Section 194I- TDS on Rent

Section 194I- TDS on Rent

A comprehensive guide to understand TDS levied on rent paid.

Who is this guide for?

Persons who are having rental income from land,building,plant & Machinery ,furniture & fittings etc.

Topics Covered

• What is Section 194I?
• Reason for Introduction of TDS u/s 194I
• What is the meaning of ‘rent’ in reference to Section 194I?
• What Payment is Covered u/s 194I?
• Who is liable to deduct TDS u/s 194I?
• What is the point of deduction of TDS?
• Rate of TDS
• No deduction or Dection at Lower Rate under Sec.197
• Under what circumstances TDS u/s 194I is not deductible?
• What is the time limit on depositing TDS?

What is Section 194I ?

• The person (not being an Individual or HUF) who is responsible for paying of rent is liable to deduct tax at source.
• in case the aggregate of the amount of rent credited or paid or likely to be credited or paid during the financial year exceeds Rs. 1,80,000/-
• Also, individuals and/or HUFs who are subject to tax audit are also under an obligation to deduct the tax at source.
• The limit of Rs. 1,20,000/- was enhanced to Rs. 1,80,000/- w.e.f. 1.7.2010

What is the Reason for Introduction of TDS u/s 194I?

• The Finance Act, 1994 inserted the Section 194I, regarding deduction of tax from rent
• The Government felt that an item of income which should be covered under TDS Deduction should be the income by way of rent
• In other countries as well, such income is subject to deduction of income tax at source

What is the Meaning of ‘Rent’ in reference to Section 194I ?

• ‘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:
1. land or
2. Building (including factory building) or
3. Land appurtenant to a building (including factory building) or
4. Machinery or
5. Plant or
6. Equipment or
7. Furniture or
8. Fittings
• whether or not any or all of the above are owned by the payee-Explanation (i) to Sec. 194-I. Sub-letting is also covered.
• If the landlord collects security or advance payment at the time of letting out a building to a tenant on the condition that the deposit will be refunded at the time of vacating the building, then such a receipt is not in the nature of income and, therefore, no tax is to be deducted at source u/s 194I.
• However, advance rent (not in the nature of refundable security deposit) paid is, subject to tax deduction. Moreover, where any such rent is credited to ‘suspense account’ or to any other account shall also be liable to deduct tax at source.

What Payment is Covered u/s 194I?

• Income from letting out of factory building
• Where a factory building is let out, the rent received generally is income from business in the hands of the lessor or the owner of the factory. Only in a few cases it is income from property in the lessor’s hands.
• But such payment also, which is business income in the hands of the lessor and for which he will necessarily be paying advance tax and finally be returning the rental income, will be subject to tax deduction at source or TDS.
• This is an unnecessary burden on both taxpayer and the tax administrator, because collection of tax will take place as TDS from the lessor without much delay.
• Rent includes service charges
• Service charges payable to business centres are covered under the definition of rent, as they cover payments by whatever named called.
• TDS requirement where building and furniture, etc., let out by separate persons
• In case where building is let out by one person, and furniture, fixtures, etc., are let out by another person, then the payee is required to deduct tax under Sec. 194I only from the rent paid/credited for the hire of building.
• TDS requirement where rent not payable on monthly basis
• Sec. 194-I does not mandate that the tax deduction should be made on month-to-month basis.
• Therefore, if the crediting of the rent is done on quarterly basis then deduction at source will have to be made on the quarterly basis only. Where the rent is paid on yearly basis deduction also will have to be made once a year on the basis of actual payment or crediting.
• Charges regarding cold storage facility
• In the case of cold storage where milk, ice cream, vegetables, etc., are stored, the payment may be styled as charges for use of plant and not for use of building. Cold storage is a plant.
• Hall rent paid by an association for use of it
• Since the association is assessed as an association of persons and not as an individual or HUF, the obligation of tax deduction will be there, provided payment for the use of hall exceeds Rs. 1,80,000
• Payments to hotels for holding seminars including lunch
• Where hotels do not charge for use of premises but charge for catering/meal only, then provisions of Sec. 194I would not apply. However, Sec.194C would apply for catering part.

Who is Liable to Deduct TDS u/s 194I ?

• The person (not being an Individual or HUF) who is responsible for paying any income to resident by way of rent is liable to deduct tax at source.
• As per Budget 2017,individual /HUF (not covered under Tax Audit) paying rent to a resident exceeding Rs 50,000 per month are also liable to deduct TDS @ 5%.This amendment will be effective from 01.06.2017.
• In case 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 payee exceeds Rs. 1,80,000/-

What is the Point of Deduction of TDS?

• Tax is required to be deducted at source at the time of credit of ‘income by way of rent’ 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.

