Don’t Know About TDS on Commercial Property Rent? Find Out Here!
Having real estate might be a fantastic method to generate passive income. It does, however, need you to become knowledgeable about tax rules. You face a number of penalties if you fail to pay your taxes on time.
The Tax Deducted at Source, or TDS, is a remarkable mechanism of the Indian tax system. The TDS amount will be subtracted from the recipient’s payment when they make a payment, such as a salary, interest payment, rent, etc. After then, the amount of taxes withheld is sent directly to the government on behalf of the beneficiary. It is employed in a number of national growth initiatives.
Imagine yourself in the confusing situation of having several tenants occupying your business space. While some pay a fixed monthly rent, others pay rent based on a percentage of their sales. In a circumstance like this, how do you compute TDS? We are specifically taking you through the TDS on commercial property rent and its circumstances in this article.
Don’t worry; we’ve provided an easy roadmap to aid you along this path.
Table of Contents
- What Constitutes Rent?
- Conditions for TDS on Rent
- Rate of TDS On Commercial Property Rent
- Commercial Property Rent
- Who is Responsible for Paying TDS On Commercial Property Rent?
- How is TDS On Commercial Property Rent Calculated?
- TDS On Advance Rent
- Consequences Of Not Paying TDS
What Constitutes Rent?
In the context of commercial real estate, rent is the sum of money paid by a tenant to the landlord in exchange for the right to use and occupy the space. It is the sum that was agreed upon and usually paid on a regular basis, such a monthly or annual basis.
There are several ways to pay for rent: fixed rates, variable rates based on turnover or sales, percentage-based rents, or a mix of these.
The payment of rent is stipulated in the agreements governing the tenancy or lease of land, buildings, factories, plants, industrial or manufacturing facilities, tools, computer systems, other infrastructures necessary for company operations, machinery, fixtures, and furnishings.
Conditions for TDS on Rent
When you make the TDS on commercial property rent, you have to meet certain requirements, like:
- If the total annual rent paid or payable by an individual or a Hindu Undivided Family (HUF) over a certain threshold level, TDS is charged on commercial property rent. The tax authorities set this threshold level, which is subject to change.
- Unless there is a foreign corporation engaged and the payment paid exceeds Rs. 1 crore, there is no surcharge on the TDS on rent.
- In general, TDS applies to commercial properties and specific residential property categories. TDS, however, does not apply to individuals or HUFs that are exempt from the Income Tax Act’s requirement that their accounts be audited.
- Subject to special rules and rates that apply to non-residents, TDS on commercial property rent is applicable for payments made to both resident and non-resident landlords.
- For TDS deduction, the payee needs to be aware of the landlord’s PAN number. If they are unaware, section 206AA requires the TDS on rent to be deducted, which rises to 20%.
- TDS on rent must be withheld at the time of each rent payment or, if that occurs beforehand, at the point when the landlord’s account is credited.
Rate of TDS On Commercial Property Rent
Here, the proportion of the commercial rent that is withheld upon payment is known as the TDS rate on rental commercial property. Ten percent is the typical TDS rate under Section 194-l.
The TDS rate is higher—20 percent of the rent—when the landlord fails to give the tenant their Permanent Account Number (PAN).
TDS is 2% of the rent for machinery and plant rentals.
The TDS rate is 5% of the entire rental payment for individuals or HUF that are not subject to a tax audit.
Commercial Property Rent
Any payment made by a person (tenant) to a resident landlord for the use or occupation of commercial property is covered under Section 194-L of the Indian Income Tax Act as commercial property rent. Particularly covered under this part is rent paid for non-residential properties utilised for business, including factories, shops, warehouses, offices, and other commercial spaces.
According to Section 194-l of the Indian Income Tax Act, a landlord renting a business property must deduct a certain amount as TDS from the rent paid by the tenant. If the annual rent exceeds Rs 2.4 lakhs, 10% of the rent is tax deductible at source.
