TDS on rent: Section 194I, Meaning, and Important Pointers to Know

Understanding the various rules regarding different taxes that we pay can be time-consuming and confusing for anyone. With every new amendment, the tax regulations change and this holds true even with certain taxes that were implemented to deduct them directly from the source of income. These taxes are called TDS (Tax Deducted at Source) and one of the major sub-parts of this tax is the TDS on rent. Not only on rent but tax is deducted at source while selling the property as TDS on sale of property. Collected at the direct source from where the person’s income is generated, the TDS can be levied on different types of income, and in this blog; we shall understand the key aspects of the tax to clarify any doubts that the reader may have about TDS deduction on rent. Keep in mind that the rate of TDS remains set throughout the fiscal year i.e. from 1st April to 30th March. So, if any changes were made to this, they would be announced in the annual budget.

What is TDS?

The full form of TDS is Tax Deducted at the Source (of Income) and it was introduced to curb tax evaders in specific instances. If we go by the official definition of TDS, it says that the taxpayer is liable to remit the tax to the account of the central government by immediately deducting the tax at the time source. The rule also states that the person whose income tax has been deducted right at the source is entitled by law to receive a credit of the amount as per the TDS certificate or Form 26AS. Now that the true meaning of TDS is clear, let us take a look at the important aspects of TDS on rent payments.

What is the TDS on Rent of Property?

The word ‘rent’ in terms of a monetary transaction is any payment that has taken place between two or more parties under any lease, or an agreement to use any land, apartment, building, equipment, furniture, machinery, etc by paying the owner the stipulated amount. The Finance Act, 1994 added to Sec. 194-I means that the Government felt the need to include TDS on house rent and this has been common practice for many countries.

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What is HUF?

The abbreviation HUF stands for Hindu Undivided Family. A Hindu undivided family, or HUF, is a family that includes all members descendants from a single ancestor, as well as their spouses and unmarried daughters, according to Hindu law. A HUF is a status symbol that is neither a product of law nor a contract. When two people marry and create a family, a HUF is formed automatically. HUFs can be formed by Hindus, Sikhs, Buddhists, Jains, and others.

TDS Rent Deductions by Individuals and HUFs

The government has enlarged the extent of the TDS applicable on rent in order to bring more individuals into the tax net. This will apply to all individuals and HUFs not covered by the present provisions. If the amount of rent paid for each month or portion of a month is more than Rs 50,000, each individual and HUF will be required to deduct tax at the source at a rate of 5%.

Individuals or HUFs who are not occupying a property for business purposes are required to deduct 5% of the rent if the rent paid exceeds Rs.50,000 per month. In the case of companies, associations, firms or trusts that are occupying a property for the purpose of conducting business and their accounts have been audited, it is necessary to deduct 10% of the rent as TDS. This is contingent upon the criteria that the aggregate rent already paid or to be paid for the year is more than Rs.2,40,000. 

Only in the last month of the year, or in the last month of the tenancy if the unit is vacated during the year, is the payer required to deduct tax. However, if the rent is paid in advance, you must deduct tax at the time of payment.

As a result of the new laws, even those who are paid or retired and do not engage in any company or profession but pay rent exceeding Rs 50,000 per month will be required to deduct tax at source. This will put those who earn rent by renting out their property to those who are not in the business or profession into the tax net.

This provision of deducting taxes at the source is not limited to commercial or residential properties. One can also deduct taxes on hotel room rentals, renting of community halls, wedding venues and other such buildings regardless of the duration of renting. This is applicable if the cost of renting such areas exceeds Rs.50,000.

Important Things to Know About TDS on Rent for Property

As with any regulations concerning taxation in India, there have been plenty of changes to the rules with the recent major amendments being in the Budget 2017 and Budget 2019 which removed the earlier rule that required only specified categories of businesses and professionals to pay TDS. In 2022-2023, the Government has clearly stated which professionals need to pay TDS on rental income and they are segregated in different categories such as:

A. TDS rate on rent for Salaried Professionals & Businesses (Section 44AB)

During the financial year if the rent paid/payable exceeds Rs. 2, 40, 000, then the TDS on rent paid by a person is capped at 10% as stated in Section 194I. Before the amendment, this value was capped at Rs. 1, 80, 000 but with the financial year 2019-20, the TDS on rent limit was increased to 2.4 lakhs/per annum. Remember, this applies to businesses and professionals who are required by law to get audited by a qualified Chartered Accountant (CA) under section 44AB only. Those that are not required to get audited do not have not to get 10% deducted TDS on rental income. In the case of a co-owner, all the parties have the same limit of Rs. 2.4 lakhs. The only exemption for the audit in this category is if the payment is made by a person or Hindu United Family if the turnover of the business is less than Rs. 5, 000, 000 to Rs. 1 cr.

