What Is Section 194I?

Introduction

Tax Deducted at Source is a mechanism for collecting income tax in India. Under TDS, tax is deducted at the time of making payments, such as salaries, rent, professional fees, etc. One such type of TDS is Section 194I, which deals with TDS on rent paid or payable. This section applies to both commercial and residential properties, and the tenant is required to take out tax at the source and send it to the government. 

In this article, we will explore Section 194I, such as who it applies to, how much it costs, and who is exempt from it.
 

What is Section 194I ?

Section 194I mandates the deduction of tax at source on rental payments by the person responsible for paying rent to a resident (not being an individual or HUF). The TDS threshold for FY 2022–23 is Rs 2,40,000, up from Rs 1,80,000 in FY 2018–19. Individuals and/or HUFs subject to tax audit must deduct tax at source on rental payments, irrespective of the rent amount. Non-compliance may lead to interest and penalties. 

What is the Reason for the Introduction of TDS u/s 194I?

The main reason for the introduction of this provision is to cover the income generated through rent under tax deduction at source. The government aims to increase tax compliance and revenue by ensuring that individuals responsible for paying rent deduct tax at the source and deposit it with the government. This is not something that only happens in India. Many other countries also take income tax out of rental income at the source.

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

Section 194I of the Income Tax Act defines ‘rent’ as any payment, regardless of the name given, made under any agreement or arrangement for the use of land, buildings (including factory buildings), machinery, plants, equipment, furniture, or fittings, whether owned by the payee or not. This definition includes sub-letting arrangements, indicating that TDS provisions apply even if the tenant sub-leases the property to a third party.

What Payment is Covered u/s 194I?

●    Rent from Factory Buildings and Service Charges

When a factory building is rented out, the rent usually counts as business income for the person who owns the building. In some cases, it may be considered income from property. Either way, the rent received is subject to tax deduction at source or TDS under Section 194I. This also applies to service charges payable to business centres, which are covered under the definition of rent as per the section.

●    TDS Requirement for Separate Rentals of Building and Furniture

In a scenario where a building is rented by one individual while furniture and fixtures are rented by another, the recipient of payment should only deduct taxes under Section 194I from the rent paid or credited for the building's hire. The rental of furniture and fixtures falls under Section 194C, which pertains to payments made to contractors and subcontractors.

●    Frequency of TDS Deduction for Rent Not Paid on a Monthly Basis

Section 194I does not mandate that the tax deduction should be made on a monthly basis. Therefore, if the rent is credited on a quarterly or yearly basis, the TDS deduction must also be made on the same basis. The TDS should be taken out when the credit is made or when the payment is made, whichever comes first.

●    Charges for Use of Cold Storage Facility

In the case of cold storage facilities, where items like milk, and vegetables are stored, the payment may be styled as charges for the use of plants and not for the use of the building. Section 194I says that TDS won't apply to cold storage because it is a plant. However, TDS under Section 194C will apply for the use of plants.

●    TDS Obligation for Association Hall Rent Exceeding Rs 2,40,000

If an association pays rent for using a hall, TDS obligations apply when the payment exceeds Rs 2,40,000 per annum. The association is counted as a group of people, not as a single person or a HUF. Therefore, the obligation of a tax deduction will be there, as per Section 194I.

●    Payments to Hotels for Seminars (TDS Applicability)

Section 194I does not apply to hotels that only charge for catering or meals and not for the use of the building. However, TDS under Section 194C would apply for the catering part. Section 194I says that TDS needs to be done if the amount paid to the hotel for holding seminars, including lunch, is more than Rs 2,40,000 per year.
 

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

Section 194I of the Income Tax Act says that the person who pays a resident's rent must take out tax. In contrast, non-auditee people and HUFs are not subject to this rule.

It is the responsibility of any person or HUF subject to an audit under Section 194I to withhold tax at the point of payment. TDS must be taken out if the total amount of such income paid or credited, or expected to be paid or credited, by the person mentioned above to the account of the payee during the financial year is more than Rs 2,40,000. Up to the fiscal year 2018-2019, that cap was at Rs 1,80,000.

Rental payments to a resident that total more than Rs 50,000 per month are subject to 5% TDS, under a new provision implemented in Budget 2017. This modification was made according to Section 194-IB, and it became effective on June 1, 2017.
 

