TDS on Rent: Section 194I Rates and Common Mistakes | FinTax24

If you pay rent above ₹2,40,000 in a year to a landlord in India, you are required to deduct tax at source before making the payment. Section 194I of the Income Tax Act, 1961 sets the rate at 10% for rent of land, building or furniture and 2% for rent of plant, machinery or equipment. The tax must be deducted at the time of credit or payment, deposited with the government by the 7th of the next month, and reported in Form 26Q every quarter. Failing to deduct or deposit on time triggers interest under Section 201(1A), disallowance of the rent expense under Section 40(a)(ia), and in some cases penalty under Section 271H.

This post is the operational guide: who must deduct, what the threshold covers, how the rate applies to mixed payments, how to deposit and file, and the mistakes that routinely generate notices.

Quick Answer

A business or individual paying rent to a resident landlord in India must deduct TDS under Section 194I when the total rent paid (or payable) to that landlord during the financial year exceeds ₹2,40,000. The rate depends on what is being rented:

Asset rented	TDS rate
Land, building, or furniture (including fittings)	10%
Plant, machinery, or equipment	2%
Both land/building and plant/machinery (separate invoices)	Apply 10% and 2% separately to each component
No PAN furnished by the landlord	20% under Section 206AA

TDS is deducted at the time of credit or payment, whichever is earlier; deposited by the 7th of the next month under challan 281; reported in Form 26Q quarterly; and a Form 16A TDS certificate is issued to the landlord within 15 days of the TDS return filing.

What Section 194I Covers

Section 194I applies to any payment of “rent” — the consideration paid for the right to use — to a resident landlord. It does not apply to payments to non-resident landlords, which fall under Section 195.

Within Section 194I, two rates apply depending on the nature of the asset:

• Land, building, or furniture — 10%. This is the default rate and covers most commercial rent, office rent, warehouse rent, shop rent, residential rent paid by businesses, and rent paid for furniture and fittings inside the premises.
• Plant, machinery, or equipment — 2%. This covers equipment hire (e.g., generator hire, machine hire, vehicle lease where the lessor retains substantially all the risks and rewards of ownership, earthmoving equipment, tower cranes, server racks rented under an operating lease).

The boundary that creates confusion: 194I vs 194C vs 194J

When the asset is plant or machinery, the payment is not always Section 194I. The classification depends on the agreement structure:

Nature of payment	Applicable section	TDS rate
Hire of equipment for use, no service contract	Section 194I	2%
Hire of equipment bundled with operation and maintenance (a service contract)	Section 194C	1% (individual/HUF) / 2% (others)
Lease rental of equipment that is a finance lease (substantially all risks transferred)	Section 194I	2% (operating lease treatment; CBDT Circular No. 7/2007)
Royalty or technical know-how fee paid for use of equipment	Section 194J	10%

In practice, the agreement title is not decisive — the substance matters. A hire agreement that includes operator services is generally 194C; a pure asset-hire agreement is 194I.

GST and Section 194I are independent

GST on rent is governed separately by the GST law (see our guide on GST on rent). Section 194I operates on the rent component — not on GST. When computing TDS, the rate is applied to the rent value before GST, unless the invoice is issued on an inclusive-of-GST basis and the rent component is not separately disclosed. Clear invoicing is therefore the first step to clean TDS compliance.

When TDS Applies — Threshold, Rates, and Time of Deduction

The ₹2,40,000 threshold

Section 194I TDS applies when the aggregate rent paid or payable to a single landlord (PAN) during the financial year exceeds ₹2,40,000. This threshold was raised from ₹1,80,000 with effect from 1 June 2016 by Notification No. 31/2016 and has remained unchanged since.

The threshold is calculated per PAN per financial year, not per property. If a business pays ₹1,50,000 each to two branches of the same landlord (same PAN), the threshold is breached even though each payment is below ₹2,40,000.

Time of deduction

Section 194I read with Section 191 requires deduction at the earlier of:

• The time of credit of the rent to the landlord’s account in the books of the deductor, or
• The time of actual payment of the rent in cash, by cheque, by bank transfer, or by adjustment against any other amount owed.

Many businesses credit rent in their books on the last day of the month but pay on the 5th of the following month. In that case, TDS is deducted on the credit date, not the payment date. The TDS amount then needs to be deposited by the 7th of the month following the month in which the deduction was made.

