Rent‘ means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any:-
a) land; or
b) Building (including factory building); or
c) Land appurtenant to a building (including factory building); or
d) Machinery; or
e) Plant; or
f) Equipment; or
g) Furniture; or
whether or not any or all of the above are owned by the payee-Explanation (i) to Sec. 194-I. Sub-letting is also covered.
In case the landlord collects security or advance payment at the time of letting out a building to a tenant on the condition that the deposit will be refunded at the time of vacating the building, such a receipt is not in the nature of income and, therefore, no tax is to be deducted at source u/s 194-I. However, advance rent (not in the nature of refundable security deposit) paid is, subject to tax deduction. Moreover, where any such rent is credited to suspense account‘ or to any other account shall also be liable to deduct tax at source.
Application of Sec. 194-I
The Finance Act, 1994 inserted the Sec. 194-I, regarding deduction of tax from payment of rent. The Government felt that an item of income which needs to be covered within the scope of deduction of income-tax at source is the income by way of rent. In a number of countries also such income is subject to deduction of income-tax at source.
Any person, not being an individual or a H.U.F., who is responsible for paying to a resident any income by way of rent is liable to deduct tax at source as and when aggregate of the amount of such income credited or paid or likely to be credited or paid during financial year exceeds Rs. 1,80,000/-. Individuals or H.U.F.s who were subject to tax audit under Sec. 44AB during the financial year immediately preceding the financial year in which such rent was paid or credited are also liable to deduct tax at source.
Income from letting out of factory building:-
Where a factory building is let out, the rent received generally is income from business in the hands of the lessor or the owner of the factory. Only in a few cases it is income from property in the lessor‘s hands. But such payment also, which is business income in the hands of the lessor and for which he will necessarily be paying advance tax and finally be returning the rental income, will be subject to tax deduction at source. This is an unnecessary burden on both taxpayer and the tax administrator, because collection of tax will take place as TDS from the lessor without much delay.
Rent includes service charges:-
Service charges payable to business centres are covered under the definition of rent, as they cover payments by whatever named called.
TDS requirement where building and furniture, etc., let out by separate persons:-
In case where building is let out by one person, and furniture, fixtures, etc., are let out by another person, then the payee is required to deduct tax under Sec. 194-I only from the rent paid/credited for the hire of building.
TDS requirement where rent not payable on monthly basis:-
Sec. 194-I does not mandate that the tax deduction should be made on month-to-month basis. Therefore, if the crediting of the rent is done on quarterly basis then deduction at source will have to be made on the quarterly basis only. Where the rent is paid on yearly basis deduction also will have to be made once a year on the basis of actual payment or crediting.
Charges regarding cold storage facility:-
In the case of cold storage where milk, ice cream, vegetables, etc., are stored, the payment may be styled as charges for use of plant and not for use of building. Cold storage is a plant.(circular see here)
Hall rent paid by an association for use of it:-
Since the association is assessed as an association of persons and not as an individual or HUF, the obligation of tax deduction will be there, provided payment for the use of hall exceeds Rs. 1,80,000.
Payments to hotels for holding seminars including lunch:-
Where hotels do not charge for use of premises but charge for catering/meal only, then provisions of Sec.194I would not apply. However, Sec.194C would apply for catering part.
No deduction in certain cases:-
Amount payable/paid not exceeding Rs. 1,80,000 during the financial year:-No tax from the amount payable in respect of rent is deductible where the amount of such rent credited or paid or likely to be credited or paid during the financial year to the payee-landlord or lessee does not exceed Rs. 1,80,000.
Deduction is not required under Sec. 194I if the amount is paid or payable by an individual or Hindu Undivided Family. If : (a) the individual/HUF is not to carrying on any business/profession or (b) individual/HUF not liable to tax audit in preceding year Sharing or proceeds of film exhibition between a film distributor and a film exhibitor owning a cinema theatre:-
Representations have been received from various quarters regarding applicability of the provisions of Sec. 194-I of the Income Tax Act to the sharing of the proceeds of film exhibition between film distributor and film exhibitor owning a cinema theatre. The matter has been examined by the Board and the Board is of the view that the provisions of Sec.194-I would not be attracted to such payment because:
the exhibitor does not let out the cinema hall to the distributor.