What is the Rate of TDS?

S. No	Nature of Payment	Rates of tax deduction
1	Rent of plant and machinery	2%
2	Rent of land or building or furniture or fitting	10% (5% if rent exceeding Rs 50,000 / month is paid by individual/HUF who are not liable for tax audit)

 have any question

No deduction or Deduction at Lower Rate under Sec. 197

• On application by payee in Form no. 13, if the Assessing Officer is satisfied that this total income justifies no deduction of tax or deduction at lower rate, he may issue a certificate in Form No. 15AA to that effect directly to the payer.

Under what circumstances TDS u/s 194I is not deductible?

• Amount payable/paid not exceeding Rs. 1,80,000 during the financial year No tax from the amount payable in respect of rent is deductible where the amount of such rent credited or paid or likely to be credited or paid during the financial year to the payee landlord or lessee does not exceed Rs. 1,80,000.
• Where tenant is individual or Hindu Undivided Family Deduction is not required under Sec. 194I if the amount is paid or payable by an individual or Hindu Undivided Family. If :
1. the individual/HUF is not to carrying on any business/profession or
2. individual/HUF not liable to tax audit in preceding year
• Sharing or proceeds of film exhibition between a film distributor and a film exhibitor owning a cinema theatre
  Representations have been received from various quarters regarding applicability of the provisions of Sec. 194-I of the Income Tax Act to the sharing of the proceeds of film exhibition between film distributor and film exhibitor owning a cinema theatre.The matter has been examined by the Board and the Board is of the view that the provisions of Sec.194-I would not be attracted to such payment because: the exhibitor does not let out the cinema hall to the distributor.Generally, the share of the exhibitor is on account of composite services; and The distributor does not take cinema building on lease or sub-lease or tenancy or under an agreement of similar nature.
• Where the payee is the Government at agency
  Under the provisions of Sec. 196, no tax is required to be deducted at source from any sums payable to the government. The matter with regard to the statutory authorities and the local authorities referred to above, has been examined by the Board. Sec. 190. And it provides for deduction of income tax at source as one of the modes of collection of income tax with respect of an income. And this is notwithstanding that the regular assessment in respect of such an income is to be made in a later assessment year.The income of an authority constituted in India by or under any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, is exempt from income tax under Sec. 10(20A).Similarly, the income of a local authority which is chargeable under the head ‘Income from house property’ or ‘Income from other sources’, is exempt from Income-tax under Sec.10(20).There is no other condition specified in these two clauses of Sec.10 which is necessarily to be satisfied to avail of the income-tax exemption. There is no requirement to deduct income-tax at source on income by way of ‘rent’ if the payee is the governmental agency.In the case of the local authorities and the statutory authorities, there will be no requirement to deduct income-tax at source from income by way of rent if the person responsible for paying it is satisfied about his tax-exempt status under clause (20) or (20A) of Sec.10 on the basis of certificate to this effect given by the said authorities.

What is the time limit on depositing TDS?

• Where the payment is made by or on behalf of the Government- On the same day (without using any challan form)
• Where the payment is made in any other case than the Government- On or before 7 days from end of month in which deduction is made, where tax is paid accompanied by an Income tax challan
1. If the amount is credited or paid in the month of March- On or before April 30th
2. In any other case- On or before 7 days from the end of the month in which the deduction is made.

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Tax Audit – Limit, Due Date & Section 44AB

Tax audit is the verification of the books of accounts of an assessee to validate the income tax computation and compliance with the laws of Income Tax. Auditing of books of accounts must be carried out by a certified Chartered Accountant. In this article, we look at tax audit limit, section 44AB of the Income Tax Act and appointment of tax auditor.

Tax Audit Limit

The provisions relating to tax audit are provided under Section 44AD of the Income Tax Act. According to Section 44AB, tax audit is required for the following persons:

Business

In case of a business, tax audit would be required if the total sales turnover or gross receipts in the business exceeds Rs.1 crore in any previous year. Under the Income Tax Act, “Business” simply means any economic activity carried on for earning profits. Section 2(3) has defined the business as “any trade, commerce, manufacturing activity or any adventure or concern in the nature of trade, commerce and manufacture”.

Profession

In case of a profession or professional, tax audit would be required if gross receipts in the profession exceeds Rs.50 lakhs in any of the previous year. A profession or professional could be any of the following as per Rule 6F of the Income Tax Rules, 1962:

1. Architect
2. Accountant
3. Authorised representative
4. Engineer
5. Film Artist – Actor, Cameraman, Director, Music Director, Editor, etc.
6. Interior Decorator
7. Legal Professional – Advocate or Lawyer
8. Medical Professional – Doctor, Physiotherapist, etc.,
9. Technical Consultant

Presumptive Taxation Scheme

If a person is enrolled under the presumptive taxation scheme under section 44AD​ and total sales or turnover is more than Rs. 2 crores, then tax audit would be required.

