by What is TDS?
Tax Deducted at Source (TDS) is a system where tax is deducted at the time of making certain payments like rent, salaries, and professional fees. This ensures tax collection in advance and minimizes tax evasion.
What is Section 194I?
Section 194I of the Income Tax Act mandates the deduction of TDS on rent paid to a resident when the annual rent exceeds a specific threshold.
Applicability of Section 194I
TDS on rent applies to individuals (if covered in tax audit), firms, and companies making rental payments above a prescribed limit in a financial year. As per Budget 2025, the threshold for TDS deduction under Section 194I has been increased from ₹2.4 lakh to ₹6 lakh per year.
TDS Rates Under Section 194I
✅ 2% for the use of plant, machinery, or equipment.
✅ 10% for the use of land, buildings (including factory buildings), furniture, or fittings.
Who Needs to Deduct TDS?
- Companies, firms, and individuals liable for a tax audit must deduct TDS if the annual rent exceeds ₹6 lakh.
- Individuals and Hindu Undivided Families (HUFs) not subject to tax audit are exempt from TDS deduction under this section.
Key Changes in Budget 2025
📌 Increase in TDS Exemption Limit:
➡️ Previously, TDS was applicable if the rent exceeded ₹2.4 lakh annually. Now, it applies only if the total rent paid exceeds ₹6 lakh per year.
📌 Reduction in TDS Rate for Certain Individuals:
➡️ Under Section 194-IB, individuals or HUFs (not subject to audit) paying rent of more than ₹50,000 per month were earlier required to deduct TDS at 5%. This rate has now been reduced to 2%.
How is Rental Income Taxed?
Rental income falls under the category ‘Income from House Property’ and is taxed accordingly. The computation includes:
1️⃣ Gross Annual Value (GAV): The higher of actual rent received or expected market rent.
2️⃣ Net Annual Value (NAV): GAV minus municipal taxes paid by the owner.
3️⃣ Deductions Allowed:
✅ Standard Deduction (30%) for maintenance and repairs, regardless of actual expenses.
✅ Interest on Home Loan: Deduction for interest paid on loans taken for purchase, construction, repair, or renovation of the property.
Conclusion
Understanding TDS on rent and taxation of rental income is crucial for compliance and financial planning. Budget 2025 has provided relief by increasing the TDS threshold to ₹6 lakh and reducing the TDS rate for certain taxpayers. These updates aim to ease compliance and lessen the financial burden on taxpayers.
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