Section 194-I — TDS on Rent Paid by Businesses and Audited Persons

When a company, partnership firm, LLP, or any individual whose accounts are subject to tax audit under Section 44AB pays rent, the obligation to deduct tax at source falls under Section 194-I of the Income Tax Act, 1961. This section is the primary TDS-on-rent provision for business entities and audited persons, and it carries stricter compliance requirements than the simplified Section 194-IB that applies to individual tenants. This guide covers who must deduct, the two rate tiers, the revised threshold introduced by the Finance Act 2025, monthly deduction rules, TAN requirements, Form 26Q filing, and the exact deposit deadlines you must meet.

Who must deduct TDS under Section 194-I?

Section 194-I applies to every person (as defined in the Income Tax Act) who makes a payment of rent and is required to get their accounts audited under Section 44AB. In practice, this includes:

• Companies — both domestic and foreign companies operating in India.
• Partnership firms and LLPs — including limited liability partnerships.
• Individuals and HUFs whose turnover or gross receipts exceed the audit threshold (Rs 1 crore for business, Rs 50 lakh for profession in the preceding FY).
• Cooperative societies, trusts, and associations that are subject to tax audit.
• Government bodies and local authorities.

If you are an individual or HUF whose turnover is below the audit threshold, you fall under Section 194-IB instead. The determining factor is whether a tax audit was applicable to you in the preceding financial year. If it was — regardless of whether you actually got audited — you must comply with Section 194-I.

Two rate tiers: 10% and 2%

Section 194-I distinguishes between two categories of property, each with a different TDS rate:

• 10% — rent paid for land, building (including factory building), furniture, or fittings. This is the more common rate, applying to office spaces, shops, warehouses, residential flats used for business, and furniture provided by the landlord.
• 2% — rent paid for plant, machinery, or equipment. This includes industrial machinery, servers, office equipment, air-conditioning plants, generators, and any other asset that qualifies as plant or machinery under the Income Tax Act.

The rate is applied to the gross monthly rent. There is no deduction for maintenance, electricity, or other charges unless the rent agreement explicitly separates them and the separate amounts are genuine reimbursements at cost. If the agreement states a single composite amount, the entire sum is treated as rent for TDS purposes.

When a single rent payment covers both building and machinery — for example, a factory that includes the building and the machines inside — you need to apportion the rent based on the agreement. If the agreement does not separate them, the higher rate (10%) applies to the entire amount.

The Finance Act 2025 threshold change

Before the Finance Act 2025, Section 194-I used an annual threshold: TDS was required only when the annual rent exceeded Rs 2,40,000 (approximately Rs 20,000 per month). The Finance Act 2025 replaced this with a monthly threshold of Rs 50,000, effective from 1 April 2025. This brought Section 194-I in line with Section 194-IB, which already used the same monthly threshold.

The new threshold means TDS is required when the monthly rent exceeds Rs 50,000. At exactly Rs 50,000, no TDS is needed. The test is strictly monthly — you do not annualise the rent. This is a significant change for businesses that previously fell below the annual threshold but now exceed the monthly one. For example, a firm paying Rs 40,000 per month (Rs 4,80,000 per year) was not required to deduct TDS before April 2025, but would need to if the rent rises to Rs 55,000 per month.

Monthly deduction obligation

Unlike Section 194-IB, where TDS is deducted once at the end of the year or tenancy, Section 194-I requires monthly deduction. You must calculate and deduct TDS from each rent payment as it is made. If you pay rent on the 5th of every month, you deduct TDS on the 5th. If you pay quarterly in advance, you apportion the TDS across the three months and deduct it at the time of payment.

The deduction is made from the gross rent. You pay the landlord the net amount (rent minus TDS). The landlord can claim credit for the TDS when filing their income tax return.

TAN requirement

Section 194-I requires the tenant to have a Tax Deduction and Collection Account Number (TAN). This is separate from your PAN. You must apply for a TAN using Form 49B before you start deducting TDS. The TAN appears on all TDS challans, returns, and certificates. Operating without a TAN attracts a penalty of Rs 10,000.

If you are an individual or HUF who recently crossed the audit threshold, apply for your TAN well in advance. You cannot file Form 26Q without it.

Deposit deadlines

After deducting TDS, you must deposit it with the government by the 7th of the following month. The one exception is March — TDS deducted in March must be deposited by 30 April. The deposit is made using a challan (Form 281) through the NSDL or OLTAS portal, or via your bank's net banking facility using the e-payment option.

