Clarification regarding deduction of tax at source from payment of rent
1. The Finance Act, 1994 introduced section 194-I in the Income-tax Act, 1961, which provides for deduction of tax at source from payment of income by way of rent. This section as amended by Finance Act, 1995 reads as follows :
‘194-I. Any person, not being an individual or a Hindu undivided family, who is responsible for paying to any person any income by way of rent, shall, 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 the issue of cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of—
(a) fifteen per cent if the payee is an individual or a Hindu undivided family; and
(b) twenty per cent in other cases :
Provided that no deduction shall be made under this section where the amount of such income, or as the case may be, the aggregate of the amount of such income credited or paid or likely to be credited or paid during the financial year by the aforesaid person to the account of, or, to the payee, does not exceed one hundred and twenty thousand rupees.
Explanation : For the purposes of this section—
(i) “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 any building (including factory building), together with furniture, fittings and the land appurtenant thereto, whether or not such building is owned by the payee,
(ii) where any 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 shall apply accordingly.’
The Board has received a number of queries from various persons regarding the application of the aforesaid provision. These queries have been carefully considered by the Board and the following clarifications are issued for information and guidance of all concerned :
Query No. 1 : Whether tax is required to be deducted at source where rent has been paid in advance before 1-6-1994?
Answer : Where an advance of rent has been paid before 1-6-1994, there is no requirement for deduction of tax at source.
Query No. 2 : Whether tax is required to be deducted at source where a non-refundable deposit has been made by the tenant?
Answer : In cases where the tenant makes a non-refundable deposit tax would have to be deducted at source as such deposit represents the consideration for the use of the land or the building, etc., and, therefore, partakes of the nature of rent as defined in section 194-I. If, however, the deposit is refundable, no tax would be deductible at source. It is further clarified that if the deposit carries interest, the tax to be deducted on the amount of interest will be governed by section 194A of the Income-tax Act.
Query No. 3 : Whether the tax is to be deducted at source from warehousing charges?
Answer : The term ‘rent’ as defined in Explanation (i) below section 194-I means any payment by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of any building or land. Therefore, the warehousing charges will be subject to deduction of tax under section 194-I.
Query No. 4 : On what amount the tax is to be deducted at source if the rentals include municipal tax, ground rent, etc. ?
Answer : The basis of tax deduction at source under section 194-I is “income by way of rent”. Rent has been defined, in the Explanation (i) of section 194-I, to mean any payment under any lease, tenancy, agreement, etc., for the use of any land or building. Thus, if the municipal taxes, ground rent, etc., are borne by the tenant, no tax will be deducted on such sum.
Query No. 5 : Whether section 194-I is applicable to rent paid for the use of only a part or a portion of any land or building ?
Answer : Yes, the definition of the term “any land” or “any building” would include a part or a portion of such land or building.