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Prior to the launch of budget 2017, only specific categories of business and professionals were liable for the TDS on rent paid. Budget 2017 has announced that now salaried employees and other individuals paying rent of over Rs 50,000 per month would have to deduct 5% as TDS. This provision will come into effect from June 1, 2017.  This article will explain what is rent, when TDS on rent has to be deducted or nor deducted, the new changes for TDS on rent paid in Budget 2017, by when to file TDS. How to Pay TDS on Rent using Challan 281, How to show Rent received in ITR.

Understanding TDS on Rent

What is rent?

Rent defined under Section 194I of the Income Tax Act, 1961 is any payment under lease, sub-lease, tenancy, sub-letting or any other agreement for use of land, building, land appurtenant to building/factory building, machinery, plant, equipment, furniture or fittings. Any advance payment or security deposit, given to the landlord on the condition that the amount will be returned at the time of vacating the property is NOT considered as rent.

For example, Anand pays Rs. 10,000 per month as house rent but has paid Rs. 1,00,000 as the security deposit to the landlord on the promise that Rs. 1,00,000 will be reimbursed to Anand once he vacates the premises. So, TDS need not be deducted on Rs. 10,000.

Who is liable for TDS on rent under section 194I?

Professionals and Business falling who have to get Tax Audit

Professionals and Business who have to get their tax audited under the scope of Section 44AB have to deduct TDS @ 10% and if the total amount of rent credited or likely to be credited exceeds Rs. 1,80,000 in a financial year. The limit was raised from Rs. 1,20,000 to Rs. 1,80,000 from 1 Jul 2010.

Businesses and Professionals who are not required to get their Tax Audit conducted are not required to deduct any TDS on Rent irrespective of the amount of payment made during the year. As a business or professional, you will not be obliged to avail tax audit if,

  1. You are carrying on a business whose total sales/turnover has not exceeded Rs. 1 crore in any previous year
  2. If as a professional your gross receipts do not exceed Rs. 25 lakhs in any previous year. (Applicable from  FY 2016-17 onwards.)
  3. If your business or profession is not covered under section 44AD, 44ADA, 44AE, 44AF, 44BB, 44BBB and income from such business/profession is less than deemed gains.

Salaried or others tenants not mentioned above

Earlier, salaried or HUF individuals were exempted from TDS on rent.

  • However From 1 Jun 2017 if rent paid is more than Rs. 50,000 per month then under new Section 194IB, TDS is 5% of the total rent paid or payable is applicable to the payer of rent. The tenant has to deduct 5% from the total rent payable and pay the balance amount to the landlord. This amendment will be effective from 1 Jun 2017 for AY 2017-18.
  • From 1 Jun 2017 Any taxpayer paying a monthly rent of Rs 50,000 or more will now have to deduct 5% TDS to make sure that the recipients of large rental incomes declare full rental income in their tax returns.
  • When TDS is applicable for individual or HUF tenants, TDS is not required to be deducted every month, it can be collectively deducted at the end of a financial year i.e. in March.
  • In case, the tenant vacates the property in the same financial year before the end of the year, then TDS @ 5% of the total amount paid until the vacancy month is required to be deducted in the last month of tenancy.
  • The tenant need not obtain TAN to deduct TDS.

When TDS on rent paid should be deducted under section 194I?

  • Rent on factory building: When a factory building is let out, the rent received by the owner or the lessor of the building.
  • Rent on furniture and building let out by separate person: In case the building is let out by one person and furniture is let out by another person, then TDS should be deducted only on rent paid for the building. For example, Ashok and  Navin are brothers and partners in a company where the furniture and fixtures are legally rented by Ashok for Rs. 2,00,000 p.a while the building premises are legally rented on the name of Navin for Rs. 3,00,000 p.a. In this case, Navin will have to deduct tax on Rs. 3,00,000 while paying rent to the owner, while Ashok will not be liable to deduct any tax.
  • Rent from Hotel holding seminars with meals: When hotels where seminars or conferences are held, do not charge any rent for using the premises but only for catering or food, then section 194I does not apply but Section 194C comes into play for catering
  • Service Charges Payable to Business Centers: Service charges paid to business centers for any purpose are also considered as rent and thus tax should be deducted before making legit payments.
  • Rent on hall associations: If an association or group of people rents a hall for any purpose whose rent irrespective of the frequency of payment exceeds Rs. 180000 annually, TDS is to be deducted by the association before making the payment to the hall.

