Section 194I - TDS on Rent, Calculate TDS on Rent

Introduction

Section 194I of the Income Tax Act applies to Tax Deducted at Source (TDS) on rent paid by a person to a landlord or property owner. This section requires the tenant (payer) to deduct tax before making rent payments if the payment exceeds a specified limit. The TDS amount is then deposited with the Income Tax Department. This ensures that the government receives tax on rental income, even if the landlord doesn’t directly file taxes. For Financial Year 2025-26, understanding the TDS provisions on rent and their implications is essential for tenants and landlords. In this guide, we will explain how to calculate TDS, rates, exemptions, and the penalties for non-compliance.

What is TDS on Rent?

TDS on Rent is the amount that a tenant must deduct from the rent they pay to the landlord and deposit it with the Income Tax Department. The concept of TDS ensures that taxes on rental income are paid directly by the tenant on behalf of the landlord.

For example, if you have to pay ₹1,00,000 as rent, and the TDS rate is 10%, you will deduct ₹10,000 and pay only ₹90,000 to the landlord. The ₹10,000 is the tax you will deposit in the government’s account. When the landlord files their yearly tax return, they will get a "credit" for this ₹10,000, meaning they have already paid this much tax.

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Budget 2025: New TDS Provisions for Section 194I

The government often makes changes to the tax rules in the yearly budget. For the Financial Year 2025-26, there is an important update for Section 194I, which is mainly for companies and entities, not for all individuals.

Previously, TDS was applicable if the total rent paid in a year was more than ₹2,40,000. The Budget 2025 has increased this limit to ₹6,00,000 per year, or if the monthly rent is more than ₹50,000.

This means:

1. If you are a company or a person who has to get their accounts audited (checked by an accountant): You only need to deduct TDS if the rent you pay to a person is more than ₹50,000 in any month. This is a very helpful change for small businesses, as they won't have to deduct TDS unless their rent is very high.
2. How to Calculate: If the monthly rent is ₹60,000, which is more than ₹50,000, you must deduct TDS on the whole ₹60,000, not just the amount above ₹50,000.

Objective of TDS u/s 194I

The objective of Section 194I is to:

1. Ensure Tax Collection at Source: It ensures that tax on rental income is collected even if the landlord does not file taxes.
2. Prevent Tax Evasion: By deducting TDS at the point of payment, it prevents landlords from evading tax on rental income.
3. Promote Tax Compliance: It encourages tenants to ensure regular tax payments on behalf of landlords and ensures compliance with tax laws.
4. Streamline Government Revenue: By having TDS deducted at the source, the government receives timely tax payments without waiting for annual returns.

Importance of Section 194I

Section 194I is crucial for maintaining transparency in rental transactions and ensuring that tax is paid on rental income. Key benefits include:

1. Saves Time for Landlords: Ensures that landlords do not need to separately file their rental income taxes, as it’s deducted at source.
2. Simplifies Tax Filing: By deducting TDS, tenants save landlords the effort of tracking their tax liabilities.
3. Promotes Tax Compliance: Makes tax collection more efficient and avoids tax evasion by directly collecting taxes from tenants.
4. Boosts Government Revenue: Ensures the timely collection of taxes on rental income for both residential and commercial properties.

Who Has to Deduct TDS Under Section 194I?

The rule of Section 194I mainly applies to companies and other large entities like Partnership Firms, Associations of Persons (AOP), etc.

1. Any person other than an Individual or a Hindu Undivided Family (HUF): This means all companies, firms, LLPs, trusts, and other organizations must follow this rule.
2. Individuals and HUFs who have a business or profession that requires a Tax Audit: A tax audit is a detailed check of accounts required if the total sales/turnover of the business is more than ₹1 Crore or if the gross receipts from a profession are more than ₹50 Lakh in the previous financial year. If an individual or HUF falls into this category, they also must deduct TDS under Section 194I.

The Golden Rule for FY 2025-26: TDS must be deducted only if the total rent paid (or credited) to the landlord is more than ₹50,000 for a month or part of a month.

Rate of TDS Under Section 194I

For the Financial Year 2025-26, the TDS rates under Section 194I are:

What is being Rented

TDS Rate (Percentage)

Plant, Machinery, or Equipment

2%

Land, Building (including a factory building or land attached to a building), Furniture, or Fittings

10%

Example:

• If a company pays ₹60,000 a month for an office (a building) and the landlord provides their PAN card, the company will deduct 10% of ₹60,000, which is ₹6,000, and pay ₹54,000 to the landlord.
• If a company pays ₹60,000 a month for heavy-duty machinery, they will deduct 2% of ₹60,000, which is ₹1,200, and pay ₹58,800 to the owner of the machinery.

Important Note: If the landlord does not provide their PAN (Permanent Account Number), the TDS rate will be much higher, which is 20% on the rent.

Payments Covered Under Section 194I

Covered Payments (Where TDS applies)

Generally Not Covered/Exempted Payments

Rent for Land (like a plot of land)

Refundable Security Deposit (as it is not income)

Rent for a Building (Office, Factory, Residential House)

Rent paid to the Government or a local authority

Rent for Machinery, Plant, or Equipment (like a generator, computer, or construction tools)

Sharing of profits from film exhibition between a distributor and an exhibitor

Rent for Furniture or Fittings (like office chairs, ACs, etc.)