Rate in the absence of PAN

If the landlord fails to furnish a PAN, the deductor must apply Section 206AA and deduct at 20% (or the rate specified in Section 194I, whichever is higher). A landlord’s Aadhaar is not a substitute for PAN for this purpose — Section 206AA specifically requires PAN.

Rent in kind

Section 194I applies to rent paid in cash, by bank transfer, or by adjustment. Where rent is paid in kind (e.g., free use of services, free accommodation in lieu of rent), the question of whether TDS applies depends on whether the benefit can be valued and is debitable in the books. In practice, most businesses prefer to convert kind rent into cash rent to keep the TDS treatment clean.

Worked Examples

Example 1: Office rent — straightforward 10% TDS

ABC Pvt Ltd rents an office in Mumbai from Mr. Sharma for ₹25,000 per month. PAN is on file.

• Annual rent: ₹3,00,000
• Threshold: ₹2,40,000 — exceeded
• TDS rate: 10% (land/building)
• TDS per month: 10% × ₹25,000 = ₹2,500
• TDS deposit: by 7th of next month under challan 281
• Quarterly Form 26Q: total TDS ₹7,500 for the quarter (3 months)
• Form 16A: issued to Mr. Sharma within 15 days of filing Form 26Q

Example 2: Plant hire — 2% TDS

A garment factory rents sewing machines from a leasing company for ₹80,000 per month. PAN is on file.

• Annual rent: ₹9,60,000
• TDS rate: 2% (plant/machinery)
• TDS per month: 2% × ₹80,000 = ₹1,600
• TDS deposit: by 7th of next month
• Form 26Q quarterly: ₹4,800

Example 3: Mixed rent — both rates in one agreement

A restaurant pays a single landlord ₹60,000 per month for the premises, of which ₹10,000 covers hire of kitchen equipment embedded in the agreement. The invoice should ideally separate the two.

If the invoice is silent on the split:

• Total rent: ₹60,000/month
• Without a clear split, the conservative approach is to treat the entire amount as 10% rent unless the agreement explicitly identifies an equipment-hire component
• TDS: 10% × ₹60,000 = ₹6,000/month

If the agreement clearly identifies ₹50,000 as premises rent and ₹10,000 as equipment hire:

• TDS on ₹50,000: 10% = ₹5,000
• TDS on ₹10,000: 2% = ₹200
• Total TDS: ₹5,200/month

The cleaner the split in the agreement, the cleaner the TDS calculation, the cleaner the Form 26Q.

Example 4: Advance rent

A business signs a 3-year lease and pays ₹6,00,000 as advance rent (₹2,00,000 per year × 3 years) at the start of the lease. PAN is on file.

• Advance rent received: ₹6,00,000
• TDS at credit/payment: 10% × ₹6,00,000 = ₹60,000 deducted in the month the advance is paid
• The landlord can claim the credit of this ₹60,000 over the 3-year period in their ITR (subject to the Income from House Property rules); the deductor reports the full ₹60,000 in Form 26Q of the quarter in which the advance is paid.

Example 5: Threshold not crossed

A freelance consultant pays ₹18,000 per month as office rent to a landlord. PAN is on file.

• Annual rent: ₹2,16,000
• Threshold: ₹2,40,000 — not exceeded
• TDS: not required. No Form 26Q entry, no challan, no Form 16A.

But the moment rent crosses ₹2,40,000 in any subsequent year (e.g., rent is increased to ₹21,000/month), TDS obligation arises for that year from the very first payment.

Step-by-Step — How to Deduct, Deposit, File and Issue the Certificate

Step 1 — Capture landlord PAN and confirm threshold

Before paying the first instalment of rent:

• Collect a copy of the landlord’s PAN card (or PAN allotment letter). PAN is mandatory for any TDS return entry above ₹40,000 aggregate in a year.
• Confirm whether the landlord is a resident (Section 194I) or non-resident (Section 195).
• Confirm the rent amount and whether it is exclusive of GST.
• Aggregate the expected annual rent with any other rent paid to the same PAN. If it exceeds ₹2,40,000, TDS applies.

Step 2 — Deduct at credit or payment, whichever is earlier

If rent is credited on the last day of the month but paid on the 5th of the next month, the TDS obligation crystallises on the credit date. In your books, post:

• Rent expense: debit
• TDS on rent (Section 194I): credit
• Rent payable to landlord: credit

The TDS credit account is cleared when the challan is deposited.

