Owning property can be a great way to make passive income. However, it does involve the need to familiarize yourself with taxation laws. If you do not pay the right taxes on time, you will be fined in various ways.
The Indian tax system has a phenomenal mode which is called TDS, the Tax Deducted at Source. When an individual makes a payment such as a salary, interest, rent, etc., the TDS amount will be deducted from the recipient while paying the amount. The deducted tax amount then goes to the government directly on behalf of the recipient. It is used for various growth schemes of the nation.
Picture yourself facing the perplexing scenario of multiple tenants occupying your commercial property. One pays a fixed monthly rent, while another pays a percentage of their sales as rent. How do you calculate TDS in such a bewildering situation? In this article, we are particularly guiding you through the TDS on commercial property rent and its conditions.
No worries, our easy guide will help you navigate this path.
What Constitutes Rent?
Rent, in the context of commercial property, refers to the payment made by a tenant to the landlord in exchange for the use and occupancy of the property. It is the agreed-upon amount that is typically paid at regular intervals, such as monthly or annually.
Rent can take various forms, including fixed amounts, variable amounts based on sales or turnover, percentage-based rents, or a combination of these.
The rent is paid under the tenancy/leases of a building, land, any factory building, a plant like industrial or manufacturing facilities, equipment like tools, computer systems, other infrastructures running a business, machinery, fittings, and furniture.
Conditions for TDS on Rent
Certain conditions are a must when you make the TDS on commercial property rent such as:
TDS on commercial property rent is applicable if the total annual rent paid or payable by an individual or a Hindu Undivided Family (HUF) exceeds a specified threshold limit. This threshold limit is determined by the tax authorities and may vary from time to time.
No surcharge is levied on the TDS on rent unless there is a foreign company involved and also the payment made is more than Rs. 1 crore.
TDS is generally applicable for commercial properties and certain specified categories of residential properties. However, TDS is not applicable for individuals or HUFs who are not required to get their accounts audited under the Income Tax Act.
TDS on commercial property rent is applicable for payments made to both resident and non-resident landlords, subject to specific provisions and rates applicable for non-residents.
The payee should know the landlord's PAN number for TDS deduction. If they don’t know, the TDS on rent becomes 20% and it is deducted under section 206AA.
TDS on rent is required to be deducted at the time of making each rent payment or at the time of credit to the landlord's account, whichever is earlier.
Rate of TDS On Commercial Property Rent
The TDS rate on commercial property rent here is a percentage of the amount deducted while paying the commercial rent. The standard TDS rate is 10% under Section 194-l.
In cases where the landlord does not provide their Permanent Account Number (PAN) to the tenant, the TDS rate is higher at 20% of the rent amount.
For the rent of plant and machinery, the TDS is 2% on the rent.
For individuals or HUF not liable to tax audit, the TDS rate is 5% of the total rental amount.
What Payment Is Covered For Commercial Property Rent Under Section 194-l?
Under Section 194-L of the Indian Income Tax Act, the payment covered for commercial property rent includes any payment made by a person (tenant) to a resident landlord for the use or occupation of commercial property. This section specifically pertains to rent paid for non-residential properties used for commercial purposes, such as offices, shops, warehouses, factories, or any other commercial premises.
By Section 194-l from the Indian Income Tax Act, the landlord has to deduct a particular amount as TDS from the rent paid by a tenant for a commercial property. The tax deduction at source on rent is 10% if the annual rent exceeds Rs 2.4 lakhs.
And also Section 194-lB from the Income Tax Act, 1961 says that the tax at the rate of 5% or 3.75% should be deducted for all the transactions made by the tenants or the payer of the property while paying the rent to the landlord or payee. The account of the government will get credited with the deducted tax from any authorized bank branch.
Section 194-L specifically covers payments made to resident landlords. For payments made to non-resident landlords, different sections and provisions of the Income Tax Act may apply, such as Section 195.
Who is Responsible for Paying TDS On Commercial Property Rent?
In India, the responsibility for deducting and paying TDS on commercial property rent falls primarily on the tenant or lessee, rather than the landlord or lessor. As per the provisions of the Income Tax Act, 1961, any individual, company, or entity (other than an individual or Hindu Undivided Family) who is responsible for paying rent to a resident landlord for commercial property is required to deduct TDS on the rental payment.
Therefore, if you are a tenant or lessee making rental payments for commercial property, you are generally obligated to deduct TDS and remit the deducted amount to the government on behalf of the landlord.
How is TDS On Commercial Property Rent Calculated?
The next thing you might want to know now is how you should calculate your TDS amount. Here we will give you an example for clarity.
Let us assume Raj is giving Rs. 40,000 as rent to his landlord every month. The TDS rate on commercial property rent is 10%.
The annual rent paid by Raj is Rs. 4.8 lakhs.
TDS deduction for this amount will be 10% of the total payment i.e. Rs. 48,000 and has to be paid to the Indian government.
TDS On Advance Rent
When it comes to advance rent, the provisions of TDS (Tax Deducted at Source) under Section 194-I of the Indian Income Tax Act are applied.
According to this section, if a tenant pays advance rent to a landlord for the use of commercial property, TDS obligations are triggered. The tenant is required to deduct tax at the applicable rate and remit it to the government on behalf of the landlord.
The advance rent amount is treated as income for the landlord, and the TDS ensures that tax is withheld at the source. It is essential for tenants to be aware of this provision and fulfill their TDS obligations to comply with the tax regulations and avoid any potential penalties or legal consequences.
Consequences Of Not Paying TDS
There will be crucial financial implications for both parties the tenant and the landlord if they didn't pay the TDS or if they didn't follow the rules and regulations of the TDS.
For late payments of TDS, the penalty is 1% of the TDS amount due. Late issue of the TDS certificate penalty is Rs 100 per day, which is subject to below RS 10000. The amount is above RS 10000, and the penalty for failing to file the TDS is Rs 200 per day.
The penalty for not providing the PAN details for the landlord is Rs. 10000.
If the landlord doesn't claim his TDS deducted from the rent for filing tax returns, there may be an interest charged on the TDS amount. In some severe cases, the Income Tax Act may prosecute both the tenant and the landlord.
If TDS is not deducted or not deposited on time, the Income Tax Department may disallow the expenditure related to the payment. This means that the deductor will not be able to claim the expense as a deduction while calculating their taxable income. Consequently, the deductor's tax liability may increase.
In serious cases of non-compliance or willful evasion of TDS, the Income Tax Department has the authority to initiate criminal prosecution. This can lead to imprisonment for a term ranging from three months to seven years, along with fines.
Non-compliance with TDS obligations can have a negative impact on the deductor's overall tax compliance profile. It may result in increased scrutiny from tax authorities and make future transactions and compliance processes more challenging.
It is always advisable to follow and understand the rules and regulations of the tax systems to avoid penalties and unnecessary complications.
Conclusion
Section 194-l of the Indian Income Tax Act plays an important role in the taxation of commercial property rent. This only refers to the commercial Property rents, not the residential property rents. The TDS is collected in advance to prevent tax evasion. The TDS rate is dependent upon the nature of payment and the tax laws. The payer will be paying the TDS while paying their rent and the payee will file that on their income tax return.
Accordingly, the Government will get revenue based on the property which is used for many welfare schemes from the government to the public. By adhering to the applicable TDS rates, deducting the correct amount, and timely remitting it to the government, taxpayers can ensure compliance and avoid penalties.
