Imagine Rajesh & Co. Pvt. Ltd. pays ₹80,000 per month to a landlord for their office space. Should they cut a cheque for the full amount? No — they must first deduct TDS and then pay. That's the job of Section 194-I: it forces the tenant (the payer) to collect tax at source on rent before handing the money to the landlord.
Who must deduct? Any person other than an individual or HUF — so companies, firms, LLPs, trusts, etc. are all covered by default. Individuals and HUFs only come in if their business turnover/receipts crossed the Section 44AB tax audit limit in the immediately preceding financial year. So if Mr. Sharma (proprietor) had turnover of ₹1.5 crore last year, he too must deduct TDS on rent this year.
The two rates you must memorise:
- 2% — for machinery, plant, or equipment (think: renting a crane, a generator, or a server rack)
- 10% — for land, building (including factory building), furniture, or fittings (think: office space, warehouse, AC units fixed to the office)
If both types are rented together under one agreement, split the payments and apply rates accordingly; if the split isn't available, 10% applies to the combined amount as a safe practice.
Threshold: No TDS if the total rent paid/credited to a single payee during the financial year does not exceed ₹2,40,000. This is an annual limit, not monthly — so a ₹19,000/month rent (₹2,28,000/year) is below the threshold and no TDS is needed. Cross ₹2,40,001 and TDS kicks in from the very first rupee.
Timing of deduction follows the standard TDS rule: deduct at the time of credit to the payee's account or actual payment, whichever is earlier. Even a journal entry to a 'Suspense Account' triggers TDS.
Key exemption: Rent paid to a REIT (Real Estate Investment Trust) for a real estate asset it directly owns is exempt from this section — relevant for larger corporates investing in REITs.
The definition of 'rent' is deliberately wide — it covers any payment under lease, sub-lease, tenancy, or any other arrangement, regardless of whether the landlord actually owns the asset. So even a sub-lease arrangement is covered. This is frequently tested as a 4–5 mark question, especially the rate differentiation and threshold.
Example 1 — Office Rent (Building)
ABC Pvt. Ltd. rents office space from Ms. Iyer at ₹25,000 per month starting April 2025.
| Particulars | Amount |
|---|---|
| Monthly rent | ₹25,000 |
| Annual rent (12 months) | ₹3,00,000 |
| Threshold under 194-I | ₹2,40,000 |
| Exceeds threshold? | Yes |
| Applicable TDS rate (building) | 10% |
| TDS per month | ₹25,000 × 10% = ₹2,500 |
| Amount paid to Ms. Iyer per month | ₹25,000 − ₹2,500 = ₹22,500 |
Final Answer: ABC Pvt. Ltd. deducts ₹2,500 per month as TDS and deposits it with the government. Ms. Iyer receives ₹22,500 net each month.
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Example 2 — Mixed Rent: Building + Machinery
XYZ Ltd. rents a factory shed (building) for ₹40,000/month and a printing machine for ₹10,000/month from the same landlord, Mr. Verma. Annual total = ₹6,00,000.
| Component | Monthly | Annual | TDS Rate | Annual TDS |
|---|---|---|---|---|
| Factory shed (building) | ₹40,000 | ₹4,80,000 | 10% | ₹48,000 |
| Printing machine (machinery) | ₹10,000 | ₹1,20,000 | 2% | ₹2,400 |
| Total TDS | | | | ₹50,400 |
Both components exceed ₹2,40,000 individually when annualised for the building; the machinery alone is ₹1,20,000 (below threshold), but since they are often paid together and the aggregate to the same payee is ₹6,00,000, TDS applies to all payments. Apply separate rates to each component.
Final Answer: XYZ Ltd. deducts ₹50,400 as TDS for the year — ₹48,000 at 10% on building rent and ₹2,400 at 2% on machinery rent.
📖 Bare Act text — Section 194-I, Income Tax Act 1961
(click to expand)
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 the 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 or 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 under this section where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year by the aforesaid person to the account of, or to, the payee, does not exceed two hundred and forty thousand rupees: Provided further that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such income by way of rent is credited or paid, shall be liable to deduct income-tax under this section: Provided also that no deduction shall be made under this section where the income by way of rent is credited or paid to a business trust, being a real estate investment trust, in respect of any real estate asset, referred to in clause (23FCA) of section 10, owned directly by such business trust. Explanation.—For the purposes of this section,— (i) "rent" means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any,— (a) land; or (b) building (including factory building); or (c) land appurtenant to a building (including factory building); or (d) machinery; or (e) plant; or (f) equipment; or (g) furniture; or (h) fittings, whether or not any or all of the above are owned by the payee; (ii) where any income is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.