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

Key Takeaways
 

• Section 194I mandates TDS on rent payments exceeding ₹2,40,000 per year, ensuring tax compliance in high-value rental transactions. 
   
• TDS is deducted at 10% for land, buildings, furniture, and fittings, and 2% for plant or machinery, depending on the asset type.
   
• Tenants must deduct TDS at the time of credit or payment, deposit it by the 7th of the next month, and file quarterly returns. 
   
• Exemptions apply to small tenants, non-audited individuals/HUFs, and government entities, reducing compliance burden on low-value transactions.

BONUS: AS PER THE INCOME TAX INDIA PORTAL, THE THRESHOLD FOR TDS ON RENT UNDER SECTION 194I WAS RAISED FROM ₹1,80,000 TO ₹2,40,000 IN FY 2019-20, PROVIDING RELIEF TO SMALL BUSINESSES. THE GOVERNMENT CONTINUES TO REFINE TDS PROVISIONS, ENSURING FINTECH STARTUPS AND CORPORATES MAINTAIN ACCURATE COMPLIANCE.

Section 194I of the Income Tax Act requires tenants to deduct tax at source on rent payments exceeding ₹2,40,000 annually.

Rajesh Mehta, who runs a fintech co-working startup in Bengaluru, pays ₹70,000 per month as office rent, totalling ₹8,40,000 annually. As this amount crosses the ₹2,40,000 threshold, Section 194I applies. He must deduct 10% TDS on rent for buildings, which equals ₹7,000 each month. 

Over the year, the total TDS deducted becomes ₹84,000. Rajesh deposits this with the government on time, files Form 26Q quarterly, and issues Form 16A to his landlord. By complying with Section 194I rules, he avoids penalties and ensures both his company and the landlord remain tax-compliant. 
This blog will help you understand more about Section 194I, Importance, and its objective. 

Section 194I of the Income Tax Act:

Section 194I of the Income Tax Act deals with tax deduction at source (TDS) on rent payments. If rent exceeds ₹2,40,000 in a financial year, the payer must deduct tax before making payment. The rate depends on the type of asset,10% for land, buildings, furniture or fittings, and 2% for plant or machinery.

For Example, Anita Kapoor, who operates a fintech consultancy in Delhi, rents an office space for ₹55,000 per month. Her annual rent is ₹6,60,000, which crosses the ₹2,40,000 threshold. Therefore, under Section 194I, she must deduct 10% TDS every month, which equals ₹5,500. Over the year, this amounts to ₹66,000. This TDS is deposited with the government, while the landlord receives the balance rent.

Importance of Section 194I of Income Tax

Section 194I plays a crucial role in ensuring timely tax collection on high-value rental transactions. It helps the government track rental income, prevents tax evasion, and builds a transparent financial system. For fintech companies, which often operate in leased spaces or use rented equipment, compliance with Section 194I ensures smooth audits and avoids heavy penalties.

Before diving into the table, let us understand that Section 194I is not just about compliance; it directly influences accountability, revenue collection, and trust in financial transactions.

This table clearly shows that Section 194I is not only a legal requirement but also a systematic way to monitor rental income and maintain compliance.

Objectives of Section 194I of Income Tax

The government introduced Section 194I with specific objectives in mind. These objectives focus on compliance, fair tax contribution, and widening the tax base: 

The above table proves that Section 194I is not only about collecting taxes but also about creating a transparent financial environment.

TDS Rates Under Section 194I of Income Tax

The TDS rate depends on the type of rent paid. If the rent is for plant, machinery, or equipment, 2% TDS applies. If the rent is for land, building, furniture, or fittings, the rate is 10%. For non-resident landlords, a higher rate applies: 

Meera Sharma pays ₹1,00,000 per month to rent a factory building. Annual rent is ₹12,00,000. Since it is a building, TDS applies at 10%. She deducts ₹10,000 monthly and deposits ₹1,20,000 annually with the government.

The rate of deduction depends not only on the type of rented asset but also on the landlord’s status and PAN availability.

Exemptions under Section 194I of Income Tax

Section 194I provides exemptions to ensure smaller transactions and certain specific cases are not burdened with TDS compliance.
 

Riya Verma, a freelance fintech consultant, rents a small office for ₹18,000 per month. Annual rent = ₹2,16,000. Since this is below the ₹2,40,000 threshold, no TDS is deducted.

These exemptions safeguard individuals and small businesses from unnecessary compliance, keeping Section 194I targeted at significant transactions.

Compliance and Due Date Requirements of Income Tax

Section 194I involves strict deadlines. Non-compliance can result in penalties: 

1. TDS Deduction Timing: At the time of credit or payment, whichever is earlier.
    
2. TDS Deposit Due Date: By the 7th of the following month; for March, by 30th April.
    
3. TDS Return (Form 26Q): Quarterly filing is mandatory.
    
4. TDS Certificate (Form 16A): Issued to landlords quarterly.
    
5. Penalty: 1% per month for late deduction and 1.5% per month for late deposit.
    

Following these compliance steps avoids interest, penalties, and unnecessary legal complications.

Conclusion

Section 194I of the Income Tax Act is a key compliance rule for businesses, especially in fintech, where rental costs form a major expense. By deducting TDS on time and filing returns, both tenants and landlords ensure financial transparency and avoid penalties. This not only helps individuals and firms stay legally compliant but also strengthens India’s tax system by preventing leakage of revenue.

FAQ:

1. Does Section 194I apply to co-working spaces billed as service invoices rather than rent agreements?

Only if the charges qualify as rent; purely service-based invoices may not attract Section 194I.

2. Can input GST be claimed on the TDS deducted under Section 194I?

No, TDS under Section 194I cannot be claimed as input GST credit.

3. Is TDS under Section 194I applicable on rent paid to Real Estate Investment Trusts (REITs)?

Generally exempt if paid to notified REITs; otherwise, Section 194I may apply.

4. If the rent is paid in advance for 3 years, how should TDS be deducted under Section 194I?

TDS must be deducted on the full advance amount in the year of payment.

5. Does Section 194I of the Income Tax Act apply to advance rent payments?
Yes, it applies to advance rent unless the amount is fully refundable at the end of tenancy.

6. Is Section 194I of the Income Tax Act applicable to fintech startups?
Yes, fintech startups must deduct TDS if their rent exceeds ₹2,40,000 in a financial year.

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