Income Tax

Section 194I of the Income Tax Act lays down the principles of taxation for rental income. Individuals earning rental income are subject to TDS, including rent on buildings, land, furniture, machinery, etc.  

Institutionally, the Government can introduce TDS to tax income at its source. TDS minimizes the chances of tax evasion irrespective of the source. Rents and payments from buildings and property are liable to taxation under Section 194I Of Income Tax.

What is TDS under Section 194I of Income Tax?

Section 194 lists the types of income and payments liable for taxation for an Indian citizen. Section 194I highlights the taxation on rental income. Individuals earning more than the newly amended limit of Rs. 2,40,000 annually are liable for TDS deductions. 

Any individual generating income from rental income is liable for taxation. This includes rents on a property, machines, equipment, buildings, offices, furniture, etc. 

Previously the limit for taxation under this section was Rs.1,80,000 until 2018-19. The rule also applies to HUF (Hindu Undivided Family) under section 2(31) of the Income Tax Act, 1961.

The Reason behind Introducing Section 194I of the Income Tax Act

This section states that individuals earning from rents or leasing out properties are liable for taxation. The income tax department introduced it because it is an additional income earned by salaried and business people. 

Properties are important sources of investment. As a result, investment prices appreciate in the long run, and it constitutes regular monthly incomes for individuals and HUFs alike. Plus, the IT department can directly tax rents at the source. 

Meaning of “Rent” Under Section 194I of Income Tax

The principal inclusion in Section 194I of Income tax is rent. This section defines rent as a payment obtained from leasing or sub-leasing properties. Properties liable to earn rental income include-

• Land, building, factory, or similar space.
• Factory machinery, plants, equipment or furniture, and fittings

Rental income is taxable irrespective of whether the tenant entirely owns it. This also includes sub-letting on behalf of owners/landlords. Advance payments and any other non-refundable payments are taxable under this section.  

Also read: Taxability Of Rental Income: Calculation, Deductions And Exemptions https://navi.com/blog/tax-on-rental-income/

List of Payments under TDS Section 194I

Section 194I covers all types of incomes that fall under the ‘rent’ category. A tax deduction is not necessarily a monthly liability. It depends on the crediting of rent which can be done quarterly or even annually.  

These include:

• Income from renting out factory buildings- This includes income from property rents and advance payments. Usually, there is minimal delay in tax collection, which might pose a potential burden on taxpayers and tax officers alike. 
• Service charges: Service charges or cover payments payable to business centres are liable to tax deductions. 
• Renting out buildings and furniture: Rent collected from letting out buildings and furniture are also liable to tax payments. However, if a different person lets out the building and furniture, TDS is payable only on the building rent. 
• Cold storage facilities: Like other plants, cold storage attracts TDS payable for renting the cold storage facility and not the building. 
• Catering: Section 194I does not apply to payments from hotel catering services. However, section 194C provisions taxation for catering services. 

Who Is Liable to Deduct Tax under Section 194I of Income Tax?

• Individuals paying rent are liable to deduct taxes at the source. Eligible HUFs are also entitled to tax deductions. 
• Section 194I is applicable if the revenue collected as rental income exceeds Rs.2,40,000. 
• Additionally, Section 194I B states that if individuals/HUFs (ineligible for taxation) pay rental income higher than Rs.50,000/month, TDS is applicable at 5%. 

Tax Rates under Section 194I

Non-Deductible Circumstances under Section 194I

A potential taxpayer can, under certain circumstances, apply for less or no deduction to the assessing officer through Form 13. The assessing officer checks his/her total income and, depending on whether it is justified or not, issues Form 15AA.  

Apart from these reasons, rental income to government enterprises is not tax deductible. Also, proceeds from film distribution are subject to numerous composite services which are not tax deductible. 

Time Limit for Paying Taxes under Income Tax Act Section 194I

Section 194I of Income Tax rules that taxes payable to government agencies should be done on the same day. In other cases, the tax amount is payable 7 days before the end of the month.

Consequences/Penalties for Not Paying Taxes under Section 194I

Typically, Section 194I rules that taxpayers pay 1% per month as a penalty for untimely payments. Non-payment of taxes after deductions attracts a penalty of 1.5% per month.

Final Word

Taxation on rental payments is an essential source of revenue for the Government. Section 194I Of Income Tax states that any individual earning rental income is liable to deduct taxes on the source. The 2017 amendments raise the minimum limit for tax deductions and make taxation obligatory for HUFs and individuals under certain conditions.

FAQs on Section 194I Of Income Tax

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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.