TDS on Rent under section 194I of Income Tax Act,1961

Poornima Madhava

What is tax deduction at source?

Persons responsible for making payment of income (rent), are responsible to deduct tax at source and deposit the same to the Government Treasury within the time stipulated.

The recipient of the income (though s/he gets only the net amount after TDS) is liable to tax on the gross amount. The amount deducted is adjusted against her/his final tax liability.

Who is responsible for deduction of tax?

Any person responsible for making payment of rent to a resident is required to deduct tax at source under section 194I.

However, an individual or an HUF whose books of account are NOT required to be audited u/s 44AB during immediately preceding financial year (FY) is not required to deduct tax at source u/s 194I. Thus, provisions of section 194I are not applicable to an individual/HUF whose books are not required to be audited u/s 44AB during the immediately preceding FY.

When is tax deducted at source?

Tax has to be deducted at source either at the time of credit of income to the payee or at the time of payment in cash/cheque/draft/any other mode, whichever is earlier.

Where income is credited to any account (whether called Suspense or any other name) in the books of person liable to pay such rent, such credit shall be deemed to be credit of such income to the account of the payee. However, tax cannot be deducted until identity of the person in whose hands it is includible as income can be ascertained – Industrial Development Bank of India Vs ITO [2006] 10 SOT 497/104 TTJ 230 (Mum).

At what rate is the tax deductible at source?

Is there any threshold limit for non-deduction of tax at source?

Yes, tax at source u/s 194I is not deductible if the amount of rent credited/paid during the FY does not exceed Rs.2,40,000. When the amount credited/paid exceeds the threshold limit, tax is deductible on the entire amount credited/paid during the FY at the specified rate as applicable.

What is the definition of Rent?

Rent is defined as the payment made under any lease, sub-lease, tenancy or any other agreement or arrangement. Such payment is made for the use of land or building or for land appurtenant to a building, machinery or plant or equipment or furniture or fittings.

Is it necessary for payee to be owner of the building?

No, provisions of section 194I are applicable even if the person to whom the rent is paid/payable is not the owner of the building. Thus, tax is deductible even in case of sub-lease of a building.

Is tax deductible on deposits made?

Tax is deductible on payment of non-refundable deposit as such deposit is the consideration for use of land/building etc and thus regarded as rent. Where the security deposit is adjustable every 6 months, such deposit is rent and the assessee is required to deduct tax at source – CIT Vs Reebok India Co. [2007] 163 Taxman 61 (Delhi).

However, if the deposit is refundable, no tax is deductible at source. Adjustment of interest-free security deposit refundable at the end of lease would tantamount to refund of security deposit and not liable for tax deduction thereon – PS Cars Pvt Ltd Vs ITO [2005] 4 SOT 143 (Delhi).

If deposit carries interest, tax deduction on such interest is governed by section 194A – Circular No.718 dated August 22, 1995.

Payment of non-refundable upfront charges for lease is liable for deduction of tax u/s 194I – Foxconn India Developer Pvt Ltd Vs ITO [2012] 53 SOT 213 (Chennai).

Is tax deductible on advance payment of rent?

Yes, provisions of 194I apply on rent paid in advance also. The recipient can claim tax credit in respect of tax deducted on advance rent as follows – Circular No.5/2001 dated March 2, 2001:

• Where advance rent is spread over more than one FY and tax is deducted thereon, credit shall be allowed in the same proportion in which such income is offered for taxation for different AYs based on single certificate for tax so deducted on entire advance rent.
• Subsequent to such tax deduction, where the rent agreement gets terminated/cancelled resulting into refund, or where rented property is transferred by way of sale/lease/gift etc resulting into refund of balance amount of advance rent to the tenant/transferee, as the case may be, credit for the entire balance of tax deducted at source, which has not been given so far, shall be allowed in the AY relevant to FY during which rent agreement gets terminated/cancelled or rented property is transferred and balance of advance rent refunded to the transferee/tenant, as the case may be.

Are warehousing charges subject to tax deduction?

Yes, warehousing charges are also included in the definition of rent and the same is subject to tax deduction u/s 194I.

Is tax deductible u/s 194I on payments made to clearing & forwarding (C&F) agents?

No, payments made to C&F agents are not of nature of rent but rather of nature of work and thus tax is deductible as per provisions of section 194C – National Panasonic India Pvt Ltd Vs CIT (TDS) [2005] 3 SOT 16 (Delhi).

Is tax deductible on payments for cold storage?

No, in case of cold storage, the customer is not given any right to use any demarcated space/place or machinery of cold storage and therefore s/he does not become a tenant. Instead there exists an arrangement between the customer and the cold storage owner which are contractual in nature and thus provisions of section 194C will be applicable – Circular No.1/2008 dated January 10, 2008.

Is tax deductible on rent including municipal tax, ground rent?

No, if municipal tax, ground rent etc are borne by the tenant, no tax will be deducted on such sum – Circular No.718 dated August 22, 1995.

Is tax deductible on rent of a part of building?