Also, any person enrolled under the presumptive taxation scheme who claims that the profits of the business are lower than the profits calculated in accordance with the presumptive taxation scheme would be required to obtain a tax audit report.

Know the limit for tax under under Income Tax.

Due Date for Filing Tax Audit Report

The due date for completing and filing tax audit report under section 44AB of Income Tax Act is 30th September of the assessment year. Hence, if a taxpayer is required to obtain tax audit, then he or she would be required to file income tax return on or before 30th September along with the tax audit report. In case the taxpayer is also liable for transfer pricing audit, then the due date for filing tax audit is 30th November of the assessment year.

Form 3CA & 3CD

Any person who is required to get tax audit would be required to furnish the following for tax audit while filing income tax return:

Form 3CA – Audit Form

Form 3CD – Statement showing relevant particulars

Tax Audit Limit for Chartered Accountnts

A tax audit can be conducted by a Chartered Accountant or a firm of Chartered Accountants. If it is performed by the latter, the name of the signatory who has signed the report on behalf of the firm must be stated in the audit report. The signatory must provide his/her membership number while registering in the e-filing portal.  Tax audits can also be performed by the Statutory Auditor.

It is important to note that, Chartered Accountants have a limit on the number of tax audit reports that can be filed. The maximum number of tax audits that can be undertaken by a Chartered Accountant is limited to 60. In case of a firm the restriction on tax audit limit will be applicable for each of the partners.

Penalty for Completing Tax Audit

If a taxpayer who is required to obtain tax audit does not get the accounts audited, then penalty could be levied under Section 271B of the Income Tax Act. The penalty for not completing tax audit is 0.5% of the turnover or gross receipts, subject to a maximum of Rs.1,50,000.

Appointment of Tax Auditor in Company

The responsibility of appointing tax auditors in a company is vested with the Board of Directors. The Board may also delegate this responsibility to any other officer like CEO or CFO. Auditors in a firm or proprietorship can be appointed by a partner, proprietor or a person authorized by the assessee.

Moreover, a taxpayer can also appoint two or more chartered accountants as joint auditors for performing the tax audit. In this case, the audit report must be signed by all the joint auditors, if all of them concur with the report. In case of any differences in opinion, the auditors must express their opinion separately through another report.

 Note: – Joint tax auditors will carry the same responsibilities as that of other auditors..

Letter of Appointment for Tax Audit

The tax auditor must obtain a letter of appointment from the concerned assessee before going forward with the tax audit. The appointment letter must be duly signed by the person competent to sign the return of income. The letter must mention the remuneration offered to the auditor.

Besides, the appointment letter should specify that no other auditor is entrusted with the task for the particular financial year, and could contain details of the previous auditor. The latter is mentioned to facilitate the communication between the appointed auditor and his predecessor.

Who cannot be tax auditor?

There are certain prohibitions on the appointment of tax auditors, which are enumerated below:

• Any member in part-time practice is not eligible to perform tax audit.
• A chartered account cannot audit the accounts of a person to whom he is indebted for more than Rs 10,000.
• A statutory auditor will be deemed to be guilty of professional misconduct if he/she accepts the appointment of Public Sector Undertaking/Government Company/Listed Company and other Public Company having turnover of Rs 50 crores or more in a year and accepts any other work, assignment or service in regard to the same undertaking/company on a remuneration which in total exceeds the fee payable for carrying out the statutory audit of the same undertaking/company.
• The Chartered Accountant who is assigned with the task of writing and maintaining the books of account of the assessee should not audit such accounts.
• The audit of accounts of a professional firm of Chartered Accountants cannot be performed by any partner or employee belonging to such firm.
• An internal auditor of the assessee cannot be appointed as tax auditor.
• An auditor cannot not accept more than 45 tax audit assignments in a particular financial year.

Removal of Tax Auditor

The management is entitled to remove a tax auditor if he/she has delayed the submission of report to such an extent that it is not anymore possible to get the audit report uploaded before the specified due date. A tax auditor cannot be removed because he has submitted an adverse audit report or on the assesee’s apprehension that the tax auditor is likely to provide an adverse audit report.

If a Chartered Accountant is removed on unfair grounds, the Ethical Standards Board, which was established by the Institute of Chartered Accountants of India (ICAI) is entitled to intervene. Moreover, if a Chartered Accountant is removed on invalid grounds, no other Chartered Accountant would be allowed to act as a replacement to the predecessor.