When is TDS on rent deducted?

Tax is deducted at the time of paying rent to the payee in the form of cash, cheque or any other mode. So when the payment is made, TDS should be deducted by the payer and the balance should be paid to the payee.

When TDS is applicable for individual or HUF tenants, TDS is not required to be deducted every month, it can be collectively deducted at the end of a financial year i.e. in March For example, Aditya who is eligible for tax audit pays Rs. 60,000 house rent per month to Shrikant and has stayed entire financial year from Apr-mar. As per section 194IB of the Income Tax Act, Aditya is eligible for TDS before making payment of rent to Mr. Shrikant. But instead of deducting Rs. 3,000(5% of 60,000) every month, Aditya can collectively deduct Rs. 36,000 in March.

TDS on rent and Service Tax

Before getting into service tax, please remember service tax will be charged only when total amount received or receivable by the owner from one or more services during the financial year exceeds rupees ten lakhs. Once the amount exceeds Rs. 10 Lakhs, then service tax inclusive of cess @ 15% is to be levied before making any payments. CBDT in circular No:4/2008 has clarified that TDS on rent has only to be deducted on the amount of rent and not on services tax on rent.

Service tax paid by the tenant does not partake the nature of income of landlord.  So TDS on rent is exclusive of service tax. Therefore tax deduction at source (TDS) under Sec. 194-I of the Income-tax Act would be required to be made on the amount of rent paid/payable without including service tax.

So, for example, Ratan pays Rs. 30,00,000 on rent annually to Anil. As the rent amount exceeds Rs, 10 Lakhs, service tax needs to be added at 15% while TDS needs to be simultaneously deducted.

  • Rent:                                                               30,00,000
  • Add: Service Tax @ 15%                                4,50,000
  • Less: TDS on Rent ( 10% of 3000000)      3,00,000
  • Total rent payable:                                         31,50,000

What is the rate of TDS on rent?

The Rate of TDS or tax deducted at source depends on the nature of payment and the type of person.

  • The receiver of the rent needs to furnish Pan Card No. to the party from whom he is receiving the payment. If PAN is not submitted, TDS @ 20% will be applicable.
  • No cess is applicable on TDS.
  • Service Tax is applicable on TDS when amount exceeds 10 lakhs

The rates for different type of properties are listed below:

  1. Rent of machinery, equipment or plant – 2% TDS on total rent (if total exceeds Rs. 180000)
  2. Rent of land, furniture, fitting or building to HUF or individual – 10% TDS on total rent (if total exceeds Rs. 180000)
  3. Rent of land, furniture or building to other than HUF or an individual – 10% TDS on total rent (if total exceeds Rs. 180000)
  4. Rent on house exceeding Rs. 50,000 p.m- 5% TDS on total rent( if rent per month exceeds Rs. 50000)

When is TDS on rent not deductible?

  1. When amount paid or likely to be paid during the financial year to the payee/landlord/owner/lessee does not exceed or is not likely to exceed Rs. 1,80,000, no TDS should be deducted while making payments.
  2. When the rent payable or to be paid is by an individual or HUF who is not carrying any business/profession or is not liable to tax audit the in the preceding year, then no TDS should be deducted while making payment by such individuals or HUF.
  3. When revenues are shared by a film exhibitor and distributor owning a theatre then no TDS is to be deducted as cinema hall is not let out on rent by the exhibitor to the distributor. Rather exhibitor’s share is from composite services and thus not liable for TDS deduction.
  4. Section 196 claims that no TDS should be deducted when any amount is paid to a government agency. If any kind of rent is payable to a government agency, local authority even then TDS need not be deducted as per clause (20) or (20A) of Section 10. Also any amount paid towards housing accommodation, planning or improvement of towns, villages and cities is exempt from TDS.
  5. Cold storage is considered as a plant and not premises or building for stacking of milk, ice cream or perishable items. Therefore rent paid towards cold storage facility will not face any TDS deductions.
  6. Under Section 197, when payee or receiver of the rent submits Form. 13 to his assessing officer stating that the total income justifies no deduction of tax, the assessing officer will issue certificate in Form. 15AA which implies the payer directly to not deduct TDS.

