Section 194I pertaining to TDS on rent was introduced to prevent tax evasion by non-reporting of rental income by the people and to widen the tax horizon by bringing more people who earn rental income into the tax system. Section 194I was introduced in the Income Tax Act, 1961, by the Finance Act, 1994, and it came into effect on June 1, 1994.
Section 194I – Deductors and Deductees
The applicability of section 194I arises when the person making the rental payment i.e. the deductor is any of the following:-
- Any person, other than individuals or HUF;
- Individuals or HUF whose total sales or gross receipts from business or profession does not exceed Rs. 1 crore or Rs. 50 lakhs respectively in the preceding FY i.e. who are subject to tax audit.
The deductee can be any resident person.
Definition of Rent for TDS u/s 194I
Under Section 194I of the Income Tax Act, 1961, “rent” refers to any payment made under a lease, sub-lease, tenancy, or any other agreement or arrangement for the use of certain types of property. The types of property covered include:
- Land: Any land used for agricultural or non-agricultural purposes.
- Building: Includes residential, commercial, industrial, or any other types of buildings.
- Machinery: Includes any mechanical devices or equipment.
- Plant: Any equipment used for industrial, manufacturing, or production purposes.
- Equipment: Any tools or appliances used for a specific purpose.
- Furniture and Fittings: Includes movable items used to furnish a space or property.
The definition encompasses any payment for the use of these assets, regardless of whether the payment is described as rent or by any other name.
Limit and Rates for deduction of TDS
TDS u/s 194I is required to be deducted by the deductor only when the aggregate amount of rent exceeds Rs. 2,40,000 during a financial year. Earlier this threshold limit was Rs. 1,80,000, however it has now been increased to Rs. 2,40,000.
However, where the share of each co-owner in the property is definite and ascertainable, the limit of Rs. 2,40,000 will be applicable to each co-owner separately.
The rates for deduction of TDS u/s 194I are categorized as under:-
- TDS rate for rent for use of plant and machinery – 2%
- TDS rate for rent for use of land, building, furniture and fixtures – 10%
- In case the PAN of the deductee is not available, the TDS on rent will be deducted at 20% as specified u/s 206AA.
Exception to the rates specified above
On an application filed by the deductee in Form 13, if the Assessing Officer is satisfied that on the basis of the total income of the deductee, a lower rate of income tax or no deduction of income tax is justified, then the AO will issue a certificate in Form 15AA than can be furnished to the deductors for lower or nil rates of tax deduction.
Time limit for deduction of TDS
TDS on rent has to deducted at the source either at the time of credit to the account of the payee or at the time of payment, whether by cash or cheque or any other mode, whichever is earlier.
However, where the rent is not payable on monthly basis, the liability of deduction of TDS will also not arise on monthly basis. For instance, if the rent is payable quarterly or annually, the TDS on rent will also be required to be deducted on quarterly or annual basis respectively.
Even if rent has been in advance, TDS has to be deducted on such advance rent. However, TDS on rent is not required to be deducted on payment of security deposit since this is not in the nature of rental payment. However, on default by the tenant, if the security deposit is being adjusted for rent arrears, then TDS u/s 194I will be deducted on such adjustment.
Time limit for deposit of TDS
Once the TDS on rent has been deducted as per rate structure as explained above, the deductor is required to be deposited as per the following timelines:-
- Payment has been made by or on behalf of the Government – TDS has to be deposited on the same day.
- Payment has been made for all cases other than the Government – TDS has to be deposited within 7 days from the end of the month in which the deduction has been made. However, for the month of March, the TDS has to be deposited on or before 30th April.
Interest on non-deduction/non-payment of TDS
- Case I – TDS not deducted
When TDS has not been deducted, the deductor will be liable to pay interest @ 1% per month from the date when tax is deductible till the date it is actually deducted.
- Case II – TDS has been deducted but not deposited
When TDS has been deducted but not deposited, the deductor will be liable to pay interest @ 1.5% per month from the date when tax is deducted to the date of deposit of TDS.
TDS regarding Cold storage
A cold storage is a facility for preservation of perishable items like ice cream, vegetables, fruits are stored by means of a mechanical process and storage of such goods is also incidental to its main function. The customer is not given the right to use any specified location/place or the machinery and therefore, he does not become a tenant.
Since this arrangement between the two parties is generally contractual in nature, TDS will be deducted u/s 194C i.e. TDS on contracts instead of TDS u/s 194I for rent.
TDS on landing and parking charges
It was held by the Supreme Court in the case of Japan Airlines Co. Ltd. V/s Commissioner of Income Tax (2015), that landing and parking charges payable by the airlines in respect of aircrafts are not for the use of land but the charges are for a number of services provided by the Airport Authority of India. Thus, landing and parking charges would attract TDS u/s 194C and not u/s 194I.
Important Case Study – Indus Towers Limited
M/s Indus Towers Limited owned a network of telecom towers and infrastructure services which were let out to major telecom operators in the country. The assessee contended that TDS has to be deducted u/s 194C, however, the AO held that TDS has to be deducted u/s 194I @10%.
The high Court held that the contentions of both the assessee and the AO were incorrect because the underlying object of this transaction was the use of machinery, plant or equipment i.e. the passive infrastructure and it is incidental that it was necessary to house the equipment in some premises. It was held that TDS has to be deducted u/s 194I @ 2% for use of plant and machinery.