Section 194I of Income Tax Act

  • Author :
  • TATA AIG Team
  • Published on :
  • 03/01/2024

In 1994, the Income Tax Act introduced Section 194I, which applies tax deduction at source to rental payments exceeding a specified limit made to resident Indians.

The goal of this provision was to curb tax evasion by landlords who either did not report their rental income or under-reported it. Also, it aimed to ensure that the government received its due share of tax revenue from the rental sector.

This section differs from other sections related to TDS on rental income, such as Section 194IB and Section 194IC. Let's get to the ins and outs of section 194I of the Income Tax Act.

What is Rent as per Section 194I of the Income Tax Act?

As per Section 194I, the term "rent" covers any payment, referred to by any name, within the scope of any tenancy, lease, sub-lease, or any other agreement or arrangement facilitating the utilisation of any land or building (including factory buildings) or any machinery, plant, equipment, furniture, or fittings.

The payer is the person who is responsible for paying the rent to the landlord. The payee is the person who receives the rent from the tenant. The machinery, plant, equipment, furniture, and fittings are the assets used for business or professional purposes.

TDS Deduction on Rent: Key Conditions

  • The TDS on rent payment does not include any surcharge, except when the payment is above ₹1 crore, and the recipient is a foreign company.

-The payee has to give the PAN number of the person or landlord getting the rent for TDS deduction. If not, the TDS on rent is 20% under Section 206AA.

  • Education and secondary and higher education cess do not apply to the TDS on rent paid by individuals.

Section 194I: TDS Rate and Threshold Limit

  • The rate of TDS applicable for different types of rent under Section 194I is as follows:

  • 2% for machinery, plant and equipment

  • 10% for land, buildings, furniture and fittings

  • The threshold TDS on the rent limit under Section 194I is ₹2,40,000 for the financial year (FY) 2022-23. That means if the payer's total rent paid or payable to the payee in an FY does not exceed ₹2,40,000, no TDS deduction is required.

  • However, if the total rent exceeds ₹2,40,000, a TDS deduction is mandatory from the entire amount, not just the excess amount.

  • The Budget 2019 raised the threshold limit from ₹1,80,000 to ₹2,40,000, aiming to offer relief to small taxpayers.

Conditions for Advance Rent TDS

  • TDS deduction applies to the payment of advance rent to the landlord. However, there are some exceptions regarding TDS calculation on advance rent.

  • If the advance rent extends to the next financial year, the TDS will be proportional to the income based on Form 16 issued for the total advance rent.

  • If the property is sold or transferred to another person, the TDS credit will not be available until the new owner receives the transfer.

  • If the rental agreement is cancelled after the advance rent is paid and the TDS is deducted, the tenants will receive the remaining amount. The landlord must report such cancellation in the ITR form filed for TDS deduction.

  • A TDS certificate must be issued every quarter as Form 16A for non-salary payments.

What is the Deadline for Depositing TDS?

There are certain conditions to the time limit. These are:

  • If the payment is made by the government or someone on the government's behalf, it should be processed on the same day without using any challan form.

  • If the payer is not the government, the tax deducted on rent should be paid with an income tax challan within seven days from the end of the month the deduction is made. However, if the TDS credit is in March, then the deposit due date is before the end of 30th April.

Consequences of Non-Compliance with Section 194I

If the payer fails to comply with the provisions of Section 194I, they have to pay the interest penalty of 1% per month or part of a month for non-deduction or short deduction of TDS and 1.5% per month or part of a month for non-payment or late payment of TDS.

The interest is computed from when the TDS was supposed to be deducted until the actual date of the TDS payment.

Section 194I vs Sections 194 IB & 194IC

  • Section 194I differs from other sections related to TDS on rent, such as Section 194IB and Section 194IC.

  • Section 194IB applies to individuals and Hindu Undivided Families (HUFs) who are not liable to audit and pay rent exceeding ₹50,000 per month to a resident landlord.

  • Section 194IC applies to individuals who pay rent to a joint development agreement holder to use land or buildings.

Conclusion

Section 194I of the Income Tax Act is necessary for TDS on rent. It applies to all payers who pay rent to resident landlords above a certain threshold. The rate and threshold of TDS on rent vary depending on the type of rent.

The payer has to deduct and pay the TDS on rent on time, issue and file the TDS certificate and return on time, and maintain proper records and documents of the TDS transactions. The payer and the payee must comply with Section 194I to avoid interest and penalty and enjoy the benefits of tax credits and tax reduction.

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Disclaimer / TnC

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