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K.R. Srivats

New Delhi, May 3 Taxpayers can now deduct tax at source on rents after reducing the service tax component on the rentals for commercial space, the Finance Ministry has said.

This could particularly benefit corporates functioning in multiple locations with large rental payouts as their cash outgo towards tax deduction at source (TDS) would stand reduced on account of the latest stance of the Revenue Department. It would help in better working capital management.

Doubts were earlier raised on whether the TDS provisions on rent will apply on the gross rental amount payable (inclusive of service tax) or net rental amount payable (excluding service tax).

“Service tax paid by the tenant does not partake the nature of income of the landlord. The landlord only acts as a collecting agency for Government for collection of service tax. Therefore, it has been decided that tax deduction at source (TDS) under Sections 194-I of Income-Tax Act would be required to be made on the amount of rent paid/payable without including the service tax,” the Central Board of Direct Taxes (CBDT) has now clarified.

Renting of commercial space was brought under the service tax net in Finance Bill 2007. With real estate boom, commercial property rents have reached dizzying heights.

Currently, under the TDS provisions for rent, companies have to deduct tax at the rate of 20 per cent. For individual taxpayers, the TDS rate is 10 per cent. TDS is applicable where rentals exceed Rs 12,000 per month.

More Stories on : Income Tax | Real Estate & Construction

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