Section 194I of Income Tax Act: TDS on Rent Explained

Section 194I of the Income Tax Act mandates the Tax Deducted at Source (TDS) for rent payments to Indian residents, applying to any person other than an individual or Hindu undivided family (HUF). Further specifications follow regarding the percentage of TDS and related exemptions. Continue reading to understand the need to deduct TDS rent, the applicable rates, and the entire process.

What is Section 194I of the Income Tax Act?

According to Section 194I, the payer (the tenant) is required to deduct TDS at the time of the payment of rent to the payee or at the time of credit to the payee’s account, whichever is earlier. 

The term “rent” as stated in this section covers rent on:

• Land or building, which includes any building that is a factory building

• Plant, machinery and equipment

• Furniture and fittings

• Payment made under a lease, tenancy, sublease or any similar arrangement

• Advance rent is also included in the meaning of rent, provided it exceeds the mentioned threshold limit in the year.

Note: refundable security deposits are not covered under TDS.

Union Budget 2025-26 Updates

In February 2025 , a proposal was made under the Finance Act to raise the exemption amount to ₹6,00,000. This is because of the shift from a yearly to a monthly consideration; TDS under this Section is now applicable if the monthly rent payment exceeds ₹50,000.

Prior to this, the condition for deduction was that the rent paid in a financial year should be over ₹2,40,000; any amount below this threshold was not applicable. These changes came into effect from April 1, 2025, and the income tax challan for deducting TDS must be deposited as prescribed.

Also Read: Everything You Need to Know About Income Tax Returns Filing

What Are The Applicable TDS on Rent Rates Under Section 194I?

The TDS rates applicable under Section 194I will vary depending upon the nature of the asset rented. The current rates as per the Income Tax Department are:

• 2% - Rent of Plant, Machinery or Equipment.

• 10% - Rent of Land, Building, Furniture or Fittings.

Additionally, it is to be noted that if the Owner or Payee does not provide you with their Permanent Account Number or PAN, you are required to deduct TDS at the rate of 20%.

Due Date of Depositing TDS: TDS for Rent must be deposited by the 7th of the following month and March TDS must be deposited by 30th April.

TDS Certificate Requirement: After depositing TDS, the deductor must issue Form 16A to the landlord as proof, allowing them to claim credit against rental income.

Also Read: Tax Benefits on Business Loans: What Every Entrepreneur Should Know

Who is Liable to Deduct TDS on Paying Rent Under Section 194I?

The requirement of TDS deduction on rent applies to:

• Companies and firms

• Individuals or HUFs (Hindu Undivided Families) who are under the tax audit u/s 44AB i.e. their total sales, gross receipts or turnover is over ₹1 Crore for their business and over ₹50 lakh for their profession during the financial year immediately preceding the current one.

When is TDS Not Applicable Under Section 194I?

A few exceptions have been carved out under Section 194I: 

• If in a given month, rent payable is less than or equal to ₹50,000 (₹6,00,000 per financial year)

• If the payer is an individual or HUF not subject to any tax audit

• When rent is paid to the government or a statutory authority

• If the Lessor submits a Form-15G or 15H, declaring that tax shall not be deducted as the income is below the taxable limit under the Income Tax Act

• For refundable security deposits (non-refundable deposits are treated as advance rent)

Also Read: 4 Possible Cases Where Personal Loan Interest Tax Is Deductible

What Happens if You Do Not Comply With Section 194I?

Failing to comply with the provisions of Section 194I can lead to significant financial penalties. It is essential to adhere to the rules to avoid these consequences:

• Interest on Late Deduction/Payment: You will be liable to pay interest at 1% per month for late deduction and 1.5% per month for late deposit of the deducted tax.

• Disallowance of Expense: If you fail to deduct or deposit the TDS, 30% of your rental expenditure will be disallowed when calculating your taxable business profits. This results in a higher tax liability for your business.

• Late Filing Fee: If TDS returns are filed late, a penalty of ₹200 per day is levied until filing, subject to the maximum TDS amount.

To Conclude

Knowing Section 194I's details regarding TDS on rent, its rates, and limitations can help you avoid penalties and manage your rental payments properly while being tax compliant. This helps you maintain a clean chit and aids you in the event of needing loans or credit as financing options.

If you’re a business owner or individual looking for financial support, Poonawalla Fincorp offers a Business Loan and Personal Loan with flexible repayment options. Explore more on the official website!

Frequently Asked Questions  

What is Section 194I of Income Tax Act?

Section 194I of the Income Tax Act deals with the matter of TDS on rent payments. It mentions the inclusions, exclusions, and payment conditions of TDS to ensure tax compliance across the country. 

What is the limit of rent for TDS?

Effective April 1, 2025, the threshold for Tax Deducted at Source (TDS) on rent in a financial year has been increased to ₹6 lakh (₹50,000 per month) for most payers.

What is 194IA and 194IB Rent?

Section 194I is for professionals and business entities who are subject to a tax audit. Section 194IB is for individuals and HUFs who are not subject to a tax audit and pay a monthly rent exceeding ₹50,000.

Is advance rent covered under Section 194I?

Yes, advance rent above the threshold of ₹2,40,000 in a financial year is subject to TDS under Section 194I, and the deduction must be made at the time of payment or credit. Only refundable deposits are excluded.