FAQs on Tax Deducted at Source under section 194I

FAQs on Tax Deducted at Source under section 194I

The Finance Act, 1994 inserted the Section 194I, regarding deduction of tax from rent. The Government introduced the provision to cover the income by way of rent under tax deduction at source. In other countries as well, such income is subject to deduction of income tax at source.

Q1. What is the Meaning of ‘Rent’ in reference to Section 194I?

  • ‘Rent’ means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any of the following:
    • Land or
    • Building (including factory building) or
    • Land appurtenant to a building (including factory building) or
    • Machinery or
    • Plant or
    • Equipment or
    • Furniture or
    • Fittings.
  • Whether or not any or all of the above are owned by the payee (Explanation (i) to Sec. 194-I). Sub-letting is also covered.
  • If the landlord collects security or advance payment at the time of letting out a building to a tenant on the condition that the deposit will be refunded at the time of vacating the building, then such a receipt is not in the nature of income and, therefore, no tax is to be deducted at source u/s 194I.
  • However, advance rent (not in the nature of refundable security deposit) paid is subject to a tax deduction.
  • Moreover, where any such rent is credited to ‘suspense account’ or to any other account shall also be liable to deduct tax at source.

Q2: Who is Liable to Deduct Tax under Section 194I?

  • The person (not being an Individual or HUF) who is responsible for paying any income to a resident by way of rent is liable to deduct tax at source.
  • Also, individuals and/or HUFs who are subject to tax audit are also under an obligation to deduct the tax at source.
  • As per Budget 2017, individual /HUF (not covered under tax audit) paying rent to a resident exceeding Rs.50,000 per month are also liable to deduct TDS @ 5%. This amendment is effective from 1st June 2017.
  • TDS threshold for deduction of tax on rent is increased from Rs. 1,80,000 to Rs. 2,40,000 for FY 2019-20 onwards.

Q3: What is the Point of Deduction of TDS?

  • Tax is required to be deducted at source at the time of credit of ‘income by way of rent’ to the account of the payee or at the time of payment, thereof, in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier.
  • Sec. 194I does not mandate that the tax deduction should be made on a month-to-month basis.
  • Therefore, if the crediting of the rent is done on a quarterly basis, the deduction at source will have to be made on a quarterly basis only. Where the rent is paid on a yearly basis, deduction also will have to be made once a year on the basis of the actual payment or credit.

Q4: What is the Rate of TDS?

Sr. No. Nature of Payment Rates of Tax Deduction
1 Rent of Plant and Machinery 2%
2 Rent of Land or Building or Furniture of fittings 10% (5% if rent exceeding Rs. 50,000 per month is paid by individual / HUF who are not liable for tax audit.)

Q5: What Payment is Covered u/s 194I?

Consider following scenarios where letting out of property is involved:

1. Income from Letting out of Factory Building:

  • Where a factory building is let out, the rent received is generally considered to be income from business in the hands of the lessor or the owner of the factory. Only in a few cases, it is income from property in the lessor’s hands.
  • But such payment also, which is business income in the hands of the lessor and for which he will necessarily be paying advance tax, will be subject to tax deduction at source or TDS.

2. Rent includes Service Charges:

  • Service charges payable to business centers are covered under the definition of rent, as they cover payments by whatever named called.

3. TDS requirement where Building and Furniture, etc., let out by separate persons:

  • In the case where a building is let out by one person and furniture and fixtures are let out by another person, then the payee is required to deduct tax under Sec. 194I only from the rent paid/credited for the hire of building.

4. Charges Regarding Cold Storage Facility:

  • In the case of cold storage where milk, ice cream, and vegetables, are stored, the payment may be styled as charges for use of plant and not for use of the building. Cold storage is a plant.

5. Hall Rent paid by an Association for use of it:

  • Since the association is assessed as an association of persons and not as an individual or HUF, the obligation of tax deduction will be there, provided payment for the use of hall exceeds Rs.2,40,000 from FY 2019-20 onwards (earlier it was Rs.1,80,000).

6. Payments to Hotels for holding Seminars including Lunch:

  • Where hotels do not charge for use of premises but charge for catering/meal only, the provisions of Sec. 194I would not apply. However, Sec.194C would apply for catering part.

Q6: What is Form 13 and Form 15AA?

  • If total income of the payee is less than maximum amount of income not chargeable to tax, he/she may file an application in Form 13 under section 197.
  • If the Assessing Officer is satisfied that this total income justifies no deduction of tax or deduction at a lower rate, he may issue a certificate in Form 15AA to that effect directly to the payer.

Q7: Under what circumstances TDS u/s 194I is not deductible?

Under following cases TDS is not deductible u/s 194I.

1. Amount payable/paid not exceeding Rs.2,40,000 during the Financial Year:

  • No tax is required to be deducted in case the amount of rent due or paid does not exceed Rs.2,40,000 from FY 2019-20 onwards (earlier it was Rs.1,80,000).

2. Where tenant is Individual or Hindu Undivided Family:

  • Deduction is not required under Sec. 194I when the rent is due or paid by an Individual or HUF not carrying on a business which is audited under income tax law.

3. Sharing or proceeds of Film Exhibition between a Film Distributor and a Film Exhibitor owning a Cinema Theatre:

  • In case of a film exhibitor and film distributor contract, the share of the exhibitor is on account of composite services. The distributor does not take cinema building on lease or sub-lease or tenancy or under an agreement of similar nature. The payment made is not rental in nature.

4. Where the payee is the Government Agency:

  • A person making payment to Government is not required to deduct tax at source under Section 196. The payments made to statutory authorities and local authorities are exempt from tax and hence not tax deductible.

Q8: What is the time limit on depositing TDS?

Consider below table for details:

Month Due Dates
April to February Within 7 days from the end of the month in which TDS is deducted
March On or before 30th April

Q9: What are the Consequences of Non-Deduction / Non-Payment of TDS?

  • A taxpayer who is liable to deduct TDS will be liable to pay interest @ 1% per month from the date when tax is deductible till the date when tax is deducted.
  • A taxpayer who has deducted tax but not deposited the same to the government is liable to pay interest @ 1.5% per month from the date when tax is deducted to the date of deposit of the TDS.

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