TDS on Rent: Complete Guide to Section 194I and Calculation

Understanding TDS on Rent

When a property is rented or sublet, the rental income is subject to Tax Deducted at Source (TDS)¹. As per Section 194I of the Income Tax Act, TDS applies if the total rent paid or payable in a financial year exceeds a specified limit¹. Currently, this threshold is ₹2,40,000³. However, as per the Budget 2025^* proposal³, from April 1, 2025, companies will deduct TDS on rent only if monthly payments reach ₹50,000 or more (₹6 lakh annually). This rule applies to individuals and Hindu Undivided Families (HUFs) who are not subject to tax audit under Section 44AB².

Note: Section 44AB of the Income Tax Act mandates that taxpayers must have their accounts audited by a Chartered Accountant if their business turnover exceeds ₹1 crore. The limit has been enhanced to Rs 10 crore if cash transactions do not exceed 5% of the total transaction value. In the case of professional receipts, the audit is mandatory if the total receipts surpass ₹50 lakh in a financial year⁴.

Understanding Section 194I

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Section 194I of the Income Tax Act is connected with TDS on rent. It requires anyone (except individuals and Hindu Undivided Families not covered under tax audit) who pays rent to deduct TDS before making the payment. This applies to rental income from properties, whether for business or personal use.

For the financial year 2024-25, TDS is applicable if the total rent paid exceeds ₹2,40,000 annually. Earlier, this limit was ₹1,80,000 until FY 2018-19. Now, from April 1, 2025, this threshold has been increased to ₹6 lakhs. The deduction must be made when the rent is credited to the payee’s account or paid in cash, cheque, or any other mode—whichever comes first³.

Additionally, individuals as well as HUFs not subject to tax audit must deduct TDS under Section 194IB if they pay ₹50,000 or more in monthly rent¹.

Why Was TDS on Rent Introduced?

The government introduced TDS on rent under Section 194I to ensure fair tax collection and prevent revenue loss. Here’s why this rule was put in place²:

• Prevent Tax Evasion

  Many landlords used to hide or underreport rental income. With TDS, tax is deducted at the source, making it harder to avoid taxes.

• Ensure Regular Tax Collection

  Instead of waiting for landlords to pay tax while filing income tax returns, the government gets tax revenue throughout the year.

• Increase Transparency

  Requiring TDS on rent ensures that rental transactions are recorded, reducing the chances of tax fraud.

• Make Tax Payments Easier

  Since tenants deduct tax before paying rent, landlords have a lower tax burden when filing returns.

• Focus on High-Value Rentals

  TDS applies only if the total rent exceeds ₹2,40,000 (₹6 lakhs from FY 2025-26)^3,* in a year, so small landlords don’t have extra compliance burdens.

What Does ‘Rent’ Mean Under Section 194I

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Under Section 194I, the term ‘rent’ covers payments made for using various types of properties and assets under a lease, sublease, tenancy, or any similar arrangement. This includes:

• Land or
• Buildings (including factory buildings) or
• Land attached to a building (including factory buildings) or
• Machinery or
• Plants or
• Equipment or
• Furniture or
• Fittings

It’s important to note that the ownership of these assets doesn’t affect TDS applicability—subletting is a part of this section too.

If a landlord collects a refundable security deposit from a tenant when leasing out a property, he has to repay the deposit when property is vacated. Such amount type is not considered income and is not subject to TDS. However, if an advance rent payment is made (which is not a refundable deposit), TDS must be deducted. Additionally, if rent is recorded in a ‘suspense account’ or any similar account, it is still subject to a tax deduction.

Conditions for Deducting TDS on Rent

To deduct TDS on rent, the landlord or recipient of the rent must provide their PAN to the payee . If they fail to do so, the tax is deducted at a higher rate of 20% under Section 206AA¹.

Unlike other TDS deductions, no additional cess applies to rent payments1. The applicable tax rates are¹:

• 2% for renting machinery, plant, or equipment
• 10% for renting land, buildings (including factory buildings), furniture, or fittings.

Payments Covered Under Section 194I

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The following payments are covered under the section:

• Rent from Factory Buildings

  If a factory building is rented out, the rent received is usually considered business income for the owner. However, in some cases, it may be treated as rental income. Regardless of how it is classified, TDS must be deducted before making the payment, even if the owner is already paying advance tax on the earnings.

