TDS
February 17, 2025

TDS Applicability on Car Hire Rent in India

Tax Deducted at Source (TDS) is a mechanism under the Indian Income Tax Act to collect tax at the time of payment. When it comes to car hire or rental payments, understanding the correct TDS provisions is crucial for businesses and individuals to ensure compliance.

In this blog, we will discuss the TDS applicability on car hire rent, the relevant sections, rates, and key considerations.

1. Nature of Car Hire Services

TDS on car hire depends on the nature of the agreement. There are two main scenarios:

Operating Lease (Car hire without a driver): Treated as rent under Section 194-I.
Contract for Services (Car hire with a driver): Treated as a service contract under Section 194C.

2. TDS Applicability Based on Agreement Type

A. Car Hire Without Driver (Operating Lease)

If a business hires a car without a driver, it is considered rent under Section 194-I.

TDS Section: 194-I (Rent)
TDS Rate:
- 2% for companies and businesses (if the recipient is not an individual or HUF)
- 10% if the recipient is an individual or HUF
Threshold Limit: ₹2,40,000 per financial year
Applicability: Applicable if the annual payment exceeds ₹2,40,000.

B. Car Hire With Driver (Contract for Service)

If the car is hired along with a driver, it is a service and falls under Section 194C.

TDS Section: 194C (Contractual Payments)
TDS Rate:
- 1% if the payment is made to an Individual/HUF
- 2% if paid to a Company, Firm, LLP, or other entities
Threshold Limit: ₹30,000 per transaction or ₹1,00,000 in aggregate during a financial year
Applicability: TDS is deducted if the amount paid exceeds the threshold.

C. Car Hire from a Travel Agency

If the vehicle is hired from a travel agency that does not own the vehicle, TDS under Section 194C may not apply as per CBDT Circular No. 715.

However, if the agency owns the vehicles, TDS will be applicable based on the type of contract.

3. Important Points to Consider

A. GST on Car Hire Rent

If GST is separately mentioned on the invoice, TDS should be deducted only on the base amount (excluding GST).
If GST is not separately mentioned, TDS should be deducted on the entire amount.

B. PAN Requirement & Higher TDS Deduction

If the service provider does not provide a PAN, TDS is deducted at a higher rate of 20%.
Ensure the PAN of the car rental provider is verified before making payments.

C. Exemption for Individuals & HUF

TDS is not required if the payer is an individual or HUF who is not subject to tax audit.
However, if the payer is a business entity subject to audit, TDS rules apply.

D. Payments to Government-Approved Operators

TDS is not applicable if the payment is made to the Government or a Government agency operating transport services.

4. Example Scenarios

Example 1: Car Hired Without a Driver (Operating Lease)

ABC Pvt Ltd hires a car from XYZ Rentals (without a driver) for ₹3,00,000 per year.
Since the amount exceeds ₹2,40,000, TDS under Section 194-I is applicable at 2% (₹6,000 deduction).

Example 2: Car Hired with a Driver (Service Contract)

DEF Ltd hires a car with a driver from GHI Travels for ₹40,000 per month.
Since the annual amount exceeds ₹1,00,000, TDS under Section 194C is applicable at 2% (₹800 per month deduction).

Example 3: Car Hire from a Travel Agency (Non-Owner)

If a business hires a car through a travel agency that does not own the vehicle, TDS may not be applicable, as per CBDT Circular No. 715.

5. Conclusion

TDS on car hire rent depends on whether it is a lease or a service contract. Businesses must deduct TDS correctly to avoid penalties. Here’s a quick summary:

Type of Car Hire	TDS Section	TDS Rate	Threshold
Car hire without driver (Operating Lease)	194-I	2% (Company) / 10% (Individual & HUF)	₹2,40,000 per year
Car hire with driver (Service Contract)	194C	1% (Individual/HUF) / 2% (Company)	₹30,000 per transaction or ₹1,00,000 per year
Car hire from a travel agency (Non-owner)	Not Applicable	Not Applicable	Not Applicable

Understanding these provisions ensures smooth compliance with TDS regulations and avoids unnecessary tax liabilities.

TDS Applicability on Car Hire Rent in India