TDS on Rent: Explore Section 194I, Applicability, Limit, Rate.
Tax Deducted at Source (TDS) is a crucial compliance mechanism under the Income Tax Act, 1961. Section 194I specifically deals with the deduction of TDS on rent payments. In this blog, we will explore the provisions, applicability, limits, and rates under Section 194I, along with a real-life case study to illustrate the implications of not deducting TDS on rent.
Applicability and Rates under Section 194I
Section 194I mandates the deduction of TDS on rent paid to a resident. Here, “rent” includes any payment under a lease, sub-lease, tenancy, or any other agreement for the use of land, building, machinery, plant, equipment, furniture, or fittings.
Rates of TDS
- 2% for the use of plant, machinery, or equipment.
- 10% for the use of land, building (including factory building), or furniture and fittings.
Threshold Limit
No TDS is required if the aggregate rent paid or credited does not exceed ₹2,40,000 in a financial year.
Time of Deduction
TDS must be deducted at the earlier of:
- The time of credit of rent to the payee’s account, or
- The time of payment of rent in cash, cheque, draft, or any other mode.
Special Cases
- Service Tax/GST Component: TDS is to be deducted on the amount excluding GST.
- Lump Sum Lease Premium: One-time upfront lease charges for long-term leasehold rights are not considered rent and thus, not subject to TDS under Section 194I.
Real-Life Case Study: ABC Ltd. and Mr. J
Scenario
ABC Ltd. took on sub-lease a building from Mr. J, an individual, from 1st September 2023, at a rent of ₹ 25,000 per month. Additionally, ABC Ltd. hired machinery from Mr. J starting 1st October 2023, at hire charges of ₹ 15,000 per month. Two separate agreements were entered for the sub-lease and hire. The total rent for the building and hire charges for the machinery for the financial year 2023-24 were ₹ 1,75,000 and ₹ 90,000 respectively.
Obligation to Deduct TDS
Since the aggregate rent and hire charges amount to ₹2,65,000 (₹1,75,000 + ₹90,000), which exceeds the threshold of ₹2,40,000, ABC Ltd. is obligated to deduct TDS as follows:
- 10% on ₹1,75,000 (rent for building) = ₹17,500
- 2% on ₹90,000 (hire charges for machinery) = ₹1,800
Calculation Summary
| Payment Type | Amount (₹) | Rate of TDS | TDS Amount (₹) |
| Rent for Building | 1,75,000 | 10% | 17,500 |
| Hire Charges for Machinery | 90,000 | 2% | 1,800 |
| Total | 2,65,000 | 19,300 |
ABC Ltd. must deduct a total TDS of ₹19,300 for the financial year 2023-24.
Consequences of Non-Deduction of TDS
Failure to deduct TDS can lead to severe consequences, including:
- Disallowance of Expense: 30% of the expense on which TDS was not deducted will be disallowed as per Section 40(a)(ia).
- Interest: Interest will be levied on the amount of TDS not deducted.
- Penalties: Penalties may be imposed under various sections of the Income Tax Act.
Example of Non-Deduction Consequence
If ABC Ltd. had failed to deduct TDS on the rent and hire charges, the consequences would include:
- Disallowance of ₹79,500 (30% of ₹2,65,000) as an expense.
- Interest and penalties as per the applicable provisions.
Conclusion
Understanding the applicability and compliance requirements of Section 194I is crucial for businesses to avoid disallowances and penalties. Properly deducting TDS on rent payments ensures compliance and financial accuracy. Always consult with a tax professional to navigate the complexities of TDS and other tax obligations.
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