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July 19, 2020

Know all about TDS on Rent as per section 194I of Income Tax

Know all about TDS on Rent as per section 194I of Income Tax

Tax deduction at source is a means of collecting tax on income, dividends or asset sales, by requiring the payer to deduct tax due before paying the balance to the payee. In India, under the Indian Income Tax Act of 1961, income tax must be deducted at source as per the provisions of the Income Tax Act, 1961. In this article we will discuss Tax deducted at source on rent paid. Section 194I deals with the scheme of deduction of tax at source on rent paid. The Finance Act, 1994 inserted the Section 194I, regarding deduction of tax from rent.

When does section 194I TDS on rent payment applies?

Any person who is responsible for paying to a resident any income by way of rent shall deduct income tax at the time of payment of rent.

However, an individual or HUF whose total sales, gross receipts or turnover from the business or profession carried on by him do not exceed the monetary limits of Rs. 1 crore and Rs. 50 lakhs, respectively, specified under section 44AB during the immediately preceding financial year is not liable to deduct tax at source.

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Further, no deduction shall be made under this section from rent credited or paid to a business trust, being a REIT, in respect of any real estate asset owned directly by it.

What do you mean by rent under section 194I?

“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

h. fittings,

Whether or not any or all of the above are owned by the payee.

What are the manner and rate of deduction of TDS under section 194I?

A. Manner of deduction of TDS:

This deduction is to be made at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of cheque or draft or by any other mode, whichever is earlier.

Where any such income is credited to any account, whether called “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section will apply accordingly.

No deduction need be made where the amount of such income or the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year to the account of the payee does not exceed Rs. 2, 40, 000.

B. Rate of TDS:

Any person who is responsible for paying to a resident any income by way of rent shall deduct income tax at the rate of:

i. 2% in respect of rent for plant, machinery or equipment in case the payment is made on or before 14th May 2020. Where, rent is paid after 14th May 2020 than TDS is to be deducted at the rate of 1.5%;

ii. 10% in respect of other rental payments (i.e., rent for use of any land or building, including factory building, or land appurtenant to a building, including factory, building, or furniture or fixtures)on or before 14th May 2020. Where, rent is paid after 14th May 2020 than TDS is to be deducted at the rate of 7.5%. The reduced rate is applicable only for the period from 14th May 2020 to 31st March 2021.

For more information on Change in TDS rates for FY 2020-21 Click here

Case laws related to TDS on Rent:

1. Are landing and parking charges paid by an airline company to Airports Authority of India in the nature of rent to attract tax deduction at source under section 194-I? (Japan Airlines Co. Ltd. v. CIT).

In the above case the issue under consideration before the Supreme Court is whether the charges fixed by the Airport Authority of India (AAI) for landing and parking facility for the aircraft are for the “use of the land” by the airline company

The Supreme Court observed that the charges which are fixed by the AAI for landing and take-off services as well as for parking of aircrafts are not for the “use of the land”. These charges are for services and facilities offered in connection with the aircraft operation at the airport which include providing of air traffic services, ground safety services, aeronautical communication facilities, installation and maintenance of navigational aids and meteorological services at the airport.

The Supreme Court was of the considered view that the Delhi High Court did not correctly appreciate the nature of charges that are paid by the airlines as landing and parking charges, in the sense, it did not appreciate that such charges were not, in substance, for use of land but for various other facilities extended by the Airports Authority of India to the airlines.

2. Is payment  made  for use of  passive  infrastructure facility such  as  mobile towers subject to tax deduction under section 194C or section 194-I? Indus Towers Ltd v. CIT (2014)

In the above case the issue under consideration before the High Court is whether payment  made  for use of  passive  infrastructure facility such  as  mobile towers subject to tax deduction under section 194C or section 194-I?

The High Court held that the submission of the assessee that the transaction is not “renting” is incorrect. Also, the Revenue’s contention that the transaction is primarily “renting of land” is also incorrect. The underlying object of the arrangement was the use of machinery, plant or equipment i.e., the passive infrastructure and it is incidental that it was necessary to house the equipment in some premises. It directed that tax deduction be made at 2% as per section 194-I(a), the rate applicable for payment made for use of plant and machinery.

Understanding with examples:

ABC Ltd. took on sub-lease a building from J, an individual, with effect from 1.9.2020 on a rent of Rs. 25,000 per month. It also took on hire machinery from J with effect from 1.10.2020 on hire charges of Rs. 15,000 per month. ABC Ltd. entered into two separate agreements with J for sub- lease of building and hiring of machinery. The rent of building and hire charges of machinery for the financial year 2020-21 were Rs. 1, 75, 000 and Rs. 90,000, respectively, which were credited by ABC Ltd. to the account of J in its books of account on 31.3.2021.

As per section 194-I dealing with deduction of tax at source from payment of rent, the rate of TDS applicable is 1.5% for machinery hire charges and 7.5% for building lease rent. The rates are applicable if payment is made after 14th May 2020. The scope of the section includes within its ambit, rent for machinery, plant and equipment. Tax is required to be deducted at source from payment of rent, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of building and machinery, irrespective of whether such assets are owned or not by the payee.

The limit of Rs. 2,40,000 for tax deduction at source will apply to the aggregate rent of all the assets. Even if two separate agreements are entered into, one for sub-lease of building and another for hiring of machinery, rent and hire charges under the two agreements have to be aggregated for the purpose of application of the threshold limit of Rs. 2,40,000. In this case, since the payment for rent  and  hire  charges  credited  to  the  account  of  J,  the  payee,  aggregates  to  Rs. 2,65,000 (Rs. 1,75,000 + Rs. 90,000), tax is deductible at source under section 194-I. Tax is deductible@ 7.5% on Rs. 1,75,000 (rent of building) and @1.5% on Rs. 90,000 (hire charges of machinery).

Total TDS to be deducted is Rs. 14,475 (175000*7.5%) + (90000*1.5%)

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