What is the Point of Deduction of TDS?

As per Section 194I of the Income Tax Act, the tax deduction at source (TDS) is mandatory at the time of crediting the "income by way of rent" to the payee's account or at the time of payment, whether in cash, cheque, draft, or any other mode, whichever is earlier. This means that the person or organisation that pays the rent must deduct TDS when they either credit the rent to the payee's account or make the payment, whichever comes first.

What is the Rate of TDS?

Under Section 194I, the rate of TDS (tax taken out at the source) changes based on the type of payment. Here is a table summarising the rates of tax deduction for each nature of payment:

Illustration/Scenario

Let's look at another situation to see how Section 194-I of the Income Tax Act is used in real life.

XYZ Corp. Ltd. is a manufacturing company that has rented a cold storage facility from Mr. Raj, an individual. The cost to hire the space each month is Rs. 40,000. Section 194-I says that companies have to take 10% out of the rent paid to a resident person for land, buildings, or furniture that costs more than Rs. 2.4 lakh.  In this case, XYZ Corp., Ltd. should deduct TDS on the rent paid to Mr. Raj.

The total rent amount paid during the financial year in this scenario is 12 x Rs. 40,000 = Rs. 4,80,000. Since the rent exceeds Rs. 2.4 lakh, XYZ Corp. Ltd. is obligated to deduct TDS at the rate of 10% on the rent paid and deposit the same to the government on behalf of Mr. Raj.
 

No Deduction or Deduction at Lower Rate under Sec. 197

Under Section 197, a person who gets paid can ask that less tax be taken out at the source or that no tax be taken out at all. The assessing officer may get this information if Form 13 is submitted. The Assessing Officer can give the payer a Form 15AA certificate saying that no deduction is needed or that a lower deduction rate is needed based on the total income of the payee.

Under What Circumstances TDS u/s 194I is Not Deductible?

TDS under Section 194I of the Income Tax Act is not always mandatory. There are certain circumstances under which TDS u/s 194I is not deductible. Here are the situations in which TDS u/s 194I is not required to be deducted:

●    No tax needs to be deducted if the rent paid or due is less than Rs 2,40,000 in the financial year.
●    Individuals or HUFs not engaged in an audited business under income tax law do not need to deduct tax under Sec. 194I for rent paid or due.
●    In a film exhibitor and distributor agreement, the exhibitor's share is for composite services and not rent, as the distributor does not lease the cinema building.
●    Payments made to government, statutory authorities, and local authorities are exempt from tax and not subject to tax deduction under Section 194I.
 

What is the Time Limit on Depositing TDS?

The timeline for TDS deposit varies depending on the payer and the month in which the deduction was made. For payments made by or on behalf of the government, the TDS should be deposited on the same day without the use of a challan form. For all other cases, TDS must be paid with an income tax challan no later than 7 days following the month in which the deduction was made, except for payments credited or paid in March, which must be deposited on or before April 30. In all other instances, TDS is due within seven days after the completion of the month during which the deduction was made.

Consequences of Non-Deduction/Non-Payment of TDS

Non-deduction or non-payment of TDS can lead to various consequences, including interest charges. If a taxpayer is liable to deduct TDS but fails to do so, they will be required to pay interest at a rate of 1% per month from the date when the tax should have been deducted until the date when the tax is actually deducted.

If a taxpayer has deducted TDS but failed to deposit it with the government, they will be required to pay interest at a rate of 1.5% per month from the date of deduction to the date of deposit of the TDS.
 

TDS on rent by Individuals

Under Section 194-I, TDS is applicable to rent paid by individuals/HUFs (if a tax audit was applicable in the preceding financial year), or any other person. If, on the other hand, the total amount of rent paid or due during the accounting year is less than or equal to Rs. 2,40,000, then no TDS will be deducted from that amount.

The TDS rate under Section 194-I is 10% on the rent paid for land, buildings, or furniture and 2% on the rent paid for plants and machinery.

Section 194-IB, on the other hand, applies to individuals and HUFs that did not have to go through a tax audit in the previous financial year and paid more than Rs 50,000 per month in rent. Under this section, the TDS rate is 5% of the rent paid for land, and building.