• Service Charges Count as Rent

  Any service charges paid to business centres or similar facilities fall under the definition of rent, regardless of how they are labelled. These payments are also subject to TDS.

• Separate Owners for Building and Furniture

  If different owners rent out a building and its furniture or fixtures, the tenant must deduct TDS separately—one for the building rent and another for the furniture rent—under Section 194I.

• TDS on Rent Paid Quarterly or Annually

  There is no requirement to deduct TDS monthly. If rent is credited or paid on a quarterly or yearly basis, TDS should be deducted at that time instead of monthly.

• Cold Storage Charges

  Payments made for using cold storage facilities (e.g., for milk, ice cream, or vegetables) are considered charges for using a plant rather than rent for a building. As a result, these payments fall under Section 194C (applicable to contractual payments) instead of Section 194I.

• Hall Rent for Associations

  If an association (assessed as an association of persons and not an individual or HUF) rents a hall and the total rent exceeds ₹2,40,000 in a year, TDS must be deducted.

• Payments to Hotels for Seminars and Catering

  If a hotel is booked for a seminar and the charges include food or catering services, TDS under Section 194I does not apply. Instead, the catering portion of the payment is subject to TDS under Section 194C, which deals with payments for contractual work.

Who Needs TDS Deduction Under Section 194I?

TDS on rent under Section 194I applies to specific individuals and entities making rental payments. Businesses, firms, and organisations (excluding individuals and Hindu Undivided Families or HUFs) must deduct TDS before paying rent to a resident¹.

However, if an individual or HUF is subject to a tax audit, they are also required to deduct TDS under this section. This applies when the total rent paid or expected to be paid during the financial year exceeds ₹2,40,000¹. Previously, this threshold was ₹1,80,000 until FY 2018-19³.

Example to Understand TDS on Rent (Section 194I)

Let's take an example to understand how TDS on rent works under Section 194I¹.

XYZ Enterprises rents an office space from Mr. Rakesh, an individual landlord. The company pays ₹30,000 per month as rent. Since the total rent paid in a financial year amounts to ₹3,60,000 (₹30,000 × 12 months), which exceeds the ₹2,40,000 threshold, XYZ Enterprises must deduct TDS at 10% before making payments to Mr Rakesh.

This means:

• The company will deduct 10% of ₹30,000 (i.e., ₹3,000) as TDS every month.
• Instead of paying ₹30,000, XYZ Enterprises will transfer ₹27,000 to Mr. Rakesh and deposit ₹3,000 with the government.

However, from FY 2025-26^*, the TDS deduction will only apply if the monthly rent is ₹50,000 or more. Since XYZ Enterprises is paying only ₹30,000 per month, no TDS will be required under the new rule. This change, as per Budget 2025^*, aims to simplify compliance and reduce the tax burden on those paying lower rent amounts.

When TDS Under Section 194I is Not Applicable

There are certain situations where TDS on rent is not required under Section 194I. These include¹:

1. Rent Below the Threshold Limit:

   If the total rent paid or payable during a financial year does not exceed ₹2,40,000, TDS is not applicable.³ Now this limit has been increased to ₹6 lakhs from FY 25-26^3,* .

2. Rent Paid by Certain Individuals or HUFs:

   If the tenant is an individual or a Hindu Undivided Family (HUF) that is not required to get their accounts audited under tax laws, they do not have to deduct TDS on rent.

3. Film Industry Revenue Sharing:

   When a film distributor and a cinema owner (exhibitor) enter into an agreement, the exhibitor provides a complete package of services rather than just renting out the theatre. Since this is not treated as rent under tax laws, TDS under Section 194I does not apply to such payments¹.

TDS on Advance Rent

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If a tenant pays advance rent to the landlord, TDS must be deducted at the time of payment. However, there are some key points to consider to ensure that TDS is deducted fairly and in line with actual rental income:

1. Advance Rent Covering Multiple Financial Years:

   If the advance rent applies to more than one financial year, TDS must be deducted proportionally for each year.

2. Property Ownership Change:

   If the property is sold or transferred to a new owner, the TDS credit does not automatically pass to them. The original landlord remains responsible for the tax deduction until ownership is legally updated.

3. Cancellation of Rental Agreement:

   If a rental agreement is cancelled after TDS has been deducted from advance rent, the landlord must refund the excess amount to the tenant. Additionally, they must report this cancellation when filing their income tax return (ITR).