Generally, the share of the exhibitor is on account of composite services; and
The distributor does not take cinema building on lease or sub-lease or tenancy or under an agreement of similar nature.
Where the payee is the Government at agency:-
Under the provisions of Sec. 196, no tax is required to be deducted at source from any sums payable to the government.
The matter with regard to the statutory authorities and the local authorities referred to, has been examined by the Board. Sec. 190 provides for deduction of income-tax at source as one of the modes of collection of income-tax in respect of an income, notwithstanding that the regular assessment in respect of such an income is to be made in a later assessment year. The income of an authority constituted in India by or under any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, is exempt from income-tax under Sec. 10(20A). Similarly, the income of a local authority which is chargeable under the head ‗Income from house property‘ or ‗Income from other sources‘, is exempt from Income-tax under Sec.10(20). There is no other condition specified in these two clauses of Sec.10 which is necessarily to be satisfied to avail of the income-tax exemption.
There is no requirement to deduct income-tax at source on income by way of ‗rent‘ if the payee is the governmental agency. In the case of the local authorities and the statutory authorities, there will be no requirement to deduct income-tax at source from income by way of rent if the person responsible for paying it is satisfied about his tax-exempt status under clause (20) or (20A) of Sec.10 on the basis of certificate to this effect given by the said authorities.
When tax needs to be deducted at source:-
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.
Credit of rental income in „suspense account‟:
The incidence of tax deduction under Sec. 194-I will arise at mere incidence of crediting to the rental income in the lessee‘s books of account, be it even a suspense account. The source : www.trpscheme.com (As amended by Finance Act, 2013)
Explanation (ii) to sec. 194-I deemed such crediting to be credit of such income to the account of the payee.
Rates of tax deduction:-
1. Rent of plant and machinery 2%
2.Rent of land or building or furniture or fitting 10%
No deduction or deduction at lower rate under Sec. 197:-
On application by payee in Form no. 13, if the Assessing Officer is satisfied that this total income justifies no deduction of tax or deduction at lower rate, he may issue a certificate in Form No. 15AA to that effect directly to the payer.
1. What are the provisions relating to TDS on rent ? From which date same are applicable?
As per the Finance Act, 1994 the provisions of TDS on rent have been introduced w.e.f. 1.6.1994. The salient feature of Sec. 194-I are as under:-
1. The provisions are applicable only in cases where the person making the payment of rent is an individual or HUF who is required to get his accounts audited u/s 44AB in the immediately preceding financial year (w.e.f. 1.6.2002) or any other person responsible for paying to a resident any income by way of rent. Prior to 1.6.2002 no individual or HUF was liable to deduct TDS from rent.
2. The TDS is required to be deducted in case the rent paid or payable to a particular person during a financial year exceeds Rs. 1,80,000 w.e.f.1.7.2010 (upto 30.6.2010 the limit was Rs. 1,20,000).
3. A facility has also been provided to obtain a certificate from the Assessing Officer for deduction of income-tax at a lower rate or for no deduction of income-tax in appropriate cases by making application in From No.13.
4. For the purpose of this section rent means any payment by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of any land or building or factory building together with furniture, fixture, fittings and land appurtenant thereto. It will not be relevant whether the payee is the owner of the building or not?
W.e.f. asst. year 2007-08, the Taxation Laws (Amendment) Act, 2006 have enlarged the scope of rent for the purpose of Sec. 194I, so as to include machinery, plant and equipment, whether rented together with building or separately, irrespective of the fact whether they are owned by the payee or not?
5. The rates of TDS on rent are as under:
Rate upto 30.09.09
Rate w.e.f. 01.10.09
a) Use of any land, building, furniture or fittings
15% (when payee is individual or HUF) 20% in other cases.
