Renting commercial premises brings with it a tax deduction at source (TDS) obligation that many businesses overlook until a notice arrives. Section 194-I of the Income-tax Act governs TDS on rent paid for land, buildings, plant and machinery, while Section 194-IB covers certain individuals and HUFs who fall outside the audit net. This article explains the applicable rates, the revised thresholds effective from FY 2025-26, who is required to deduct, and how GST is treated, with a worked Mumbai example.<\/p>\n
Section 194-I requires any person (other than an individual or HUF not liable to tax audit) who pays rent to a resident to deduct TDS before making the payment. For this purpose, rent is defined broadly. It includes any payment under a lease, sub-lease, tenancy or any other agreement for the use of land, building (including a factory building), land appurtenant to a building, machinery, plant, equipment, furniture or fittings, whether or not these are owned by the payee.<\/p>\n
This wide definition means that most commercial arrangements are caught, including office space, retail showrooms, warehouses, godowns and factory premises. Payments described as licence fees, facility charges or amenity charges are examined on substance rather than the label used in the agreement.<\/p>\n
The rate depends on the nature of the asset being rented:<\/p>\n
Commercial property rent, being rent for land and building, attracts the 10% rate. No surcharge or cess is added to TDS on payments to residents. Where the landlord does not furnish a valid PAN, Section 206AA applies and TDS must be deducted at 20%.<\/p>\n
The annual exemption threshold under Section 194-I has been raised. Up to FY 2024-25 the limit stood at Rs 2,40,000 per financial year. With effect from 1 April 2025 (FY 2025-26), the threshold has been increased to Rs 6,00,000 per financial year, which works out to Rs 50,000 per month. TDS is required only where the aggregate rent paid or payable to a landlord during the financial year exceeds Rs 6,00,000. If total rent for the year stays within that figure, no deduction is required under this section.<\/p>\n
The obligation falls on businesses and other payers who are not individuals or HUFs, and on those individuals and HUFs whose accounts were required to be audited under Section 44AB in the immediately preceding financial year. In practice this covers companies, LLPs, partnership firms, trusts, and proprietors or HUFs whose business turnover exceeded Rs 1 crore or whose professional gross receipts exceeded Rs 50 lakh in the previous year. Such deductors must hold a Tax Deduction and Collection Account Number (TAN), deduct TDS at the time of credit or payment (whichever is earlier), deposit it with the government, and file quarterly TDS returns.<\/p>\n
Where the rent invoice separately shows Goods and Services Tax, TDS under Section 194-I is deducted on the rent component only and not on the GST amount. This position follows CBDT Circular No. 23\/2017, which clarified that if GST on services is shown separately in the agreement or invoice, TDS is to be applied on the amount paid or payable without including the GST on services. The relief applies only when GST is separately indicated; if the invoice shows a single consolidated figure, TDS is computed on the whole amount.<\/p>\n
Consider a private limited company that leases office space in a commercial tower in Lower Parel, Mumbai, at a monthly rent of Rs 2,00,000 plus 18% GST. The annual rent of Rs 24,00,000 clearly exceeds the Rs 6,00,000 threshold, so TDS under Section 194-I applies.<\/p>\n
The company deposits Rs 20,000 each month to the credit of the central government and reports it against the landlord’s PAN in its quarterly TDS return, allowing the landlord to claim credit.<\/p>\n
Salaried individuals and small proprietors who are not liable to tax audit are not covered by Section 194-I. To bring high-value residential and commercial rent paid by such persons into the TDS framework, Section 194-IB applies. It requires an individual or HUF, whose accounts are not subject to audit under Section 44AB, to deduct TDS where rent to a resident landlord exceeds Rs 50,000 for a month or part of a month.<\/p>\n
The key features of Section 194-IB are:<\/p>\n
An individual paying, say, Rs 70,000 a month for a small commercial unit but not under tax audit would deduct 2% under Section 194-IB, not 10% under Section 194-I.<\/p>\n
Rent for land and building, which covers commercial premises, attracts 10% under Section 194-I. The 2% rate applies only to rent for plant, machinery or equipment.<\/p>\n
From FY 2025-26, TDS applies where annual rent to a landlord exceeds Rs 6,00,000, equivalent to Rs 50,000 per month. The earlier limit of Rs 2,40,000 applied up to FY 2024-25.<\/p>\n
No. If GST is shown separately on the invoice or agreement, TDS is computed on the rent excluding GST, as clarified by CBDT Circular No. 23\/2017.<\/p>\n
Section 194-IB applies. If your rent exceeds Rs 50,000 per month, deduct 2% once a year, deposit it using Form 26QC, and issue Form 16C to your landlord. No TAN is needed.<\/p>\n
Failure attracts interest, a possible disallowance of part of the rent expenditure, late-filing fees and penalties. Timely deduction, deposit and return filing protect both the tenant and the landlord’s tax credit.<\/p>\n