4. Issuing a TDS Certificate:

   For non-salary payments like rent, tenants must provide the landlord with a TDS certificate (Form 16A) every quarter, confirming the tax deducted and deposited.

Section 194IB

This section applies to individuals and Hindu Undivided Families (HUFs) who are not required to get their accounts audited under Section 44AB². If such individuals or HUFs pay rent exceeding ₹50,000 per month to a resident, they must deduct TDS at 2% (reduced from 5% from October 1, 2024).²

Key Points to Remember:

²

• Individuals or HUFs paying rent above ₹50,000 per month deduct tax.
• The rate of TDS is 2% (or 20% if PAN is unavailable).
• TDS is deducted when rent is credited (for the last month of the year or tenancy) or when rent is paid (whichever is earlier) ².
• No TAN(Tax Deduction and Collection Account Number) is required for deduction under this section.
• No TDS if the rent is ₹50,000 or less per month.

Section 194IC

This section covers TDS on payments made under Joint Development Agreements (JDAs) ². A Joint Development Agreement is a contract between a landowner and a real estate developer. The landowner provides the land, while the developer undertakes the construction. In return, the landowner may receive a share in the developed property or a monetary consideration.

Key Points to Remember:

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• The developer or payer who makes a payment to the landowner under the JDA deducts tax.
• The rate of TDS is 10% on the payment made to the landowner.
• This is applicable to ensure tax is deducted on payments received by landowners under such agreements.

Deadline for Depositing TDS

The time limit for depositing TDS depends on who is making the payment and when the deduction is made. Here’s a simple breakdown¹:

1. If the payment is made by the Government:

   TDS must be deposited on the same day without needing a challan.

2. If the payment is made by others (non-government entities like businesses or individuals):

   TDS should be deposited by the 7th of the following month in which the deduction was made, using an income tax challan.

3. For payments made in March:

   If TDS is deducted in March, the deposit deadline is April 30 instead of the usual 7-day rule.

4. For rent payments under Section 194IB (for individuals and HUFs not under tax audit):

   (Form 26QC) ², a challan-cum-statement, must be submitted within a tenure of 30 days from the month end in which TDS was deducted.

Penalties for Late TDS Deduction, Payment, and Filing

The Income Tax Act has strict rules regarding the timely deduction, payment, and filing of TDS If there are delays, interest charges and penalties apply. Here’s what you need to know:

• Interest for Late Deduction or Payment of TDS (Section 201(1A)):

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  • If TDS is deducted late:
    1. Interest is charged at 1% per month (or part of a month).
    2. The interest applies from the date TDS was supposed to be deducted until the actual date of deduction.
  • If TDS has been deducted on time but not deposited:
  1. Interest is charged at 1.5% per month (or part of a month).
  2. The interest applies from the date of deduction until the date of deposit with the government.

• Late Filing Fee for TDS Returns (Section 234E):

  ²

  If a person fails to file their TDS return within the deadline:

  • A late fee of ₹200 per day is charged.
  • The total penalty shall never be more than the TDS amount due.
  • ₹200 × 20 days = ₹4,000
  • Since the penalty cannot exceed the TDS amount, the actual penalty is ₹2,500.

  Example:

  XYZ Enterprises was required to file its TDS return for October-December by January 31 but filed it on February 20 (20 days late). Their TDS amount was ₹2,500.

  Penalty Calculation:

• Additional Penalty for Incorrect or Non-Filing of TDS Returns (Section 271H):

  ²

  If a TDS return is:

  • Filed with incorrect details, such as wrong PAN, TDS amount, or challan details,

    Then, the Assessing Officer can impose a penalty between ₹10,000 to ₹1,00,000.

  TDS on Rent Paid to a Non-Resident (NRI)

  When paying rent to a Non-Resident Indian (NRI), a 30% TDS must be deducted, along with applicable surcharge and a 4% cess¹. Unlike rent payments to Indian residents, there is no minimum threshold—TDS must be deducted regardless of the rent amount. However, if the NRI’s total income in India is below the basic exemption limit, they can apply for a nil or lower deduction certificate from the Income Tax Department. This allows them to reduce or eliminate TDS on their rental income¹.

  Conclusion

  Understanding TDS on rent is essential for compliance. Recent budget updates have raised exemption limits and added provisions for high-value rentals. Staying informed on deductions, penalties, and special cases like advance rent can help avoid fines. When in doubt, consulting a tax expert ensures smooth compliance and better tax planning.