TDS on payment of Rent falls under section 194I of Income Tax Act-1961. The plain reading of this section is very simple but very difficult to apply practically, specially when there is no clarity over simple definition of Rent and duration of Rent too.
In this article, section 194I shall be critically analysed and confusion over application on day in day transaction shall be resolved.
|Who is liable to deduct||Any person, not being an individual or a Hindu undivided family, who is responsible for paying||All Company, Partnership firm, LLP, Trust, Society, Govt, AOP, BOI, Individual or HUF subjected to Tax Audit,
Local Authority (example- Panchayat), Artificial juridical person (Example- University)
|When||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 a cheque or draft or by any other mode, whichever is earlier||When entry of liability posted in books of account or actual payment whichever earlier Here other mode includes- book adjustment, UPI, barter, exchange etc|
|Rate||a) two per cent for the use of any machinery or plant or equipment; and||2% when rent pertains to MACHINERY or PLANT or EQUIPMENT
Machinery, Plant or equipment is not defined but it may be understood as Machinery includes all types of mechanical items and contrivances. Machinery also need not be a self-contained unit and could be a part of a bigger machine or even be one that must be used in conjunction with one or more machines.
Plant includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purpose of business or profession.
Equipment includes part or component of Plant or Machinery.
|b) ten per cent for the use of any land or building (including factory building) or land appurtenant to a building (including factory building) or furniture or fittings:||10% when rent pertains to Land or Factory Land or Building or Factory building or land belongs to building or Furniture or fittings (this includes renting of movable as well as immovable items other than Plant/Machinery and Equipment)|
|Any exemption||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 amounts 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 45[two hundred and forty thousand rupees]||TDS is not required to deduct when total rent payment during the Financial Year does not exceed Rs.240000/-|
|Provided also that no deduction shall be made under this section where the income by way of rent is credited or paid to a business trust, being a real estate investment trust, in respect of any real estate asset, referred to in clause (23FCA) of section 10, owned directly by such business trust||No TDS is required to deduct when payment is made to Business Trust, being Real estate investment trust in respect of any Real Estate Asset.
As per Section 10(23FCA)- any income of a business trust, being a real estate investment trust, by way of renting or leasing or letting out any real estate asset owned directly by such business trust.
Since this income is not subjected to Tax as per section 10 ITA-1961
The Explanation(i) of this section define Rent as .—For the purposes of this section,—
“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
whether or not any or all of the above are owned by the payee;
Some Practical confusion over application of this section and its solutions as clarified by CBDT vide its Circular no- 5/2002 and 718/1995 etc.
Q 1. Whether a contract for putting up a hoarding would be covered under section 194C or 194-I of the Act?
Ans: The contract for putting up a hoarding is in the nature of advertising contract and provisions of section 194C would be applicable. It may, however, be clarified that if a person has taken a particular space on rent and thereafter sub-lets the same fully or in part for putting up a hoarding, he would be liable to TDS under section 194-I and not under section 194C of the Act.
Q 2. Whether the limit of Rs. 2,40,000 per annum would apply separately for each co-owner of a property?
Ans: Under section 194-I, the tax is deductible from payment by way of rent, if such payment of the payee during the year is likely to be more than Rs. 2,40,000. If there are a number of payees, each having definite and ascertainable share in the property, the limit of Rs. 2,40,000 will apply to each of the payee/co-owner separately. The payers and payees are, however, advised not to enter into sham agreements to avoid TDS provisions.
Q 3. Whether the rent paid should be enhanced for notional income in respect of deposit given to the landlord?
Ans: The tax is to be deducted from actual payment and there is no need of computing notional income in respect of a deposit given to the landlord. If the deposit is adjustable against future rent, the deposit is in the nature of advance rent subject to TDS.
Q 4. Whether payments made by company taking premises on rent but styling the agreement as a business centre agreement would attract the provisions of section 194I ?