Late deposit attracts interest under Section 201 at 1.5% per month (or part of a month) from the date of deduction until the date of deposit. This is in addition to any penalty for late filing of the TDS return.

Quarterly TDS return — Form 26Q

You must file a quarterly TDS return in Form 26Q for every quarter in which you have deducted TDS under Section 194-I. The due dates are:

• Q1 (April–June): 31 July
• Q2 (July–September): 31 October
• Q3 (October–December): 31 January
• Q4 (January–March): 31 May

The return is filed online through the Income Tax Department's TRACES portal (tdscpc.gov.in). You need your TAN, the deductee's PAN, the rent amount, and the TDS amount for each transaction. Late filing attracts a fee of Rs 200 per day under Section 234E, capped at the total TDS amount for the quarter.

Form 16A — certificate for the landlord

After filing the quarterly return, you must issue Form 16A to each deductee (landlord). Form 16A is the TDS certificate for non-salary payments. You can download it from the TRACES portal after the return is processed. It must be issued within 15 days from the due date of filing the return for that quarter.

Jointly owned property — per-owner threshold

When a property has multiple owners, each owner receives rent separately. The Section 194-I threshold applies to each co-owner individually. If you pay Rs 1,00,000 per month split equally between two co-owners (Rs 50,000 each), neither owner's receipt exceeds the threshold, so no TDS is required. But if one owner receives Rs 60,000 and the other Rs 40,000, you must deduct TDS on the Rs 60,000 portion only.

This treatment is consistent with the CBDT's guidance that the threshold is tested against the amount paid to each payee, not the total rent for the property.

Worked example — land/building at 10%

TechVista Solutions Pvt. Ltd. rents an office space for Rs 2,00,000 per month. The rent agreement covers the building and furniture. The landlord's PAN is available. The company has a TAN.

• Monthly rent: Rs 2,00,000
• Applicable section: 194-I (building/furniture)
• TDS rate: 10%
• Monthly TDS: Rs 20,000
• Net to landlord per month: Rs 1,80,000
• Annual TDS: Rs 2,40,000
• Deposit deadline: 7th of each month (30 April for March)
• Return filing: Form 26Q quarterly
• Certificate: Form 16A to landlord each quarter

Worked example — plant/machinery at 2%

GreenChem Industries rents a chemical processing plant for Rs 5,00,000 per month. The agreement specifies that this covers only the plant and machinery, not the building.

• Monthly rent: Rs 5,00,000
• Applicable section: 194-I (plant/machinery)
• TDS rate: 2%
• Monthly TDS: Rs 10,000
• Net to landlord per month: Rs 4,90,000
• Annual TDS: Rs 1,20,000

How Section 194-I differs from Section 194-IB

The fundamental distinction is the payer type. Section 194-I applies to business entities and audited persons; Section 194-IB applies to individual/HUF tenants who are not under tax audit. Both sections now share the same Rs 50,000 monthly threshold (post-Finance Act 2025), but the compliance burden differs significantly:

• Rate: 194-I has two tiers (10%/2%); 194-IB is a flat 2%.
• Deduction frequency: 194-I is monthly; 194-IB is once at year-end or tenancy-end.
• TAN vs PAN: 194-I requires TAN; 194-IB uses your PAN.
• Return: 194-I requires quarterly Form 26Q; 194-IB requires a single Form 26QC.
• Certificate: 194-I issues Form 16A; 194-IB issues Form 16C.
• Cap: 194-IB has a statutory cap (total TDS cannot exceed last month's rent); 194-I has no such cap.

Consequences of non-compliance

Failing to deduct or deposit TDS under Section 194-I carries multiple penalties. The tenant is treated as an "assessee in default" under Section 201, and interest is charged at 1% per month for late deduction and 1.5% per month for late deposit. A disallowance of up to 30% of the expenditure is made under Section 40(a)(ia) if TDS is not deducted or deposited. Additionally, a penalty of equal to the TDS amount may be imposed under Section 271H for failure to file the TDS return, and a late fee of Rs 200 per day applies under Section 234E.

Disclaimer: This article is for informational purposes only and does not constitute tax advice. Tax rules can change and individual situations vary. Please consult a qualified Chartered Accountant before deducting or depositing TDS.