Understand Everything TDS On Rent – Section 194-I of Income Tax Act, 1961

If you're a taxpayer with rental income from properties, it's essential to grasp the concept of TDS on rent, as it plays a vital role in your income tax obligations. Whether you're leasing out real estate, buildings, industrial plants, or machinery, understanding the intricacies of TDS on rent can help you manage your tax deductions and reduce your tax liability.

Section 194-I of the Income Tax Act, 1961

In the world of rental income, there are two key players: the Renter (the one leasing the property) and the Tenant (the one renting the property). TDS on rent primarily concerns the Renter, as they receive the rental income, which they must declare in their income tax returns.

Section 194-I of the Income Tax Act mandates the deduction of TDS on rental income. This section imposes a TDS threshold of Rs. 2,40,000 per assessment year. Even individuals and Hindu Undivided Families (HUFs) are subject to TDS on rent they receive, with distinct tax rates and conditions applicable to each category.

Under this section, "rent" encompasses income derived from leasing various types of assets, which may be further sub-leased or subject to separate agreements. These assets include:

• Non-agricultural land
• Buildings and structures
• Furniture and fittings
• Industrial plants
• Machinery
• Equipment
• Industrial factories
• Land surrounding a building or factory

Additionally, TDS on rent applies to advance rent payments. If you receive advance rent for a month or even a year, this income falls under the purview of TDS. However, it's important to note that refundable payments, such as rent deposits, are exempt from TDS. Rent deposits, which are refundable when the lease agreement ends, do not attract taxes. Regardless of the deposit amount, all refundable deposits are tax-exempt.

TDS on Rent Rates

As of Assessment Year (AY) 2021, industrial plants and machinery rentals are subject to a 2% tax rate. For all other types of properties, including land, structures, furniture, and fittings, the tax rate is 10%. However, this 10% tax can be reduced to 5% if the individual or HUF receiving the rent does not require a tax audit and the monthly rent exceeds Rs. 50,000.

The exemption limit for TDS on rent is Rs. 40,000 per year or Rs. 20,000 per month. Taxpayers who file income tax returns can claim refunds for any amount below this limit by including the relevant details in their return.

Specifics of Section 194-I

TDS on rent applies to various scenarios involving property rentals. Different properties and situations are subject to varying exemptions, rates, and regulations. Let's delve into the specifics of TDS on rent for different types of properties and circumstances.

TDS on Rent of Factory Buildings

TDS on rent applies to all factory buildings, as this rental income is a source of revenue for the Renter. Payments conducted through banks automatically attract TDS if the Renter's total rental income falls below the exemption limit. In such cases, the Renter can apply to the bank, certifying that their income remains below the exemption limit. This application is typically sent to the regional Income Tax Officer, ensuring that future rent payments are not subject to TDS deductions at the bank.

In most instances involving factory buildings, a refundable agreement deposit is collected from the tenant. This deposit is fully refundable when the lease agreement concludes, and the tenant vacates the property. Since this deposit does not accrue interest or charges, it is entirely tax-exempt.

TDS on Service Charges

TDS applies to all service charges paid by tenants to Renters. These service charges, related to property maintenance, are non-refundable payments and, therefore, qualify for TDS.

TDS on Rent for Different Entities

In cases where different entities lease a building and its furniture or fittings, TDS is applicable only to the rental income from the building. The rent received for the furniture and fittings inside the building does not require tax deductions.

TDS on Rent for Semi-Annual or Annual Rent Payments

Section 194-I does not specify the interval between rent payments. Thus, whether rent is paid monthly, quarterly, annually, or for a more extended period, it is subject to TDS. Even if the Renter charges the entire rent for two or more years, the full amount is eligible for TDS deduction.

TDS on Rent for Cold Storage Facilities

Rental income from cold storage facilities, categorized as industrial plants due to their refrigeration units, electrical items, and other equipment, is subject to TDS deductions.

TDS on Rent for Halls

All payments received as rent for halls without food accommodations are subject to TDS, regardless of the lease duration, whether for a few hours or several weeks. The limit for such halls is Rs. 2,40,000 per annum.

TDS on Rent for Hotel Halls with Lunch

TDS on rent for halls that offer food and catering services is not applicable under Section 194-I. This exemption exists because only the use of halls and enclosures falls within this section, while food charges are governed by another section of the Income Tax Act.

In Conclusion

Now that you have a comprehensive understanding of when TDS on rent payments is applicable, you can effectively manage your rental income and associated tax obligations. This knowledge empowers you to optimize your tax liability, allowing you to reduce the amount you pay in TDS each year