Furthermore, according to Section 194-lB of the Income Tax Act of 1961, taxes at the rate of 5% or 3.75% must be subtracted from all transactions made by renters or property payers when they pay rent to the landlord or payee. The tax that is withheld from any authorised bank branch will be credited to the government’s account.
Particularly, payments provided to resident landlords are covered by Section 194-L. Section 195 and other requirements of the Income Tax Act may apply to payments paid to non-resident landlords.
Who is Responsible for Paying TDS On Commercial Property Rent?
In India, the tenant or lessee, not the landlord or lessor, is primarily in charge of deducting and paying TDS from the rent on commercial property. Any person, organisation, or entity (apart from an individual or Hindu Undivided Family) that pays rent to a resident landlord for commercial property is obligated by the Income Tax Act, 1961 to withhold TDS from the rental amount.
Consequently, you are usually required to deduct TDS and send the amount deducted to the government on behalf of the landlord if you are a tenant or lessee paying rent for commercial property.
How is TDS On Commercial Property Rent Calculated?
How to determine your TDS amount is the next thing you might want to know at this point. For the sake of clarity, we’ll offer you an example here.
Assume for the moment that Raj pays his landlord Rs. 40,000 each month in rent. Rent on commercial property is subject to a 10% TDS rate.
Raj pays an annual rent of Rs. 4.8 lakhs.
TDS deduction for this amount, which must be paid to the Indian government, will be 10% of the total payment, or Rs. 48,000.
TDS On Advance Rent
The provisions of TDS (Tax Deducted at Source) under Section 194-I of the Indian Income Tax Act are applicable to advance rent.
This clause states that TDS duties start to accrue when a tenant pays a landlord in advance for the use of commercial property. It is the tenant’s responsibility to withhold tax at the appropriate rate and send it to the government on the landlord’s behalf.
The landlord views the advance rent payment as income, and the TDS makes sure that tax is deducted at the source. Tenants must be aware of this clause and fulfil their TDS responsibilities in order to abide by the tax laws, prevent fines, and stay out of trouble with the law.
Consequences Of Not Paying TDS
If the landlord and the tenant fail to comply with the TDS’s laws and regulations or fail to pay the TDS, there will be serious financial repercussions for both.
The penalty for late TDS payments is one percent of the total amount owed. The penalty for issuing a TDS certificate beyond the deadline is Rs 100 per day, with a cap of Rs 10,000. The sum exceeds RS 10,000, and there is a daily penalty of Rs 200 for not filing the TDS.
The landlord would be fined Rs. 10,000 if the PAN information are not provided.
Interest on the TDS amount may be assessed if the landlord fails to claim the TDS withheld from the rent in order to file tax returns. The Income Tax Act may prosecute both the landlord and the tenant in some extreme circumstances.
The Income Tax Department may not approve the payment-related expenses if TDS is not withheld or deposited on time. This implies that the expense cannot be written off by the deductor when determining their taxable income. As a result, the tax burden of the deductor can rise.
The Income Tax Department may file for criminal charges in circumstances of severe non-compliance or deliberate evasion of TDS. If this happens, you could spend anywhere from three months to seven years, along with fines.
The deductor’s overall tax compliance profile may suffer from non-compliance with TDS duties. It might lead to more tax authorities looking into the matter, which would make future transactions and compliance procedures more difficult.
To avoid fines and needless hassles, it is always advisable to abide by and comprehend the tax systems’ rules and regulations.
Conclusion
The Indian Income Tax Act’s Section 194-l is crucial to the taxation of rent on commercial property. Not the rents on residential property; only the rents on commercial property are being discussed here. Pre-collection of TDS is done to avoid tax avoidance. The type of payment and the applicable tax legislation determine the TDS rate. The payee will include the TDS in their income tax return, and the payer will pay it while they pay their rent.
As a result, the government will receive funding based on the property that is utilised for numerous public welfare programs. Taxpayers can guarantee compliance and prevent penalties by following the relevant TDS rates, deducting the appropriate amount, and promptly remitting it to the government.
For more information on TDS on commercial property rent, visit us at www.addindiagroup.com