Ans: The tax is to be deducted from rent paid, by whatever name called, for hire of a property. The incidence of deduction of tax at source does not depend upon the nomenclature, but on the content of the agreement as mentioned in clause (i) of Explanation to section 194-I
Q 5. Whether in a case of a composite arrangement for user of premises and provision of manpower for which consideration is paid as a specified percentage of turnover, section 194-I of the Act would be attracted?
Ans: If the composite arrangement is in essence the agreement for taking premises on rent, the tax will be deducted under section 194-I from payments thereof.
Q 6. On what amount the tax is to be deducted at source if the rentals include municipal tax, ground rent, etc?
Ans: 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.
Q 7. Stall is exhibited in exhibition centre for two days whether payment shall be subjected TDS under 194I ?
Ans: Payment of Rent should be on regular basis; this payment is one time in nature and shall not be subjected TDS u/s 194I.
Q 8. Whether payments made to a hotel for rooms hired during the year would be of the nature of rent?
Ans: Payments made by persons other than individuals and HUF for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I.” [Emphasis supplied]
1. In this context, doubts have been raised as to what constitutes “hotel accommodation taken on regular basis” for the purpose.
2. The Board have considered the matter. First, it needs to be emphasised that the provisions of section 194-I do not normally cover any payment for rent made by an individual or HUF except in cases where the total sales, gross receipts or turnover from business and profession carried on by the individual or HUF exceed the monetary limits specified under clause (a) or clause (b) of section 44AB. Where an employee or an individual representing a company (like a consultant, auditor, etc.)makes a payment for hotel accommodation directly to the hotel as and when he stays there, the question of tax deduction at source would not normally arise (except where he is covered under section 44AB as mentioned above) since it is the employee or such individual who makes the payment and the company merely reimburses the expenditure.
Furthermore, for purposes of section 194-I, the meaning of ‘rent’ has also been considered. “‘Rent’ means any payment, by whatever name called, under any lease . . . or any other agreement or arrangement for the use of any land. . . .” [Emphasis supplied]. The meaning of ‘rent’ in section 194-I is wide in its ambit and scope. For this reason, payment made to hotels for hotel accommodation, whether in the nature of lease or licence agreements are covered, so long as such accommodation has been taken on ‘regular basis’. Where earmarked rooms are let out for a specified rate and specified period, they would be construed to be accommodation made available on ‘regular basis’. Similar would be the case, where a room or set of rooms are not earmarked, but the hotel has a legal obligation to provide such types of rooms during the currency of the agreement.
3. However, often, there are instances, where corporate employers, tour operators and travel agents enter into agreements with hotels with a view to merely fix the room tariffs of hotel rooms for their executives/guests/customers.Such agreements, usually entered into for lower tariff rates, are in the nature of rate-contract agreements. A rate-contract, therefore, may be said to be a contract for providing specified types of hotel rooms at pre-determined rates during an agreed period. Where an agreement is merely in the nature of a rate contract, it cannot be said to be accommodation ‘taken on regular basis’, as there is no obligation on the part of the hotel to provide a room or specified set of rooms. The occupancy in such cases would be occasional or casual. In other words, a rate-contract is different for this reason from other agreements, where rooms are taken on regular basis. Consequently, the provisions of section 194-I while applying to hotel accommodation taken on regular basis would not apply to rate contract agreements
Q 9. How Section 194IB is different from 194I, when both are applicable on payment of Rent.
Ans: Section 194IB is applicable when payment is made Individual or HUF who are not subjected to Tax Audit. While 194I is applicable for those persons who are defined above. TDS rate u/s 194IB is 5% while in 194I- 2%/10%. 194I is TAN base tax deduction while 194IB is PAN base deduction.
Disclaimer: The entire above stated article is squarely based on our opinion, derived from the interpretation of the respective sections, rules and circulars as amended and other notifications. The observations are the personal view and the authors do not take responsibility of the same and this cannot be quoted before any authority.
FCA, ASA-Australia, MA(Eco), B. Com-DU