How to Report TDS for Professional Fees Under Section 194J and Avoid Tax Notices :

Section 194J of the Income Tax Act plays a crucial role in the taxation of professional services, ensuring that taxes are deducted at source (TDS) on payments made to professionals. It applies to individuals, businesses, and organizations that hire professionals for services such as technical consulting, legal advice, or media-related work. As of April 1, 2025, significant changes in the TDS rates and threshold limits under Section 194J have been introduced, affecting how businesses and professionals need to handle their tax obligations.

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Table of Contents

• Understanding Section 194J

• Latest Threshold Limit and TDS Rates (Effective April 1, 2025)

• How to Report TDS for Professional Fees Under Section 194J

• How to Avoid Tax Notices Related to Section 194J TDS

• Conclusion

• FAQs

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Understanding Section 194J

Section 194J of the Income Tax Act pertains to TDS on payments made for professional or technical services. The section is primarily relevant for payments made to individuals or firms offering professional services such as:

• Legal services (advocates, law firms)

• Technical services (engineering, consultancy)

• Management consultancy (including tax consultants)

• Doctors, accountants, and other professionals

Under Section 194J, individuals or entities making these payments are required to deduct TDS at a specified rate before making the payment. The TDS is then remitted to the government, ensuring that taxes are collected at the source, thus preventing tax evasion. This TDS is applicable on fees paid for professional or technical services rendered by an individual or a firm.

Latest Threshold Limit and TDS Rates (Effective April 1, 2025)

For the Financial Year 2024-25, the government has revised the TDS rates and threshold limits under Section 194J, effective from April 1, 2025. These changes aim to make the tax deduction process more streamlined and to increase compliance among taxpayers.

• TDS Rate on Professional Fees: The TDS rate for payments made to professionals for technical or professional services remains at 10% under Section 194J. This is applicable when the payment exceeds the prescribed threshold limit.
  

• TDS Rate on Fees for Technical Services: Similarly, payments made for technical services, such as IT services, also attract a 10% TDS rate.
  

• Threshold Limit: The revised threshold limit for deducting TDS under Section 194J has been set at ₹30,000 per year for fees paid to professionals. This means if the payment made to a professional exceeds ₹30,000 in a financial year, the payer is required to deduct TDS at the specified rate. Below this limit, no TDS is required to be deducted.
  

• Other Key Changes: Changes have also been made in terms of deductibility on payments made for royalty or copyright fees and fees paid to contractors for technical services. These changes have been introduced to simplify and regulate tax deductions, ensuring that the payments align with the growing economy and evolving service industries.

How to Report TDS for Professional Fees Under Section 194J

Reporting TDS for professional fees under Section 194J involves several key steps:

• Determine TDS Applicability: The first step is to determine whether TDS is applicable. If the professional fees paid to an individual or firm exceed ₹30,000, the payer is required to deduct TDS at 10%.
  

• Deduct TDS at the Correct Rate: Once the applicability is determined, the next step is to deduct the TDS at the prescribed rate of 10%. For payments made to professionals or consultants, the rate will be 10% unless they are exempt from TDS under specific provisions.
  

• Deposit TDS with the Government: The deducted TDS must be deposited with the government within the specified time limits. For payments made in a given month, the TDS must be deposited by the 7th of the following month.
  

• Issue Form 16A: After the TDS has been deposited, the payer is required to issue Form 16A to the payee (professional or consultant). This form serves as proof of the TDS deduction and is required for the professional’s tax filing.
  

• Report in Income Tax Return: When filing the income tax return, professionals should report the TDS deducted under Section 194J as income, and claim the TDS credit against their tax liabilities.
  

• Reconciliation: It is essential to ensure that the amount of TDS deducted matches with the TDS entries in the Form 26AS to avoid discrepancies during tax filing.

How to Avoid Tax Notices Related to Section 194J TDS

To avoid tax notices related to Section 194J TDS, it is essential to ensure compliance with the following:

• Correct TDS Deduction and Filing: Ensure that the TDS is deducted at the correct rate and deposited within the specified time limits. Failure to comply with TDS deductions or delayed deposits can trigger penalties or tax notices from the Income Tax Department.
  

• Maintain Proper Documentation: Proper records of TDS deductions, payment receipts, and the issuance of Form 16A are crucial in case of scrutiny. Make sure that all documentation is correctly maintained, which will act as evidence in case of tax assessments or audits.
  

• Monitor Threshold Limit: Ensure that the threshold limit for TDS deductions is not exceeded without proper reporting. If payments exceed ₹30,000 to a single professional in a year, TDS must be deducted, and failure to do so can lead to penalties.
  

• Regular Reconciliation: Regularly reconcile the deducted TDS entries with the Form 26AS available on the Income Tax portal. Discrepancies between what has been reported and what is reflected in the 26AS could trigger notices.
  

• Timely Filing of Returns: Both the payer and the payee need to file their returns on time. Late filing may attract penalties or additional scrutiny. Ensure that all TDS certificates are submitted along with the return.
  

• Professional Assistance: If you are unsure about the technicalities of TDS under Section 194J, it is advisable to consult a tax professional or use platforms like TaxBuddy to ensure timely and accurate filing, avoiding potential issues with the Income Tax Department.