B. Salaried Professionals not falling in Category “A” as stated above

Any people who do not fall in the A category that we have mentioned were earlier exempted from TDS on rent but from June 2017 onwards, any tenant excluded from the A category was required to deduct TDS on rent if the amount exceeded Rs. 50,000 p.m.

C. TDS on rent limit for any taxpayer not falling under the above two categories is capped at 5% of the total rent paid/payable. 

Who is Liable to Deduct TDS?

Now that the main categories of the TDS on rent limit are clear. It is very simple to understand which professionals and businesses are liable for TDS on rental income. So, anyone who is not an individual or HUF and falls under the category A and B is liable for TDS on rent payments.

In the case of a commercial factory building being let out, the rent receivable is considered a part of the income from the business itself that the owner is getting and thus even the lessor (owner) will be required to pay TDS on rent.

If you are wondering if it makes a difference that you are paying rent monthly then rest assured that under Section 194-I the TDS on rent payment can be deducted quarterly and similarly, the tax will be deducted at source once a year if the payment is done yearly.

The term ‘rent’ by law also covers any service changes that are payable to the business/commercial centres and thus this amount is also considered as rent despite it being an extra part of the agreed amount and will be considered while deducted TDS rate on rent.

How is TDS on Rent Calculated?

If the persons or businesses are covered under the provision, and are residing in India, the deduction of TDS on rent payment will happen in the following ways:

• The TDS is 2% for rent paid for plants, equipment, or machines.
• The TDS on rent limit is 10% for rent payable for land, building, furniture, business centres, fittings, etc.
• For TDS on rent paid by an individual or Hindu United Family that is under the tax, the audit bracket will be liable for a 5% TDS on rent.

When is TDS on Rental Income Deducted?

As stated in the tax law, the rent payer must deduct the amount of tax at the time the money is being credited in the accounting book (even if payment is done at a later date). If the rent being paid is done in advance (for a year or even more than a year) the deduction has to be done at the time of payment and one can easily obtain a Tax deduction account number (TAN number) and depot the tax through a challan.

TDS on Rent Paid to NRI

As you must have noticed, whenever we were talking about TDS on the rent section, we were specifically talking about owners residing in India. That’s because the tax laws such as the TDS tax on rent are different for Non-resident Indians (NRIs). As per Section 195 of the IT Act, the tenant is expected to deduct 30% of rent paid to a landlord who is an NRI but is located outside the country. As stated above, it is necessary to have a TAN and if the TDS on rent paid to NRI is not done on time, the owner may have to pay a hefty penalty

Rent Paid to NRIs: Is TDS to be Deducted?

In case of rent paid to NRI individuals for properties present within India, the tenants are required to have a TAN (Tax Deduction and Collection Account Number). The TAN is a ten-digit alphanumeric code assigned to persons who are required to deduct TDS on the rent. 

The renter must deduct TDS at a rate of 30% on rent paid for NRI properties situated in India, according to Section 195 of the Income Tax Act.

If the renter fails to deduct TDS from the rent paid to the NRI, the payer will be subject to the applicable penalties.

How to Pay TDS on Rent?

Paying the TDS on rent is very easy thanks to the digitisation of the entire process! All you have to do is log on to www.tin-NSDL.com and find the link to download Form 26QC. Once you have filled in all the details such as the financial transaction, landlord’s financial account details, etc, you must also note down the details of the type of accommodation. Another aspect of the TDS filing that should be known is that if the landlord is the co-owner of the property, then the details of all the owners must be filled diligently in the form!

What is TAN? Is TAN Mandatory for Deducting TDS on Rent?

TAN stands for Tax Deduction and Collection Account Number and is a 10-digit alphanumeric number. All individuals who are involved in deducting or collecting the tax must receive the number.

The Income Tax (IT) Department assigns the alphanumeric number under Section 203A of the Income Tax Act, 1961. All TDS returns must include it as a mandatory item.

Individuals must have a TAN since TIN facilitation centres will not accept tax deducted at source (TDS) or tax collected at source (TCS) returns without it. If the TAN is not quoted, banks will not accept the challans for TDS or TCS payments.

Failure to apply for a TAN or not stating the 10-digit alphanumeric number in certain documents such as e-TDS/e-TCS returns, TDS/TCS returns, TDS/TCS payment challans and TDS/TCS certificates can result in an Rs.10,000 penalty.

Forms  for TDS Payment on Rent

Log on to tin-nsdl.com to pay TDS on your rent. The link to fill out Form 26QC can be found on the website under the “Services” menu. Fill in all of your personal information, as well as the information about your landlord and the financial transaction. If you're sharing a room, you'll need to provide the information of the co-tenant as well. Similarly, if your landlord co-owns the property with another person, that person's information must be included in the form as well.

Understanding all aspects of TDS on rent is critical if you are a landlord or are thinking of leasing your property. You can post your property ad for free on NoBroker and find the right tenants. NoBroker is the best place for property owners and seekers in India. 

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