Circular No. 4/2008 — Clarification on deduction of tax at source (TDS) on service tax component on rental incom

What this is

Circular No. 4/2008 was issued by the Central Board of Direct Taxes on 28 April 2008. Its subject is Clarification on deduction of tax at source (TDS) on service tax component on rental income under section 194-I of the Income-tax Act.

This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.

What it does

Settles that tax under section 194-I is to be deducted on the rent paid or payable excluding the service tax component, not on the gross amount inclusive of it. The Board's reasoning is that service tax paid by the tenant is not income of the landlord at all; the landlord merely collects it for the Government. It directs that the position be brought to the notice of all officers in the region for strict compliance and to those conducting internal audit.

Why it was issued

Representations and letters had been received asking whether deduction under section 194-I went on the gross rental inclusive of service tax or the net rental exclusive of it.

Who it reaches

Tenants deducting under section 194-I on commercial rent
Landlords of land, buildings, plant, machinery, equipment, furniture and fittings
Internal audit parties checking TDS compliance
Assessing Officers passing section 201 orders on rent payments

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.194	s.2, s.393, s.397, s.400, s.402

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

Clarification on deduction of tax at source (TDS) on service tax component on rental income under section 194-I of the Income-tax Act
CIRCULAR NO. 4/2008, DATED 28-4-2008

Representations/letters have been received in the Board seeking clarification as to whether TDS provisions under section 194-I of the Income-tax Act will be applicable on the gross rental amount payable (inclusive of service tax) or net rental amount payable (exclusive of service tax).
2. The matter has been examined by the Board. As per the provisions of 194-I, tax is deductible at source on income by way rent paid to any resident. Further rent has been defined in 194-I as
"rent" means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any,-
(a) land; or
(b) building (including factory building); or
(c) land appurtenant to a building (including factory building); or
(d) machinery; or
(e) plant; or
(f) equipment; or
(g) furniture; or
(h) fittings,
whether or not any or all of the above are owned by the payee;
3. Service tax paid by the tenant doesn’t 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.
4. These instructions may be brought to the notice of all officers working in your region for strict compliance.
5. These instructions should also be brought to the notice of the officers responsible for conducting internal audit and adherence to these should be checked by the auditing parties.

[F.No.275/73/2007-IT(B)]

What to watch

The reasoning is specific to section 194-I; it does not by itself decide the treatment of an indirect tax component under any other deduction section.
The definition of rent in section 194-I is wide and covers machinery, plant, equipment, furniture and fittings whether or not owned by the payee.
Service tax has since been replaced by goods and services tax, so the levy this circular deals with no longer exists in that form.
The circular is about the base for deduction only, not about the landlord's own taxability.

Where you meet it

On a section 201 or section 201(1A) demand for short deduction on rent, where the Department computes tax on the gross invoice.

An example

Ours, not the Board’s: a worked case built from the rule the instrument sets, to show how it falls out.

A tenant is billed rent of Rs. 1,00,000 with service tax added on top. Deduction under section 194-I is worked on the Rs. 1,00,000 alone; the service tax element is left out of the base.

What it names

It mentions. Circular No. 4/2008

On the same provision

Other instruments in this library that name the same provision of the 1961 Act. They are not necessarily still operative, and a later one may have replaced an earlier one without saying so.

Notification No. 52/2023 [F.No. 275/17/2023-IT(B)] / SO 3254(E) — Ministry of Finance 20 July 2023
Circular No. 10/2022 — Circular regarding use of functionality under section 206AB and 206CCA of the income tax act 1961 17 May 2022
Circular No. 20/2021 — Guidelines under sub section 4 of section 194 o sub section 3 of section 194Q and sub section 1 i of section 206C of the 25 November 2021
Notification No. 106/2021 [F. No. 370149/158/2021-TPL] / SO 3679(E) — 2 the Gazette of INDIA : Extraordinary [Part Ii—sec. 3(ii)] 10 September 2021
Circular No. 21/2017 — Non applicability of the provisions of section 194 1 of the i.t. act 1961 on remittance of passenger service fees psf by 12 June 2017
Notification No. 48/2017/F. No. 370 142/16/2017-TPL / GSR 561(E) — Ministry of Finance 8 June 2017

← Circular No. 5/2008 · Circular No. 3/2008 →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.