Tax Deducted at Source (TDS) is a mechanism in India where a person (deductor) making specific payments is liable to deduct tax at source and deposit it to the government on behalf of the recipient (deductee). This applies to various income streams, including rental income. This article delves into TDS on rent, explaining Section 194I of the Income Tax Act, 1961, and its implications for both tenants and landlords.
Applicability of TDS on Rent (Section 194I)
Section 194I mandates tenants (deductors) to deduct TDS on rent payments exceeding a specific threshold to resident landlords (deductees). This is to ensure that the landlord pays their fair share of income tax on the rental income received.
Threshold for TDS on Rent
As of the 2019-2020 financial year, the threshold for TDS on rent under Section 194I is Rs. 2,40,000 per annum. This means, if the total rent payable or paid during the financial year surpasses Rs. 2.4 lakh, the tenant is obligated to deduct TDS at source.
Who is Liable to Deduct TDS on Rent?
- Individuals/Hindu Undivided Families (HUFs) under Audit: These entities are exempt from deducting TDS on rent under Section 194I if they are liable for tax audit under Section 44AB of the Income Tax Act.
- Companies, Partnerships, Firms, Local Authorities, etc.: These entities are liable to deduct TDS on rent exceeding Rs. 2.4 lakh per annum irrespective of their tax audit status.
TDS Rate on Rent
The rate of TDS deduction on rent depends on the nature of the rented property:
- Land or Building (194 I(a)): 10%
- Plant or Machinery (194 I(b): 2%
- Furniture or Fittings (194 I(a): 10%
Example 1: TDS on Rent for a Flat
Let’s assume Mr. X (tenant) pays a monthly rent of Rs. 25,000 for a residential flat to Mrs. Y (landlord). The annual rent amounts to Rs. 25,000 x 12 = Rs. 3,00,000.
Since the annual rent exceeds the threshold of Rs. 2.4 lakh, Mr. X (tenant) is liable to deduct TDS on rent at 10% (applicable rate for land or building).
Calculation of TDS:
TDS per month = Rs. 25,000 (monthly rent) x 10% (TDS rate) = Rs. 2,500
Net Rent Payable to Landlord:
Rs. 25,000 (monthly rent) – Rs. 2,500 (TDS) = Rs. 22,500
Example 2: TDS on Rent for Machinery
Consider ABC Ltd. (tenant) leasing a machine from XYZ Company (landlord) for a monthly rent of Rs. 10,000. The annual rent is Rs. 10,000 x 12 = Rs. 1,20,000.
Though the annual rent doesn’t reach the threshold of Rs. 2.4 lakh, TDS is still applicable in this case because the rented property is machinery. The TDS rate for machinery is 2%.
Calculation of TDS:
TDS per month = Rs. 10,000 (monthly rent) x 2% (TDS rate) = Rs. 200
Net Rent Payable to Landlord:
Rs. 10,000 (monthly rent) – Rs. 200 (TDS) = Rs. 9,800
Form 16 and TDS Certificate
The tenant who deducts TDS is responsible for issuing Form 16 to the landlord. Form 16 is a certificate that reflects the details of the TDS deducted, including the amount, challan date, and challan serial number. The tenant should issue Form 16 within 15 days from the end of the quarter in which the TDS was paid or deposited to government.
Key Points to Remember
- TDS is deducted at the time of making the rent payment (monthly, quarterly, or annually).
- The tenant needs to obtain the landlord’s PAN (Permanent Account Number) before deducting TDS. If the PAN is unavailable, TDS is deducted at a higher rate of 20%.
- The tenant is responsible for depositing the deducted TDS to the government challan within seven days of deducting it. They can do this online or at designated banks.
- The landlord receives a Form 16A from the tenant, reflecting the TDS deducted and deposited. This form helps the landlord claim the deducted TDS while filing their income tax return.
Consequences of Non-Compliance
- Tenant: If the tenant fails to deduct TDS or deposits it late, they may face a penalty of interest at 1.5% per month on Taxable Values.