Scope of Section 194I of Income Tax Act:
- The person who is responsible for paying of rent is liable to deduct tax at source.( Not being an Individual or HUF)
- Individuals and/or HUFs who are subject to tax audit are under an obligation to deduct the tax at source.
- It imposes an obligation for TDS deduction on persons (other than individual/HUF) making rental payments to resident Indians above a specified limit, i.e., Rs.2,40,000 in a year.
- The limit of Rs 2,40,000 for deduction at source will apply to aggregate rent of all assets. Even if separate agreement are entered into , one for sub lease of building and another for hiring of machinery, rent and hire charges under the two agreement have to to be aggregated for for the purpose threshold limit Rs 2,40,000.
- The rent under this section broadly includes house rent, machine rent, building rent, office rent, furniture rent etc.
Who is Responsible for Deduction of TDS:
- Any person pays to another resident an income by way of rent is required to deduct TDS u/s 194I(who is not an Individual/HUF).
- Individuals or HUF who are liable for tax audit are responsible to deduct tax at source under Section 194I i.e individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed one crore rupees in case of business or fifty lakh rupees in case of profession during the financial year immediately preceding the financial year.
Time of Deduction of TDS u/s 194I:
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.
Rate of TDS u/s 194I:
| Nature of Payment | Rates of Tax Deduction |
|---|---|
| Rent on Plant and Machinery | 2% |
| Rent of land or building or furniture or fitting | 10% |
Meaning of Rent under Section 194I:
As per section 194I rent means any payment made under lease or sub-lease or tenancy or any agreement for use of the following:
- Building (including factory building)
- Land
- Machinery
- Plant
- Equipment
- Furniture
- Fittings
TDS u/s 194I is Not Applicable:
- No tax is required to be deducted in case the amount of rent due or paid does not exceed Rs 2,40,000 during the financial year.
- 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.
- 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.
- A person making payment to Government is not required to deduct tax at source under Section 194I. The payments made to statutory authorities and local authorities are exempt from tax and hence not tax deductible.
Examples for More Understanding
Example-1
ABC Ltd, took on sub-lease a building from J, an individual, with effect from 1.9.2022 on a rent of 20,000 per month. It also took on hire machinery from J with effect from 1.10.2022 on hire charges 25,000 per month. ABC Ltd. entered into two separate agreement with for sub-lease of building and hiring of machinery. The rent of building and hire charges of machinery for the financial year 2022-23 were 1,40,000 and 1,50,000, respectively, which were credited by ABC Ltd. to the account of J in its books of account on 31.3.2023. Examine obligation of ABC Ltd. with regard to deduction of tax at source in respect of the rent and hire charges.
Answer
As per section 194-1 dealing with deduction of tax at source from payment of rent, the rate of TDS applicable is 2% for machinery hire charges and 10% for building lease rent. The scope of the section includes within its ambit, rent for machinery, plant and equipment. Tax is required to be deducted at source from payment of rent, by whatever name called, under any lease, sub-lease, or any other agreement or arrangement for the use of building and machinery, irrespective of whether such assets are owned or not by the payee.
The limit of 12,40,000 for tax deduction at source will apply to aggregate rent of all the assets. Even if two separate agreements are entered into, one for sub-lease of building and another for hiring of machinery, rent and hire charges under the two agreements have to be aggregated for the purpose of application of the threshold limit of 2,40,000. In this case, since the payment for rent and hire charges credited to the account of J, the payee, aggregates to 2,90,000 (1.40,000+ 1,50,000), tax is deductible at source u/s 194-1. Tax is deductible@10% on 1,40,000 (rent of building) and @2% on 1,50,000 (hire charges of machinery).
Example-2
State Bank of India pays 750,000 per month as rent to the Central Government for a building in which one of its branches is situated.
Answer:
Section 194-1, which governs the deduction of tax at source on payment of rent, exceeding 2,40,000 pa, is applicable to all taxable entities except individuals and HUFs, whose turnover/ gross receipts do not exceed 1 Cr. In case of business & Gross 50 lakhs in case of profession in last year. Section 196, however, provides exemption in respect of payments made to Government from application of the provisions of tax deduction at source. Therefore, no tax is required to be deducted at source by State Bank of India from rental payment to the Government.
Some Special Considerations under section 194I:
TDS is applicable under the section 194I on the deposit of rent which is not refundable.
Arrears of Rent received during the current year shall also be considered for the purpose for the purpose of deducting of TDS u/s 194I.
In the case of Advance Rent shall also be subjected to TDS under this section 194I.
Warehouse charges also be subject to be TDS under section 194I.
Due date of TDS deposit and Filing of TDS returns:
The Deductor is liable to deposit TDS with the Government with following dates:
| Particulars | Due date of Deposite |
|---|---|
| April-February | 7th of Next following next Month |
| March month | 30th April |
The Deductor is liable to File TDS Returns with the Government with following dates:
| Quarter | Due Date for Return |
|---|---|
| April to June | 31st of July |
| July to September | 31st of October |
| October to December | 31st of October |
| January to March | 31st of May |