Conclusion

Section 194J is an essential provision under the Income Tax Act, ensuring that professional services are adequately taxed at the source. The latest changes, including revised TDS rates and threshold limits, aim to simplify the process and ensure better compliance. Businesses and professionals must stay updated with these changes to avoid penalties and unnecessary tax notices. By following the correct procedures for TDS deduction, timely filing, and proper reporting, one can ensure smooth compliance with Section 194J. Professional platforms like TaxBuddy can provide valuable assistance to navigate these complex tax provisions, ensuring that businesses and professionals remain compliant.

For anyone looking for assistance with tax filing and TDS compliance, consider using the TaxBuddy mobile app for a seamless and hassle-free experience.

FAQs

Q1: What is the TDS rate under Section 194J? Under Section 194J of the Income Tax Act, the Tax Deducted at Source (TDS) rate for payments made to professionals for technical or professional services is 10%. This applies to payments made to individuals or entities providing services like consultancy, legal services, technical services, or any other professional service that falls under the scope of this section.

Q2: When should TDS be deducted under Section 194J? TDS under Section 194J should be deducted when the total payment made to a professional exceeds ₹30,000 in a financial year. This threshold applies to payments for professional or technical services, such as legal or consultancy fees. The deduction must be made at the time the payment is made, either at the time of credit or at the time of payment, whichever is earlier.

Q3: What are the penalties for not deducting TDS under Section 194J? Failure to deduct TDS under Section 194J can result in penalties and interest. The penalty for non-deduction of TDS can be 1.5% per month on the amount of TDS not deducted. Additionally, the payer may face interest charges on the unpaid TDS, along with the possibility of scrutiny from the Income Tax Department. In some cases, the payer could also be liable for the TDS amount itself, along with the penalties.

Q4: How do I report TDS for professional fees in my ITR? When filing your Income Tax Return (ITR), you need to report the TDS deducted under Section 194J in the section specifically designated for TDS on professional or technical fees. In your return, you will claim the deducted TDS as a credit against your total tax liability. Ensure the details of the TDS deducted are reported accurately, including the amount of TDS, the section under which it was deducted, and the TDS certificate (Form 16A) issued by the payer.

Q5: Can I avoid TDS deductions if the payment is below ₹30,000? Yes, if the total payment made to a professional in a financial year is below ₹30,000, no TDS is required under Section 194J. However, if the payment exceeds this threshold, the payer must deduct TDS at the rate of 10%. It is important to track the total payments to ensure that the threshold is not crossed, which could trigger TDS obligations.

Q6: Is there any exemption available under Section 194J for certain professionals? Yes, some exemptions may apply under Section 194J depending on the professional's income, specific provisions in the Income Tax Act, or the type of service being provided. For instance, certain professionals may be exempt from TDS deductions if their income is below the taxable threshold or if they fall under specific exemption categories, such as government employees or entities that have received specific exemptions. It’s important to check the relevant provisions or consult a tax expert for applicable exemptions.

Q7: How can I ensure TDS compliance under Section 194J? To ensure TDS compliance under Section 194J, it is essential to:

• Deduct TDS at the correct rate (10%) whenever payments exceed ₹30,000.

• Ensure that the TDS is deposited with the government within the prescribed time frame.

• Report the TDS deductions correctly in Form 16A and Form 26AS.

• Keep records of all payments made to professionals and the TDS deducted.

• Provide the professionals with accurate TDS certificates (Form 16A) to help them report the TDS credit.

Q8: What happens if TDS is deducted incorrectly under Section 194J? Incorrect TDS deductions, such as deducting the wrong amount or applying the incorrect rate, can lead to penalties, interest charges, and additional scrutiny by the Income Tax Department. If the TDS amount is deducted incorrectly, you may need to rectify the error by filing a revised TDS return or adjusting the entry in the TDS records. Incorrect deductions can also affect the tax liability of the recipient, resulting in potential claims for refunds or discrepancies in their own returns.

Q9: How can TaxBuddy assist with TDS under Section 194J? TaxBuddy can help ensure TDS compliance under Section 194J by providing tools that calculate the correct TDS amount based on your professional payments. The platform also offers automated filing for TDS returns, ensuring that TDS is deposited on time and reported correctly. Additionally, TaxBuddy generates Form 16A for professionals, providing them with a proper certificate to claim the TDS credit while filing their tax returns. This makes the entire TDS process smoother and more streamlined.

Q10: What is the revised threshold limit for TDS under Section 194J? The revised threshold limit for TDS deduction under Section 194J is ₹30,000 for the Financial Year 2024-25. This means that payments exceeding ₹30,000 to professionals or technical services in a financial year will be subject to TDS at the rate of 10%. If the payment is below this threshold, no TDS needs to be deducted under Section 194J.

Q11: Is TDS applicable to payments for both professional and technical services? Yes, TDS under Section 194J applies to both professional and technical services. Professional services include legal, medical, and consultancy services, while technical services may include IT services, engineering services, and technical consultancy. The key criterion is that the services should be rendered by professionals, and the payments should exceed the ₹30,000 threshold.

Q12: Can I make corrections if I made an error in TDS deduction under Section 194J? Yes, corrections can be made if there is an error in TDS deduction under Section 194J. You can rectify the mistake by filing a revised TDS return with the correct details. If the TDS was incorrectly reported, it can be corrected in Form 26AS. Additionally, any discrepancies or errors in the TDS return can be addressed with the Income Tax Department to ensure that the correct credit is applied and to avoid penalties.