Yes, even if a part or portion of building is rented, provisions of section 194I are applicable – Circular No.718 dated August 22, 1995.

Is tax deductible on payments made to funds established for the benefit of armed forces?

No, since income of regimental fund or non-public fund established by armed forces is exempt u/s 10(23AA), no tax may be deducted u/s 194I on such payments – Circular No.735 dated January 30, 1996.

Is tax deductible on payments by an individual to a hotel which is reimbursed later by the company?

Where an employee or an individual representing a company (like consultant, auditor etc) makes payment for hotel accommodation directly to the hotel during his/her stay, 194I is not applicable (except when such individual is liable for audit u/s 44AB) since the payment is made by the employee or such individual and the company merely reimburses the expenditure – Circular No.5/2002 dated July 30, 2002. Thus, if such individual is liable for audit u/s 44AB, tax has to be deducted at source.

Is sharing of proceeds from film exhibition between film distributor and film exhibitor owning a cinema theatre subject to tax deduction?

No, provisions of section 194I are not applicable as the exhibitor does not let out the cinema hall to the distributor and the share of exhibitor is on account of composite services. Further the distributor does not take the cinema hall on lease/sub-lease/tenancy/under any agreement of similar nature – Circular No.736 dated February 13, 1996.

Are landing & parking charges paid by an airline to Airport Authority of India (AAI) subject to tax deduction?

Contrary views have been observed and it is debatable:

• Payments made by an airline towards landing and parking charges to AAI are in the nature of rent and hence section 194I would be attracted on such payments and not section 194C – CIT Vs Asiana Airlines [2008] 175 Taxman 177 (Delhi), CIV Vs Japan Airlines Co Ltd [2009] 180 Taxman 188 (Delhi).
• However, a contrary ruling was given in CIT Vs Singapore Airlines Ltd [2012] 24 taxmann.com 200 (Mad). Accordingly, payment of landing and parking charges by an airline to AAI is payment to contractors and not payment of rent and hence TDS obligation is u/s 194C.

Are payments made to hotel subject to provisions of tax deduction?

If payments are made for hotel accommodation taken on regular basis, such transactions will be in the nature of rent and subject to tax deduction u/s 194I on exceeding the threshold limit. However, section 194I shall not be applicable in case of rate-contract agreements – Circular No.5/2002 dated July 30, 2002.

Tax is required to be deducted u/s 194I for hiring of rooms and banquet in hotels and also u/s 194C for availing catering services therein – Hero Moto Corp Ltd Vs CIT [2013] 60 SOT 25 (Delhi).

Is tax deductible on payments under a composite agreement?

If the composite agreement is in essence the agreement for taking premises on rent, provisions of section 194I is attracted – Circular No.715 dated August 8, 1995.

Is tax deductible for hiring of storage tanks?

Yes, storage tanks are regarded as plant and not as land or building within the meaning of section 194I. – Gulf Oil India Ltd Vs ITO [2000] 75 ITD 172 (Mum).

Is tax deductible u/s 194I on payments to owners of hoarding site?

No, section 194I is not applicable but 194C is applicable when an advertising agency makes payment to owners of hoarding site – ITO Vs Roshan Publicity P Ltd [2005] 4 SOT 105 (Mum).

Are roaming charges regarded as rent?

No, payment of roaming charges made by one mobile service provider to others cannot be considered as rent for the purpose of section 194I – Vodafone Essar Ltd Vs CIT [2011] 9 taxmann.com (Mum – ITAT).

Is tax deductible on payments made for transmission of power?

No, 194I is not applicable in respect of payment for transmission of electricity as the control of power transmission lines remain with other parties – Chhattisgarh State Electricity Board Vs ITO [2012] 50 SOT 33 (Mum).

Is tax deductible on service charges related to fixtures of rented house?

Yes, payments in the nature of service charges in connection with fixtures of rented house attract provisions of section 194I – Karnavati Co-op Bank Ltd Vs CIT [2012] 134 ITD 486 (Ahd).

Is tax deductible where the payee is Government/local authorities?

No, there is no need to deduct tax at source on rent if the payee is Government. In case of local/statutory authorities referred to in section 10(20) or 10(20A), no need to deduct tax at source on rent if the person responsible for paying the rent is satisfied about the tax-exempt status u/s 10(20) or 10(20A) on the basis of certificate to this effect given by the said authorities – Circular No.699 dated January 30, 1995.

When is tax deducted at lower rate?

As per provisions of section 197, the recipient can apply in form no.13 to the Assessing Officer to get a certificate authorizing the payer to deduct tax at lower rate (or deduct no tax, if certain conditions are satisfied). There is no time limit for application and it can be filed at any time before actual deduction of tax. If the recipient does not have PAN, he cannot apply for the certificate.

The certificate shall be issued, directly to the person responsible for paying income, on a plain paper, under an advice to the applicant. The certificate cannot be issued with retrospective effect. The recipient may furnish copy of such certificate to the person responsible for paying the income for lower/no deduction of tax at source.

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(Republished with Amendments by Team Taxguru)