Payments for food/catering services in a hotel (TDS applies under a different section)

Advance Rent (payment for rent for future months)

Any payment where the total annual rent is ₹6,00,000 or less (for non-individuals) or ₹50,000 per month or less.

Section 194I – Exemption and Deduction at Lower Rate

Exemption from TDS

1. Low Rent Amount: For a non-individual or an individual/HUF subject to tax audit, if the total amount of rent paid or to be paid to the landlord in the entire Financial Year 2025-26 is ₹6,00,000 or less (which is equivalent to ₹50,000 per month or less).
2. Payment to Government: If the rent is paid to the Government, a local authority, or any statutory authority (like certain government bodies), no TDS needs to be deducted.
3. Security Deposit: If you pay a refundable security deposit to the landlord, it is not considered income, and no TDS is required on this deposit.
4. Specific Cases: Certain payments to Real Estate Investment Trusts (REITs) are also exempt.

Deduction at a Lower Rate

The landlord can apply to the Income Tax Department (using Form 13) to get a certificate that allows the person paying the rent (the tenant) to deduct tax at a lower rate, or even a "NIL" rate (zero tax). The tenant must have a copy of this certificate to legally deduct the tax at the reduced rate mentioned in the certificate.

Tax Deducted at Source on Advance Rent

A tenant pays a large amount of rent in advance, maybe for six months or a full year, at the beginning of the agreement. The question is: Do you deduct TDS on this full advance amount immediately?

Yes, TDS must be deducted from the advance rent.

The rule says that TDS should be deducted at the time of:

1. Credit of the income to the landlord's account, or
2. Payment of the rent in cash or by cheque, whichever happens earlier.

Since advance rent is a payment of income to the landlord, you must deduct the TDS at the time of paying that advance.

Example:

• A company rents an office for ₹60,000 per month.
• On April 1, 2025, they pay a full year's rent of ₹7,20,000 in advance.
• Since the total rent is more than the ₹50,000 monthly limit, the company must deduct TDS on the full ₹7,20,000.
• TDS at 10% would be ₹72,000. The company will pay ₹6,48,000 to the landlord and deposit ₹72,000 as TDS with the government.

The landlord will then claim the ₹72,000 as a tax credit over the entire year in their tax return.

TDS on Rent by Individuals

Rule

Details

Applicability

Only if the monthly rent paid to a resident landlord is more than ₹50,000.

TDS Rate

5% of the total annual rent.

When to Deduct

You only have to deduct the TDS once in the year: in the last month of the financial year (March), or in the last month of the tenancy if you move out earlier.

TAN Required?

No special Tax Deduction Account Number (TAN) is required. You can use your PAN card.

Form to Deposit

The tax is deposited using a special online Form called 26QC.

TDS on Rent Paid to NRI

TDS rate for rent paid to Non-Resident Indians (NRIs) is 20% under Section 194I. This ensures the government collects taxes on rental income even when the landlord is outside India.

Implications of Not Paying TDS under Section 194I of the Income Tax Act

Failure to deduct or deposit TDS as required can lead to:

1. Interest under Section 201 and Section 234A.
2. Penalties for non-compliance or incorrect TDS deductions.
3. Additional tax liability if TDS is not deposited with the government.

What is the Time Limit for Depositing TDS?

Period of Deduction

Due Date for Deposit

TDS deducted in any month (April to February)

7th day of the next month

(For example: TDS deducted on rent in May 2025 must be deposited by June 7, 2025.)

TDS deducted in the last month of the year (March)

30th April

For Government Deductors: If the person deducting the tax is a government office, they must deposit the TDS on the same day the rent is paid, without using a challan.

For Individuals/HUFs under Section 194IB: If you are a simple individual/HUF paying more than ₹50,000 rent, the TDS is deducted once a year in March and must be deposited using Form 26QC within 30 days from the end of the month in which the tax was deducted (i.e., by April 30).

Penalties for Delayed TDS Payment and Filing

1. Interest: Interest at 1.5% per month is levied if TDS is not paid on time.
2. Penalty: If TDS is not filed, penalties can go up to ₹1,000 per day under Section 234E.

How to Make TDS Payment Online?

1. Visit the TDS Portal: Go to www.tdscpc.gov.in.
2. Select TDS Payment Option: Choose the appropriate challan type.
3. Fill Details: Enter TAN number, payment type, and amount.
4. Make Payment: Complete payment through Net Banking or Debit/Credit Card.
5. Download Receipt: After payment, download the Challan receipt.

Conclusion

Section 194I ensures that tax on rent payments is deducted at source, promoting transparency and compliance in rental transactions. For FY 2025-26, understanding TDS obligations under this section helps both landlords and tenants ensure proper tax filings and avoid penalties. By following the prescribed rules and filing on time, businesses and individuals can enjoy smooth and efficient tax compliance.