Ep 2/21
Section 194I — TDS on Rent
Land, buildings, equipment — the ₹2.4 lakh threshold and beyond
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Threshold
₹2.4L/yr
Per payee per FY
Land/Building
10%
Including furniture
Machinery
2%
Plant & equipment
Deposit Due
7th
Of following month
Section 194I is one of the most litigated TDS provisions. It catches everyone — companies, firms, and even individuals subject to tax audit. If you pay ₹20,000 or more per month in rent — whether for an office, warehouse, factory floor, or equipment — the TDS obligation is yours. Understanding this section correctly saves you from substantial interest, penalties, and prosecution.
The Law
Section 194I — Full Scope
Any person (other than an individual or HUF not liable to tax audit under Section 44AB) paying to a resident any income by way of rent shall deduct tax at source at the time of credit or payment, whichever is earlier. Rate: (a) 2% for use of plant, machinery or equipment; (b) 10% for use of any land, building, furniture or fittings. Threshold: ₹2,40,000 per payee per financial year.
Section 194I, ITA 1961
Tutor Explains
The ₹2.4 Lakh Threshold — Exactly How It Works
The threshold is ₹2,40,000 per payee per financial year — not per property, not per month. If one landlord owns two shops you rent, club both rents for the threshold calculation. Once ₹2.4 lakh is crossed, every rupee — including earlier payments — becomes TDS-liable. Many companies make the mistake of only deducting from the crossing point. Wrong — make a catch-up deduction on earlier instalments too.
Common Trap
Individuals and HUFs — When 194I Applies to You
Most individuals assume Section 194I does not apply to them. But if your accounts are subject to tax audit under Section 44AB (turnover above ₹1 crore for business, ₹50 lakhs for profession), you ARE required to deduct TDS under Section 194I — even as an individual. This regularly catches small business owners by surprise.
Section 44AB read with Section 194I proviso
GST Note
TDS on GST Component of Rent
CBDT Circular No. 23/2017 clarified that TDS under Section 194I should be deducted only on the rent portion and NOT on the GST component, provided the invoice clearly separates the base rent from GST. If the invoice shows only a lump-sum, TDS must be deducted on the entire amount including GST.
CBDT Circular 23/2017
Section 194I — Verbatim Statutory Text
Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of rent, shall, 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 issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of— (a) two per cent for the use of any machinery, plant or equipment; and (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. Provided that no deduction shall be made where the aggregate of amounts credited or paid or likely to be credited or paid during the financial year does not exceed two lakh and forty thousand rupees.
Section 194I, Income Tax Act 1961 (Finance Act 2019 increased threshold to Rs.2,40,000)
When to Deduct Under Section 194I
Apply / Deduct
- +Rent paid by company, firm, LLP, AOP, BOI, local authority, or any artificial juridical person
- +Rent paid by individual or HUF subject to Section 44AB tax audit in the preceding FY
- +Cumulative rent to ONE payee in FY exceeds Rs.2,40,000 — apply threshold per payee, not per property
- +Advance rent where total (advance plus future) will cross Rs.2,40,000
- +Payments for land, building, furniture, fittings at 10%; plant, machinery, equipment at 2%
- +Payments called warehousing, facility, or any name that are economically rent for use of property
Not Required
- −Rent paid by individual or HUF NOT subject to audit in the preceding FY
- −Total rent to payee in FY below Rs.2,40,000
- −Genuinely refundable security deposit not adjustable against rent
- −Rent paid to non-resident landlord — Section 195 applies instead
- −Hotel accommodation for stays up to 15 days — treated as service not rent
- −Landlord holds valid Section 197 nil or lower deduction certificate
Practical Challenges
CHALLENGE 1 — Advance rent timing: Company pays 6 months advance rent Rs.6,00,000 on Day 1. TDS timing question: on Day 1 or spread across 6 months?
Answer: Full Rs.60,000 TDS on Day 1 (payment date). Advance covers future months but payment is made in full upfront. TDS trigger = date of payment.
CHALLENGE 2 — Rent-free period threshold: Lease for 36 months at Rs.20,000/month but first 3 months are rent-free. Year 1 actual payment = 9 months x Rs.20,000 = Rs.1,80,000. No TDS?
