s.194-I — Tax deducted on rent
A person paying rent to a resident must deduct ten per cent for land, building, furniture or fittings and two per cent for plant, machinery or equipment, where rent exceeds fifty thousand rupees for a month.
The monthly threshold of fifty thousand rupees replaced the annual threshold of two hundred and forty thousand rupees by the Finance Act, 2025 with effect from 1 April 2025. The counterpart in the Income-tax Act, 2025 is serial 2 of the Table in section 393(1), with the definition of rent in section 402(29).
Income-tax Act, 1961
s.194-I
Income-tax Act, 2025
s.393(1) Table serial 2
In force from 1 April 2026, but s.536(2)(c) preserves the 1961 Act for tax years beginning before that date.
In short
Section 194-I of the Income-tax Act, 1961 requires any person, not being an individual or a Hindu undivided family below the turnover limits in the second proviso, who is responsible for paying to a resident any income by way of rent, to deduct at the time of credit or payment two per cent for the use of machinery, plant or equipment and ten per cent for the use of land, building, land appurtenant to a building, furniture or fittings. The first proviso, substituted by the Finance Act, 2025 with effect from 1 April 2025, exempts rent that does not exceed fifty thousand rupees for a month or part of a month. Rent is defined in the Explanation as any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of land, building, land appurtenant to a building, machinery, plant, equipment, furniture or fittings, whether or not owned by the payee. In redevelopment the Mumbai Tribunal has consistently held that monthly payments by a developer to society members or slum dwellers for alternate accommodation are compensation for displacement and not rent, a view the Bombay High Court took in Sarfaraz S. Furniturewalla in April 2024 and a Division Bench applied in Ganga Appa Mhaskar in April 2026. The counterpart in the Income-tax Act, 2025 is serial 2 of the Table in section 393(1), with the definition of rent in section 402(29).
What the provision does
Imposes withholding on rent above a monthly threshold, at ten per cent for land and buildings and two per cent for plant and machinery, under a definition of rent that covers any arrangement for the use of the listed assets whether or not owned by the payee. It does not apply, on the Mumbai authority, to compensation paid by a developer to displaced occupants who use no premises of the developer's, and it does not apply to payers who are individuals or Hindu undivided families below the turnover limits.
Threshold questions
- Is the payer outside the exclusion for an individual or Hindu undivided family below the turnover limits
- Is the payment made under a lease, tenancy or other arrangement for the use of land, building, plant or the other listed assets
- Does the rent exceed fifty thousand rupees for a month or part of a month, from 1 April 2025
- Is the asset land, building, furniture or fittings at ten per cent, or plant, machinery or equipment at two per cent
- If tax was not deducted, has the payee returned the income and paid tax so that the first proviso to section 201(1) and the second proviso to section 40(a)(ia) apply
In practice
The recurring disputes.
Transit rent paid by a redevelopment developer
The Revenue's argument is that the definition covers any payment by whatever name called under any arrangement for the use of a building whether or not owned by the payee, and that a developer paying members a monthly sum so that they can occupy premises during construction is paying under such an arrangement, particularly where the agreement calls it rent and records an undertaking to deduct tax. The developer's argument is that it uses no building, is no one's tenant or licensee, and pays compensation for displacement measured by the members' hardship. The Mumbai Tribunal accepted the developer's argument in Sahana Dwellers, Shree Jalaram Builders, Omkar Realtors, Nathani Parekh Constructions and Shivalik Ventures, and the Bombay High Court agreed in Sarfaraz and Ganga Appa Mhaskar. The point remains arguable where the developer itself takes the alternate premises on lease, when it is the tenant and the section applies on its terms.
Payments made directly to a landlord on the occupant's behalf
Where a developer pays a landlord directly under a tripartite arrangement for premises occupied by a displaced member, the Revenue argues that the developer has assumed the member's rent obligation and is paying rent on the member's behalf. In Sahana Dwellers the Tribunal held on its facts that the developer had not in reality paid rent on behalf of the tenants. The developer's position is weaker where it is party to the lease or pays the landlord under its own covenant, and stronger where it pays a fixed sum to the member who chooses the premises.
The effect of Sarfaraz, a civil writ to which the Revenue was not a party
Sarfaraz S. Furniturewalla was decided by a single judge in a civil dispute between private parties connected with a rent suit, and the Revenue was not heard. The Revenue's argument is that it does not bind the Tribunal on a question of tax. The developer's answer is that the Tribunal has treated it as a jurisdictional High Court ruling, and that a Division Bench in Ganga Appa Mhaskar applied it in April 2026 and directed a developer to pay over to the tenants the tax it had deducted. The weight of the authority is now firmly with the developer in Mumbai. No Gujarat decision was traced, and the Ahmedabad Bench, though it ordinarily follows the Mumbai Tribunal, is not bound by a Bombay High Court ruling.