When you can’t claim office rent as business expenditure for tax calculation

Any expenses incurred in the running of business is tax deductible if it’s not specifically disallowed or certain tax provisions are not satisfied. Similarly, office rent incurred by your business can be deducted as a business expenditure if provisions of income tax act, 1961 is satisfied.

In this article, we will discuss certain situations where you can’t claim office rent as business expenditure while calculating income tax liability.

Before claiming any office rent as a business expenditure, you must see whether it satisfied all the basic conditions as per our income tax laws or not.

Here is a list of those basic conditions:

  • Business must be legitimate.
  • Office space taken on rent must be used as a principal place of business or for any other specific business purpose, such as to run branch activities or to maintain business documents.
  • Rent claimed as business expenditure must be for the space which is exclusively used for the business.

Requirement of Rent Agreement

While taking office space for your business, the first and foremost thing you should do is to execute an rent agreement with all the terms and conditions including rent payable per month, security deposit, exact address and space used out of the total available space.

Please remember agreement should be in the name of the company and the person signing the agreement must be authorized.

In case of a private limited or One person company, the person must be authorized by a board resolution or through a authorized letter from the person who is authorized to delegate such power.

Similarly, in case of a partnership firm, a partner authorised by the partnership deed or by a resolution should execute the agreement.

Rent agreement will prove that you are authorized by the owner to use the rented space for business purpose. Don’t forget to notarize the agreement.

Execution of lease agreement and using the space for business will not serve the purpose to claim office rent as a business expenditure. In addition to it you must fulfill all the conditions to income tax act,1961.

Office rent can’t be paid in cash

Aggregate cash payment above Rs 10,000 per person per day is disallowed under section 40A(3) of income tax act,1961.

Therefore, to claim office rent as business expenditure, you must check whether aggregate payment per person per day will exceed Rs 10,000 or not.

If, yes, then you have to pay it either by account payee cheque or through any other banking mode. It’s applicable to all form of business irrespective of size and turnover.

In case, office rent is paid by cash, where it has to be compulsorily paid by account payee cheque or any other banking mode, then the whole amount paid in cash will be disallowed while calculating income tax liability of your business.

For instance, if your office rent is Rs 16,000 per month, then to claim it as a business expenditure, you have to pay it through account payee cheque or by using any other banking mode.

Please note, limit of Rs 10,000 is specified for a aggregate amount paid to per person per day. This means, if as per the agreement, you are paying Rs 4,000 every week on a day to a person, then this provision will not be applicable.

Similarly, in our above case, if you have signed agreement with joint owners with 50% ownership each, then you have to transfer Rs 8,000 per month to per person per day. In such a case, you can pay it through cash as provisions of section 40A(3) not applicable.

Whatever be the amount, we suggest you to pay each expenses including your office rent through your business/company’s bank account. This will not only help you to claim expenses as deductible while calculating tax liability but also helps you in tax scrutiny.

You have to deduct tax from rent

As per section 194I, if rent payment per year is more than Rs 1,80,000, then tax has to be deducted (TDS) at the rate of 10% from the whole amount while making payments to landlord. This limit of Rs 1,80,000 will be applicable up to the financial year 2018-19 (AY 2019-20).

In interim budget 2019, it has been proposed to increase the limit of Rs 1,80,000 to Rs 2,40,000. Therefore, from, financial year 2019-20, limit will be Rs 2,40,000 instead of Rs 1,80,000.

After deducting tax, you need to deposit the deducted TDS amount with the government on or before the due date.

After depositing it with the government, you need to file quarterly TDS return on or before the due date along with other tax deduction details.

If you have not deducted tax while paying rent to landlord, where it needs to be deducted then 30% of the whole amount on which tax has not been deducted will be disallowed while calculating income tax liability.

In case, you have deducted TDS amount on rent as per the provisions of income tax act,1961, but not deposit the same with the government on or before the due date of filing as specified in section 139(1), then 30% of the whole amount of office rent on which tax deducted but not deposited will be disallowed.

To claim office rent as your business expenditure for calculating tax liability, you need to do following things:

  • Execute a lease agreement with the landlord by putting all the terms and conditions in it,
  • Always pay office rent by using a banking mode such as account payee cheque, NEFT, RTGS or IMPS, and
  • Deduct TDS at the rate of 10% when rent per person per year is more than Rs 1,80,000 (for financial year 2019-20, the limit is Rs 2,40,000).
  • If TDS on rent has been deducted, then deposit the same on or before the due date of filing your tax return.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.