10% for all assessees
b) Use of plant, machinery or equipment
10% (from 1.6.07 to 30.9.09) prior to 1.6.07 the rate was same as rent of land and building
2% for all assessees
W.e.f. Financial Year 2009-10, education cess or higher education cess is not required to be deducted at source in case of payment to domestic companies or any person who is resident in India. However, education cess is to be deducted in case the payment is made for salary.
6. W.e.f. 1.4.2010, where the deductee fails to furnish its PAN or furnishes an incorrect PAN to the deductor, the deductor will be required to deduct tax at higher of the following rates: source : www.trpscheme.com (As amended by Finance Act, 2013)
a. At the rate specified under the Income Tax Act; or
b. At the rates in force; or
c. At the rate of 20%.
2. Will tax be deducted from service tax included in rent?
Service tax paid by the tenant does not partake the nature of income of landlord. The landlord only acts as a collecting agency for Government for collection of service tax. Therefore tax deduction at source (TDS) under Sec. 194-I of the Income-tax Act would be required to be made on the amount of rent paid/payable without including service tax.
Further No TDS on service Tax :As per circular 01/2014 dated 13.01.2014 TDS is not applicable on service tax part if service tax is shown separately.
3. What does the „rent‟ mean for the purpose of Sec. 194-I?
‗Rent‘ means any payment, by whatever named called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together)any,-
a. Land; or
b. Building (including factory building); or
c. Land appurtenant to a building (including factory building); or
d. Machinery; or
e. Plant; or
f. Equipment; or
g. Furniture; or
whether or not any or all of the above are owned by the payee.
In other words, besides tax on land and building, tax shall now also be deductible for leasing out or hiring of machinery, plant, equipment, furniture and fittings whether given separately or together. Further, it shall be deductible whether or not any or all of the above are owned by the payee?
4. What are the circumstances under which no tax is to be deducted at source on rent as defined under Sec. 194-I ?
No tax is required to be deducted at source under this section if the following conditions are satisfied:
A) Where aggregate amount of rent does not exceed Rs. 180,000:- No tax is to be deducted if the aggregate amount of rent in the previous year does not exceed Rs. 180,000.
B) Rent paid to the Government and certain entities:- No tax at source needs to be deducted from payments by way of rent made to Government and entities whose income is exempt from income-tax under clauses (20) and (20A) of Sec.10 of the Income tax Act.
C) Certain entities required to file return under Sec. 139(4A) or 139(4C):- As per rule 28AB certain entities who are required to file return of income under Sec. 139(4A) or 139(4C) may apply in Form No. 13 for no deduction of tax at source provided certain conditions are satisfied.
D) Certain entities whose income is unconditionally exempt under Sec. 10:- In case of certain entities whose income is unconditionally exempt under Sec. 10 and who source : www.trpscheme.com (As amended by Finance Act, 2013)
are statutorily not required to file return under Sec. 139 there will be no requirement for TDS, since their income is any way exempt.
5. Where is the limit of Rs. 180,000 for non-deduction of tax at source applicable in case of each co-owner?
Where the share of each co-owner in the property is definite and ascertainable, the limit of Rs. 180,000 will be applicable to each co-owner separately.
6. What are the provisions regarding low deduction or no deduction of tax on rent under Sec. 194-I ?
Any person to whom rent is payable may make an application in Form No.13 to the Assessing Officer and obtain such certificate from him, as may be appropriate, authorizing the payer not to deduct tax or to deduct tax at lower rate.
As per Sec. 206AA(4), w.e.f. 1-4-2010, no certificate under Sec. 197 for deduction of tax at Nil rate or lower rate shall be granted, unless the application made under that section contains the Permanent Account Number of the applicant.
7. What is method of taking credit of TDS on advance rent ?
On advance rent pertaining to more than one financial year, the tax is deducted at source in the year of receipt of advance rent. The credit for TDS shall be allowed to the assessee in the same proportion in which such income from rent is offered for taxation for different assessment years, based on the single TDS certificate furnished for the entire advance rent.
However, if the rent agreement gets terminated in a subsequent year or rented property is transferred and the balance advance is refunded to the transferee or the tenant, as the case may be, the credit for entire balance of TDS which has not been given credit, shall be allowed in the year of termination.