent goes towards the government, will there still be tax deductions at the source?

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.

3. If my rent is more than Rs. 2,00,000 will I be charged TDS from my rent?

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.

4. What happens if TDS is not deducted on rent?

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.

5. Is Section 194-I related to TDS on rent applicable for using a part of any land or building?

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.

6. Is TDS on rent deductible on the gross amount, including the service tax?

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.

Speak to an insurance specialist now!

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