Step 3 — Deposit TDS under challan 281 by the 7th of next month

Pay the TDS using Challan No. 281 on the TIN-NSDL portal (for non-government deductors) or via the income tax e-filing portal. Use the appropriate section code:

• Section code 194I with type “Rent — Land/Building/Furniture” for 10% payments
• Section code 194I with type “Rent — Plant/Machinery/Equipment” for 2% payments

Use the major head 0021 — Income Tax on Companies for companies and major head 0020 — Income Tax on Non-Companies for individuals, HUFs, firms, LLPs, AOPs, BOIs and others. Save the BSR code and challan serial number — you will need them when filing Form 26Q.

The deposit is due by the 7th of the month following the month of deduction (Rule 30 of the Income Tax Rules, 1962). A deduction in March 2026 must reach the government by 7 April 2026.

Step 4 — File Form 26Q quarterly

TDS deducted under Section 194I is reported in Form 26Q (non-salary, non-NRI TDS). Due dates:

Quarter	Period	Due date
Q1	April – June	31 July
Q2	July – September	31 October
Q3	October – December	31 January
Q4	January – March	31 May

Form 26Q is filed on the TRACES portal (now accessed via the income tax e-filing portal under TDS → File Form 26Q). The form requires deductee-wise details: PAN, name, section code, gross payment, TDS amount, and the challan against which TDS was deposited.

Step 5 — Issue Form 16A within 15 days of return filing

After Form 26Q is processed, download Form 16A (TDS certificate for non-salary payments) from TRACES and issue it to the landlord within 15 days from the due date of the TDS return (Section 203 read with Rule 31). The landlord claims the TDS credit in their ITR based on Form 16A and the corresponding entry in Form 26AS / AIS.

Step 6 — Reconcile Form 26AS / AIS

Verify in Form 26AS / AIS that the TDS deducted and deposited appears under the landlord’s PAN for the correct section code and quarter. If the entry is missing or mismatched, the landlord’s ITR will not auto-credit the TDS — and you will have to file a correction statement.

Section 194IB — The Simpler Path for Individuals and HUFs

A separate, simpler TDS provision applies when the deductor is an individual or HUF who is not required to get their books audited under Section 44AB (typically, businesses with turnover below the audit threshold, professionals with gross receipts below the threshold, and individuals earning rental income without business audit).

Section 194IB requires the tenant (individual or HUF) to deduct TDS at 5% on rent paid to a resident landlord when the rent for the month (or part of the month) exceeds ₹50,000. The TDS is deducted on the total rent paid during the previous financial year (or the rent expected for the current year, whichever is higher), and must be deposited using Challan 26QC by the 7th of the month following the month of deduction.

The TDS return for Section 194IB is Form 26QC (a single challan-cum-statement, not Form 26Q), and a Form 16C TDS certificate is generated from TRACES and issued to the landlord within 15 days from the due date of Form 26QC.

In short:

Situation	Section	Rate	Return	Certificate
Company / LLP / firm / audited individual paying rent > ₹2.4L/year	194I	10% / 2%	Form 26Q (quarterly)	Form 16A
Individual / HUF (not audit-bound) paying rent > ₹50,000/month	194IB	5%	Form 26QC (one per payment)	Form 16C
Any deductor paying rent to a non-resident	195	20%+	Form 27Q (quarterly)	Form 16A

Common Mistakes

The mistakes below are the ones we see generating Section 201 / 271H / 40(a)(ia) notices year after year. Treat the numbered list as the audit checklist.