Answer: Correct — Rs.1,80,000 below Rs.2,40,000 threshold. From Year 2 onwards (Rs.2,40,000) TDS applies.
CHALLENGE 3 — Mixed use property: Building rented where ground floor is office (10% rate) and basement houses machinery (2% rate). Single invoice for Rs.50,000. What rate?
Answer: Apply 10% to entire amount unless lease agreement clearly bifurcates consideration between building space and equipment use. Ambiguous invoice = higher rate applies.
CHALLENGE 4 — Mid-year audit threshold: Individual's FY 2024-25 turnover was Rs.92 lakhs (below Rs.1 crore audit threshold). In FY 2025-26 she pays office rent Rs.3,00,000/year. Must she deduct TDS?
Answer: No. Section 194I proviso requires audit liability in the PRECEDING year (FY 2024-25). Since she was not audit-liable in FY 2024-25, she need not deduct in FY 2025-26.
Worked Examples — Section 194I Rent
Example 1 — Aggregate per landlord across two properties
Scenario: Sunrise Ltd rents Office A (Rs.12,000/month) and Warehouse B (Rs.9,000/month) from same landlord Mr. Agarwal.
Working: Annual to Mr. Agarwal: Rs.1,44,000 + Rs.1,08,000 = Rs.2,52,000 > Rs.2,40,000. Both buildings: 10%. TDS = Rs.25,200/year = Rs.2,100/month. Mr. Agarwal receives Rs.18,900/month net.
⚠ Common Mistake: Applying threshold per property. Each is individually below Rs.2,40,000 — but ITAT Delhi in Shahzada Nand held threshold is per payee. Per-property calculation is legally incorrect.
Example 2 — GST bifurcation saves Rs.21,600 annually
Scenario: ABC Pvt Ltd pays Rs.1,00,000/month rent + 18% GST = Rs.18,000. Invoice shows bifurcated amounts.
Working: Bifurcated invoice: per CBDT Circular 23/2017, TDS base = Rs.1,00,000. TDS = Rs.10,000. If consolidated: TDS = Rs.11,800. Annual saving: Rs.1,800 x 12 = Rs.21,600 in excess TDS avoided.
⚠ Common Mistake: Deducting TDS on GST-inclusive amount when invoice clearly separates GST. Over-deducts Rs.1,800/month and forces landlord to claim refund.
Example 3 — Advance rent TDS timing
Scenario: Delta Corp pays 6 months advance rent Rs.6,00,000 on 1 April. Monthly rent Rs.1,00,000.
Working: TDS trigger: 1 April (payment date). TDS on Rs.6,00,000 = Rs.60,000. Deposit by 7 May. Remaining 6 months: Rs.10,000 TDS/month. Year total TDS = Rs.1,20,000 = 10% of Rs.12,00,000.
⚠ Common Mistake: Spreading TDS on advance rent across 6 months. Payment date is the trigger — full Rs.60,000 TDS due on 1 April.
Action Guide
- 1Create a landlord register — list every person to whom rent is paid, with their PAN and annual rent amount.
- 2Verify if cumulative rent per landlord exceeds ₹2,40,000/year; if yes, 194I is triggered.
- 3Apply 10% TDS for land, building, furniture or fittings; 2% for plant, machinery or equipment.
- 4If GST is charged, request a bifurcated invoice and deduct TDS only on base rent (CBDT Circular 23/2017).
- 5If landlord has a lower deduction certificate (Section 197), deduct at the rate specified therein.
- 6Deposit using ITNS 281 challan with correct section code (94I).
- 7File Form 26Q quarterly; issue Form 16A to landlord within 15 days of return filing.
✓ Do This
- ✓Deduct on credit or payment, whichever is earlier
- ✓Aggregate rent from same landlord across all properties
- ✓Apply for Section 197 lower deduction certificate if landlord has large mortgage deductions
✗ Avoid This
- ✗Do not deduct TDS on the GST component if invoice is bifurcated
- ✗Do not ignore Section 44AB — individuals with auditable books must also deduct
- ✗Do not miss the catch-up deduction when threshold is crossed mid-year