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Budget 2019

 

Interim Budget 2019 announced way ahead Lok Sabha election, has increased the threshold for deduction u/s 194I – TDS on Rent to Rs 240000 increasing it by Rs 60000. The earlier limit was Rs 180000 which will be applicable till FY 2018-19.

Section 194I: TDS on Rent

Whenever we hear the word ‘rent’, the first thing which comes to mind is the payment which knocks on the door at the end (or beginning) of every month. It can be in any form like house rent, machine rent, building rent, office rent, and the list is endless. Hence it does not come as the surprise that Section 194I, i.e. TDS on Rent impacts millions of people across India. Let’s know about this section more in detail.

Who has the need to deduct TDS u/s 194I?

Any person (who is not an Individual/HUF) pays to another resident an income by way of rent is required to deduct TDS u/s 194I. But if the Individual/HUF becomes liable to audit u/s 44AB (a) and (b) then he/she is required to deduct TDS under this section.

What is Rent?

Rent means any payment made under lease or sub-lease or tenancy or any agreement for use of the following:

  • Land
  • Building (including factory building)
  • Machinery
  • Plant
  • Equipment
  • Furniture
  • Fittings
What is the rate & time of tax deduction u/s 194I?

The rate of tax under this section is as follows:

  • 2% for the use of any machine or plant or equipment.
  • 10% for the use of any land or building (including factory building) or both or furniture or fittings.

And the time of deducting tax is earlier of, the credit of income to the account of the payee (receiver) or actual payment (in cash, cheque, draft or other modes).

  • No TDS Requirement
  • Where the amount paid as rent (at once or total in a financial year) to a payee (i.e. receiver) does not exceed ?180000. From the Financial Year 2019-20, this limit has been increased to ?240000.
  • Where the rent is given to a business trust (such trust owns the asset) which is a real estate investment trust as referred u/s 10(23FCA).
Some Special Considerations
  • Amount paid as warehousing charge is liable to TDS u/s 194I
  • The amount given as security deposit to the owner of an asset is not liable to TDS u/s 194I if such amount is refundable in nature. But when that amount of ‘deposit’ is adjusted against rent then it becomes liable to TDS u/s 194I.
  • Payment made for renting a business center is liable to TDS under this section.
  • When an accommodation in the hotel is taken on a regular basis (i.e. under an agreement) then such payment attracts TDS under this section.

But, if such payment is made by an employee or individual (who represents the company) and is later gets reimbursed then no TDS will be leviable. However, if such individual is liable to audit u/s 44AB then TDS will be levied.


Section 194IB: TDS on Payment of Rent by Certain Individuals or HUF

We saw that how section 194I makes only those Individual/HUF liable to TDS who are required to get accounts audited u/s 44AB. Hence, to widen the coverage and bring in ambit those individuals or HUF who pay big amount of rent but are still not liable to audit, Section 194IB was introduced in Budget 2017.

Who has the need to deduct TDS u/s 194IB?

Any person (who is an Individual/ HUF but not liable to audit u/s 44AB) pays income by way of rent to a resident is required to deduct TDS under this section.

What is the rate & time of tax deduction u/s 194IB?

The rate of the tax deduction is 5% and if the PAN of the recipient is not available then the rate will be 20%. But the amount of TDS cannot exceed the amount of rent paid for the last month. Time of tax deduction is, earlier of:

  • The time of credit of rent (for the last month in the previous year or the last month of the tenancy if the property is vacated before during the year), or
  • The time of payment (via cash or cheque or draft or any other mode).
No TDS Requirement
  • Where the amount paid by way of rent does not exceed ?50000 per month (or part of it), then TDS is not required to be made.
  • Also, if TDS is deducted under this section then there is no requirement of TAN.

Section 194IC: TDS on Payment Made Under Specified Agreement

This provision has been inserted recently from Budget 2017 and the objective was to bring under scope ‘Joint Development Agreements’. So let’s understand this section in detail:

Who has the to deduct TDS u/s 194IC?

Any person who pays to a resident some consideration (not in kind) under a Joint Development Agreement, has to deduct TDS u/s 194IC.

What is Joint Development Agreement?

This is an agreement between the owner of an asset (being land or building or both) who agrees to allows another person to build a real estate project on such asset, in return for share and/or payment in cash.

What is the rate & time of tax deduction u/s 194IC?

The rate of the tax deduction is 10% and if the PAN of the receiver is not available then the rate is 20%. Time of deducting tax is earlier of, the credit of income to the account of the payee (receiver) or actual payment (in cash, cheque, draft or other modes). Also, there is no threshold limit (exemption limit) under this section.


Frequently Asked Questions

Q- Whether payments made by company taking premises on rent but styling the agreement as a business centre agreement would attract the provisions of section 194-I?

Ans: The tax is to be deducted from the rent paid, by whatever name called, for the hire of a property. The deduction of tax at source does not depend upon the nomenclature, but on the content of the agreement. In this case, though the agreement has been styled as a business centre agreement , the substance of the payments is of the nature of rent. Hence, TDS under section 194-I is required to be deducted.


Q- Whether a contract for putting up a hoarding would be covered under section 194C or 194-I of the Act?

Ans: The contract for hoarding is in the nature of advertisement and advertisement comes under contract and provisions of section 194C would be applicable. It may, however, be clarified that if a person has taken a particular space on rent and thereafter sub lets the same fully or in part for putting up a hoarding, he would be liable to TDS under section 194-I and not under section 194C of the Act.


Q- On what amount the tax is to be deducted at source if the rentals include municipal tax, ground rent, etc.?

Ans: The tax deduction at source under section 194-I is to be done from "income by way of rent". Rent has been defined, in the Explanation of section 194-I, to mean any payment under any lease, tenancy agreement, etc.for the use of any land or building. Thus, if the municipal taxes, ground rent, etc.are borne by the tenant, no tax will be deducted on such sum.


Q- Whether section 194-I is applicable to rent paid for the use of only a part or a portion of any land or building?

Ans: As per Explanation to section 194-I, "rent" means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of any land or any building (including factory building), together with furniture, fittings and the land appurtenant thereto, whether or not such building is owned by the payee. Further, the definition of the term "any land" or "any building" would include a part or a portion of such land or building. Hence, Section 194-I is applicable to rent paid for the use of only a part or a portion of any land or building.


Q- Where accommodation in hotel rooms taken on a regular basis whether tax is deductible u/s 194C or 194I?

Ans: As per circular 715/1995, the department has clarified that payments made by persons, other than individuals and HUFs for hotel accomodation taken on a regular basis will be in the nature of rent and will be subject to TDS under section 194-I. However, the department via circular 5/2002, has further clarified that where the arrangement is only for rate contract (rate contract agreements are normally entered between corporates, tour operators, travel agents, etc. with hotels with a view to merely fix the room tariffs of hotel rooms for their executives/guests/customers), this will not be construed as rooms taken on a regular basis and therefore TDS shall not be applicable in such situation. Hence, TDS will only be applicable on payment of room rent to hotels where the rooms are taken on a regular basis, however, where the arrangement is only for rate contract, TDS shall not be applicable.


CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.