1. Treating security deposit as not subject to TDS. Refundable, interest-free security deposits that do not convert into rent are generally not subject to TDS. But if the deposit carries implicit interest, or if any portion is adjusted against rent, the adjusted amount is rent and TDS applies. Banks and software tools flag “security deposit” without scrutiny; the analysis must be on the agreement.
2. Splitting rent across multiple landlord PANs to stay under the threshold. If the same beneficial owner holds two PANs (or uses family members’ PANs) and you pay each below ₹2,40,000, this can be treated as tax avoidance. The department looks at substance over form. Better to deduct TDS, file the return, and avoid the notice.
3. Deducting TDS only on the component above the threshold. Section 194I requires TDS on the entire rent once the threshold is crossed, not just on the amount above ₹2,40,000. If annual rent is ₹3,00,000, TDS is 10% on ₹3,00,000 (₹30,000), not 10% on ₹60,000.
4. Treating plant hire under 194C instead of 194I (or vice versa). Equipment hire without operator service is 194I at 2%; equipment hire with operator service is 194C at 1%/2%. Misclassification is a common trigger for short-deduction notices.
5. Missing the 7th-of-next-month deposit deadline. TDS deducted in March must reach the government by 7 April. Businesses that run their payables cycle monthly often deposit March TDS in April’s batch and miss the deadline. Section 201(1A) interest at 1.5% per month applies from the due date.
6. Not deducting TDS on advance rent. Advance rent is also subject to TDS at the time of credit or payment, even if the rental period is months or years in the future. The landlord can claim credit over the rental period, but the deduction is upfront.
7. Issuing Form 16A late. Form 16A must be issued within 15 days of the due date of Form 26Q. Late issuance is a separate procedural default and the landlord cannot easily claim TDS credit without it.
8. Filing Form 26Q with the wrong section code. Section 194I uses two sub-types (land/building/furniture vs plant/machinery). Using the wrong sub-type invites a correction notice.
9. Ignoring 194IB when paying rent above ₹50,000/month as an individual tenant. If you are an individual renting office space for a freelance practice and pay more than ₹50,000 in a month, Section 194IB applies at 5%, even though the annual threshold of 194I is not crossed.
10. Not reconciling Form 26AS / AIS at year-end. The landlord’s credit depends on your Form 26Q filing. Mismatches (wrong PAN, wrong section code, wrong amount) mean the landlord does not get credit, the ITR processing fails, and you receive a Section 201 deemed assessee notice.

FAQ

What is the rate of TDS on rent of land or building?

The TDS rate under Section 194I on rent paid for land, building or furniture is 10% of the rent amount. The rate is 2% if the rent is for plant, machinery or equipment. The rate becomes 20% if the landlord does not furnish a PAN (Section 206AA). TDS is not required if total annual rent to the same landlord PAN does not exceed ₹2,40,000 in the financial year.

Is TDS applicable if I pay rent below ₹20,000 per month?

Yes, in most cases. The threshold under Section 194I is ₹2,40,000 per financial year, not per month. A monthly rent of ₹20,000 totals ₹2,40,000 over 12 months and therefore reaches the threshold — TDS applies on the entire annual rent from the first payment. Lower monthly rent that aggregates to ₹2,40,000 or below over the year does not require TDS, but the calculation should include any escalation clauses and any advance rent.

Is TDS on rent applicable on the GST component?

TDS under Section 194I is calculated on the rent value. If the invoice clearly separates rent and GST, TDS applies only on the rent value. If the invoice is silent or states the amount as “inclusive of GST”, the TDS should be computed on the rent component after backing out GST at the applicable rate. In practice, the cleanest approach is to keep rent and GST separate on every invoice — this also makes the GST treatment of the rent straightforward.

What is the difference between Section 194I and Section 194IB?

Section 194I applies to companies, firms, LLPs, and any deductor (including individuals subject to audit) paying rent to a resident landlord; the threshold is ₹2,40,000 per year and the rate is 10% / 2%. Section 194IB is a simpler route available only to individuals and HUFs who are not required to get their books audited under Section 44AB; it applies when rent exceeds ₹50,000 in a month and the TDS rate is 5% on the entire annual rent paid or payable. Section 194IB uses Form 26QC and Form 16C, instead of the Form 26Q and Form 16A used by Section 194I.

What is the penalty for not deducting TDS on rent?

Failure to deduct TDS on rent triggers three layered consequences:

• Section 201(1A) interest at 1% per month (or part of the month) on the TDS amount not deducted, from the date the deduction should have been made until the date it is actually deducted.
• Section 201(1A) interest at 1.5% per month on TDS deducted but not deposited with the government, from the date of deduction until the date of deposit.
• Section 40(a)(ia) disallowance of the rent expense — for rent paid to a resident landlord, the entire rent is disallowed in the P&L if TDS is not deducted (Finance Act 2017, effective from FY 2018-19 onwards). Earlier, only 30% was disallowed.

In addition, the deductor may be treated as a “deemed assessee” under Section 201 and asked to pay the TDS, interest, and any penalty that the department may levy under Section 271H for late filing of the TDS return. Prosecution under Section 276B is theoretically possible for repeated wilful default.

Is TDS applicable on security deposit paid to a landlord?

