If you pay rent for office space, machinery, or a guesthouse, you may already be a tax collector for the government, whether you realise it or not. Section 194I of the Income-tax Act, 1961, requires certain rent payers to deduct TDS on rent before they pay the landlord. The rules look simple on paper. In practice, the threshold limits, the rates, and the question of who is liable trip up small businesses every year.

This guide explains TDS on rent under Section 194I, the updated thresholds from FY 2025-26, related provisions like Section 194-IB, and the basic compliance checklist.

What Section 194I Covers

Section 194I applies to any person, except an individual or Hindu Undivided Family (HUF) below the audit threshold, who pays rent above a prescribed limit to a resident. The definition of “rent” here is wide. It covers payment under a lease, sub-lease, tenancy, or any other agreement for use of:

• Land
• Buildings, including factory premises
• Land appurtenant to a building
• Machinery
• Plant
• Equipment
• Furniture or fittings

So if your company hires a generator on monthly rent or rents office space, both can trigger TDS under Section 194I.

The Updated Threshold Limits (FY 2025-26)

The Finance Act, 2025, made an important change. Until 31 March 2025, TDS was triggered once the aggregate rent paid in a financial year crossed Rs. 2,40,000. From 1 April 2025, the threshold has shifted to Rs. 50,000 per month or part of a month.

In effect, the new threshold works out to Rs. 6,00,000 per year. This shift means a few smaller landlords have moved out of the TDS net, while monthly testing has become the new normal.

If rent for any single month crosses Rs. 50,000, TDS applies for that month on the full rent, not just on the amount exceeding the threshold.

TDS Rates Under Section 194I

The rate of TDS depends on the asset being rented:

• Land, building, furniture, or fittings — 10 percent
• Plant, machinery, or equipment — 2 percent

These rates apply to the gross rent before GST. GST is excluded from the TDS base if the GST amount is shown separately on the invoice. For salaried tenants, TDS on salary is a separate compliance area handled under Section 192, and should not be confused with the rent compliance here.

Section 194-IB and Smaller Landlords

What about individuals and HUFs who pay rent but are not under tax audit? They fall under Section 194-IB. The cut-off here is Rs. 50,000 per month. The rate, after 1 October 2024, is 2 percent on the rent for the last month of the tenancy or the year, whichever ends first.

Section 194-IB is a one-time deduction made through Form 26QC. There is no need for a TAN number for these taxpayers. This is a welcome relief for tenants of premium residential properties.

GST on Rent: A Quick Note

Do not confuse TDS on rent with GST on rent. They are separate compliance burdens. Commercial property rent attracts GST at 18 percent. Residential property rented for residential use is generally exempt. From October 2024, residential property rented to GST-registered businesses falls under the reverse charge mechanism, which means the tenant pays the GST directly.

A registered business should ensure its gst registration covers the right state and that every gst return reports rent inputs correctly. Input tax credit on commercial rent is available where the property is used for business, subject to the usual conditions. A clean gst invoice rules trail on rent reduces audit risk dramatically. A gst refund on excess input credit is rarely seen on rent inputs but can arise in export-linked structures. Any gst penalty for wrongful credit can wipe out a year of rent savings.

When and How to Deduct

TDS must be deducted at the earlier of credit of rent to the landlord’s account in the books, or actual payment. The deductor must do four things:

• Have a valid tan number (Tax Deduction and Collection Account Number). Without a TAN, Section 194I deduction is not legally possible.
• Deposit the tds into the government’s account by the seventh of the following month (the thirtieth of April for March deductions).
• File a tds return in Form 26Q every quarter.
• Issue a tds certificate in Form 16A to the landlord.

The TDS certificate is downloadable from the TRACES portal. Without it, the landlord cannot claim credit for the tax already deducted.

PAN Card and Higher TDS

If the landlord does not provide a pan card, Section 206AA kicks in. TDS is then deducted at 20 percent, much higher than the standard rate. So always collect a self-attested PAN copy before the first rent payment.

What Counts as “Rent”

A few specific situations clarified by courts and CBDT circulars:

• Lease premium paid upfront for long-term use is generally not “rent” under Section 194I (it is treated as capital expenditure).
• Cold storage charges are usually not rent; they are service charges.
• Hotel banquet hire for a few days is rent if there is a continuous arrangement, but a single banquet booking is service.
• Common area maintenance charges paid along with rent are usually included in the rent base for TDS unless billed separately and clearly identified.

A Note on Other TDS Sections You May Encounter

Businesses that pay rent often also deduct tax under Section 194C (payments to contractors) and Section 194J (professional or technical services). The rates and thresholds differ. Section 194C generally applies at 1 percent for individual or HUF payees and 2 percent for others. Section 194J applies at 10 percent on professional fees and 2 percent on technical services. Looking up the tds rate chart for the year is a wise habit before every quarterly return. Customs duty and the Excise Act sit in a completely different compliance universe, but small businesses sometimes mix them up with TDS. They are separate. TDS sits inside the income tax framework.

Common Compliance Mistakes

• Forgetting to deduct TDS in months where rent crosses Rs. 50,000 even if the annual rent is below Rs. 6,00,000
• Deducting on the GST-inclusive amount
• Missing the TAN registration and trying to deduct anyway
• Wrong section codes in TDS returns
• Issuing the TDS certificate late, which leads to landlord disputes
• Forgetting Section 194-IB for individual tenants of high-value residential properties

Penalties for Non-Compliance

The Income Tax Department takes TDS defaults seriously:

• Interest at 1 percent per month for non-deduction (or 1.5 percent for non-deposit)
• Penalty under Section 271C, up to the TDS amount
• Disallowance of 30 percent of the rent expense under Section 40(a)(ia)
• Late filing fee of Rs. 200 per day for delayed TDS returns

For a small business renting an office, a single year of non-deduction can wipe out the tax benefit of the rent expense entirely.

ITR Filing and the Landlord’s Side

The landlord receives the TDS certificate (Form 16A) and uses it for itr filing. The TDS amount appears in Form 26AS and the Annual Information Statement. If the rent income is below the basic exemption limit, the landlord can claim a refund. For high-rent landlords, the TDS credit reduces their final tax liability.

Closing Thoughts

Section 194I is a small section with big compliance teeth. The new monthly threshold makes it easier in spirit but stricter in practice. Anyone running a business that pays rent of any kind — for office, plant, machinery, or fittings — should treat the TDS on rent calendar with the same seriousness as GST returns. A cheap mistake in TDS today becomes an expensive penalty next year.

References

• Income-tax Act, 1961, Sections 194I, 194-IB, 206AA, 271C
• Finance Act, 2025
• CBDT Circular updates on revised thresholds, FY 2025-26
• ClearTax, “Section 194I — TDS on Rent”
• Income Tax Department, “TDS Rates”, incometaxindia.gov.in
• ICICI Prudential Life, “TDS on Rent — Section 194I of Income Tax Act”
• RegisterKaro, “TDS Rate Chart for FY 2025-26 in India (Updated)”