By when should one deposit TDS on rent?

  • When payment is made on behalf of the government or by the government, it is supposed to be deposited on the same day without any challan.
  • When payment is made to any other payee other than government then TDS is to be deposited on or before 7 days from the end of month in which deduction is made i.e. if the amount is paid in the month of March then on or before 7th April.
  • It is not mandatory that tax is deducted always on a monthly basis. It depends on the rent period and deducted as per that. For example, if the rent is yearly, tax deduction is also done every year.
  • In case of payments other than salary, TDS certificate need to be issued quarterly in Form 16A which can be generated through TIN central system by downloading the certificate from the website. The certificate has to be issued by:
  • Quarter Due Date for Non Govt Deductor Due Date for Govt Deductor
    Apr to Jun 30 July 15 Aug
    Jul to Sep 30 Oct 15 Nov
    Oct to Dec 30 Jan 15 Feb
    Jan to Mar 30 May 30 May
  • In the 2017 budget, an amendment was introduced where in cases there is Nil Tax applicable on the individual’s income but who is in turn receiving rent as income, Form 15G or Form 15H for non-deduction of TDS can be filed for liberal and convenient compliance. This will be applicable for AY 2017-18.
  • The individual and HUF tenants not involved in business or not liable for tax audit, need not avail TAN for deduction of TDS. They can pay TDS @ 5% on the total rent at the end of the year or before vacating the house.

How to pay TDS on rent?

  • The tenant should file Form 26QC which is a challan-cum-statement shown in the image below.
  • Form 26QC has to be filed 30 days from the end of the month in which TDS deducted
  • The tenant would also be required to issue a tax withholding certificate (Form 16C) to the landlord, as a proof that taxes have been deposited in his name.
  • TDS certificate (Form 16C) – To be provided within 15 days from the due date for furnishing Form 26QC

TDS on rent and ITR

  • The nature of taxability on the rental income received by the owner will depend on how he rents the property out. If you have a jointly held property, the rent received from it will be taxable in the hands of each co-owner based on the respective shareholding.
  • if the property is let out for residential accommodation, it will be subject to tax as income from house property. Rental income is determined based on the rent received after deductions like municipal taxes paid in the year, a standard deduction of 30% from the net annual value after deducting the property’s municipal taxes and the interest paid to banks on the borrowed capital to buy the property.
  • On the other hand, it will be considered as business income if it is used for purposes like home stay or service apartments. the profits after all relevant expenses would be taxable,” said Rego. That means any expenditure incurred for running the business—repairs, salaries of people recruited, even groceries bought—can be claimed as deduction
  • If rent received on which taxes are deducted at source by the tenants, one must verify Form 26AS and check the appropriate tax credits and disclose the rental income while filing the tax returns. The Receiver of the rent must claim the TDS in ITR.
  • The final amount—be it as income from house property or as business—will be taxed in your hands according to the income tax slab that you come under (10%, 20% or 30%, excluding education cess and surcharge).
  • While filing income tax return, if the TDS for rent is more than the tax to be paid as per slab rates, the payee can always claim a refund from the Income Tax department.
  • If TDS is less than the actual tax to be paid, then the difference is to be paid by the payee to Income Tax Department.
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  • Fixed Deposit,Interest,TDS,Tax,Income Tax Return,Refund
  • Payment of TDS on Property
  • NRI and ITR:TDS,Tax and Income Tax Return
  • SMS alerts for TDS deduction from Income Tax Department

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