Refundable, interest-free security deposits that are not adjusted against rent are generally not subject to TDS under Section 194I. However, if the deposit carries implicit interest (e.g., the deposit is refunded after several years without any agreed interest, but the time value of money suggests an implicit return), the department may treat the notional interest as rent. If any portion of the deposit is adjusted against rent at any point during the lease, the adjusted amount is rent and TDS applies from the date of adjustment. The safer practice is to keep the security deposit clearly separate from rent in the agreement and the books.

What if the landlord does not give a PAN?

Under Section 206AA, if the landlord does not furnish a PAN, the deductor must deduct TDS at 20% or the rate specified in Section 194I (10% / 2%), whichever is higher — so the effective rate becomes 20%. In addition, the deductor cannot claim credit for this TDS in any subsequent correction or refund — the 20% deposit is treated as the final liability. The correct remedy is to obtain the PAN before making the payment. PAN can also be verified on the income tax e-filing portal before relying on a copy provided by the landlord.

Can rent paid to a non-resident landlord be deducted under Section 194I?

No. Section 194I applies only to payments to resident landlords. Payments to non-resident landlords for rent of property situated in India are governed by Section 195 of the Income Tax Act, and the TDS rate depends on the applicable Double Taxation Avoidance Agreement (DTAA) between India and the country of residence of the landlord. The procedural requirements under Section 195 are more complex and typically require the non-resident to obtain a TAN, file Form 15CB (a chartered accountant certificate), and the deductor to deposit TDS and file Form 27Q. Where DTAA relief is available, the deductor can apply to the AO for a certificate under Section 197 reducing or nil-ing the TDS rate.

Sources and References

• Section 194I, Income Tax Act, 1961 — TDS on rent of land, building, furniture, plant, machinery or equipment
• Section 191, Income Tax Act, 1961 — Time of deduction at source
• Section 200, Income Tax Act, 1961 — Duty to deposit TDS with the government
• Section 201 / 201(1A), Income Tax Act, 1961 — Consequences of failure to deduct or deposit
• Section 203, Income Tax Act, 1961 — TDS certificate
• Section 206AA, Income Tax Act, 1961 — Higher TDS rate when PAN is not furnished
• Section 271H, Income Tax Act, 1961 — Penalty for failure to file TDS return
• Section 40(a)(ia), Income Tax Act, 1961 — Disallowance for non-deduction of TDS (rent: 100% for FY 2018-19 onwards, per Finance Act 2017)
• Section 194IB, Income Tax Act, 1961 — TDS by individuals/HUFs not subject to audit
• Section 195, Income Tax Act, 1961 — TDS on payments to non-residents
• Rule 30, Income Tax Rules, 1962 — Due date for deposit of TDS (7th of next month)
• Rule 31A, Income Tax Rules, 1962 — Quarterly TDS returns
• Notification No. 31/2016, CBDT — Revision of Section 194I threshold from ₹1,80,000 to ₹2,40,000, effective 1 June 2016
• CBDT Circular No. 7/2007, dated 3 September 2007 — Clarification on equipment lease classification between Section 194I and Section 194C
• Form 26Q — Quarterly TDS return for non-salary payments
• Form 16A — TDS certificate for non-salary payments
• Challan 281 — TDS deposit challan on the TIN / e-filing portal
• Income Tax e-filing portal: https://www.incometax.gov.in
• TRACES portal: https://www.tdscpc.gov.in

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Disclaimer: This article is for general informational purposes and reflects the position of Section 194I of the Income Tax Act, 1961 as understood at the time of publication. TDS rates, thresholds and procedural rules can change with subsequent Finance Acts, notifications and circulars. The treatment of specific payments — particularly security deposits, advance rent, mixed rent, equipment hire, and payments to non-residents — depends on the facts and the agreement. Consider professional advice before relying on this article for a significant transaction or to respond to a notice.

If your business pays rent under several agreements, or if your landlord refuses to furnish PAN, or if you have received a Section 201 / 271H / 40(a)(ia) notice on a past rent payment, this is a good moment to get a review. FinTax24 handles end-to-end TDS return filing in Form 26Q, including challan reconciliation, quarterly filing, and Form 16A issuance. For back-year defaults and notices, our TDS notice reply service covers the Section 201 deemed assessee defence, Section 271H penalty mitigation and Section 40(a)(ia) disallowance reversal. Share your agreement and the challan history on WhatsApp for a no-charge assessment.