Section 194J of the Income Tax: TDS on Fees for Professional or Technical Services
Updated: Oct 3
Section 194J of the Income Tax Act is a vital provision that mandates the deduction of Tax Deducted at Source (TDS) on payments made for professional or technical services. Whether you are a business paying for consultancy, legal advice, or technical expertise, understanding Section 194J is essential to remain compliant with tax regulations. This section primarily applies to payments made for professional services, technical services, royalties, and director fees.
In this article, we will break down the key aspects of Section 194J, including the applicable TDS rates, the threshold limits for deduction, and the types of services covered under this section.
Table of Contents
Section 194J of the Income Tax
Section 194J of the Income Tax Act has made provisions for deducting tax at source on payments for professional or technical services. Any payers other than individuals or HUFs are required to deduct TDS at 10% or 2% while making payments to a resident, depending on the nature and amount of payment. If the payee fails to disclose their PAN, TDS is deducted at 20%.
Further, any person or HUF whose business or professional turnover is more than the limits prescribed under Sec 44AB for the immediately preceding financial year, shall also be liable to follow these provisions of TDS while making any payments for professional or technical services. In the case of non-resident Indians, fees for technical services are to be subjected to TDS at the rate 20% under Section 195.
Payments Covered under Section 194J
The following are the kinds of payments made to residents who fall under this section:
Professional services fees
Technical services fees
Remuneration to directors—not including salary—(such as sitting fees for board meetings)
Royalty
Payments in the form of non-compete fees—that is, payments to refrain from engaging in any business or profession for a predetermined period of time and within a predetermined geographic area—or payments to withhold technical knowledge or know-how
What are Professional and Technical Services?
The term "professional services" describes the services rendered by experts in their fields. These include:
Medical Services
Legal Services
Accountancy or Technical Consultancy Services
Advertising Services
Engineering Services
Architectural Services
Interior Decoration Services
Notified Professions (related to sports activities: sportspersons, coaches, trainers, umpires, referees, physiotherapists, team physicians, commentators, anchors, event managers, and sports columnists)
"Technical services" typically refer to services that are involved in creating, utilising, or sharing technical information. These include:
Technical
Managerial
Consultancy services (including the services of technical or other personnel)
Exceptions are as follows:
Construction
Mining
Assembly
Project for which the income of the recipient is chargeable under the head "Salaries."
It is the payer's responsibility to deduct the TDS and deposit the money to the government within the allotted time. The recipient can claim credit for the TDS when filing their income tax return. The deducted TDS is subsequently credited to the recipient's income tax account.
Royalty
A royalty is the money paid for the following:
The use or transfer of an innovation, model, design, trademark, patent, etc
Making use of designs, innovations, and patents
Offer any details about the use of a formula, patent, invention, etc
Transfer of rights for radio broadcasts related to scientific discoveries, literary works, motion pictures, or videotapes; this does not include payment for the purchase, distribution, or display of motion pictures
Disseminating any knowledge, expertise, or experience in technical, industrial, commercial, or scientific fields.
Non-Compete Fees
The payment of an agreement that forbids the other party from disclosing any patent, trademark, franchise, know-how, commercial or business rights, licence, or information that might be used for manufacturing, processing, or other temporary services is known as a non-compete fee. This payment can be made in cash or kind.
Persons Liable to Deduct TDS under Section 194J
A tax deduction is required at the source for anyone paying fees for technical or professional services. But the following individuals are exempt from having TDS withheld from such payments:
If an individual or HUF is operating a business, their revenue from the prior fiscal year cannot surpass Rs 1 crore.
If a person or HUF continues in their career: if the previous fiscal year's turnover did not surpass Rs 50 lakh.
To put it simply, tax deduction (TDS) must be made when paying for professional or technical services by all entities (apart from individuals and HUF who were exempt from doing a tax audit in the previous year).
Section 194J TDS Rate
The following rate is applicable for services listed under Income Tax Act section 194J:
Nature of Payments | Rate of TDS | Threshold Limit |
Fees for Technical Services | 2% | Rs. 30,000 |
Payments to Call Centre Operators | 2% | Rs. 30,000 |
Royalty for Sale, Distribution, or Exhibition of Cinematographic Films | 2% | Rs. 30,000 |
Other Royalty Payments | 10% | Rs. 30,000 |
Professional Services and Other Payments under Section 194J | 10% | Rs. 30,000 |
If Payee Does Not Furnish PAN | 20% | Rs. 30,000 |
Payments Made by Companies to Directors (Fees, Commissions, etc.) | 10% | Nil |
Threshold Limit for Section 194J TDS
If the cost of professional and technical services is more than Rs 30,000 in a given year, the tax must be withheld.
Each item or payment is subject to a maximum limit of Rs 30,000. For instance, the X Company paid Mr.A Rs 20,000 in fees for technical services and Rs 25,000 in royalties. Here, X Business is not required to withhold TDS from money given to Mr. A. The reason for this is that each item, such as royalties and fees for technical services, has a separate cap of Rs 30,000.
Nevertheless, there is no such cap on compensation, fees, or commissions that the firm pays to a director. It is necessary to deduct the tax, regardless of the amount
Time of Deduction and Deposit of TDS under Section 194J
The tax has to be deducted at the time of making the real payment of the expense or making such an entry in the books, whoever came first.
For TDS deposits, the following timelines apply:
Payment made before 1st March
Government deductors: 7th day from the end of the month
Non-government deductors: 7th day from the end of the month
Payment made in the month of March
Government deductors: The date on which professional or technical fees are paid to the payee, provided that the matching challan is submitted by the seventh day after the end of the month of March.
Non-government deductors: April 30th
Penalties for Non-Deduction or Late Deduction of TDS under Section 194J
There are several consequences when taxes are not deducted or are deducted after the fact:
Disallowance of expenditure: All amounts (save salaries) paid outside of India or to non-residents that are taxable in India in the hands of the recipient are exempt from deduction under Section 40(a)(ia) of the Income Tax Act if they are made without withholding tax or if tax is withheld but not remitted to the Central Government until the deadline for filing a return. Nonetheless, the payment will be subtracted in the subsequent year if the tax is withheld or remitted, as applicable. Furthermore, every payment made to a resident that is subject to withholding tax will be subject to 30% non-deductibility if it is made without withholding tax or if tax is withheld but not submitted to the Central Government until the return filing date, per Section 40(a)(ia).
Levy of Interest: Interest will be charged to anyone who is required to deduct TDS but either fails to do so completely or in part, or fails to pay the government the TDS. The interest rate on the TDS amount from the day that TDS was to be deducted is 1% every month, or part of a month. 1.5% on the total amount of TDS from the time it was deducted to the time it was actually paid, either monthly or in part each month. Prior to providing the TDS statement, the assessee is required to pay this interest.
Levy of Penalty: If that the assessee is required to deduct or pay TDS and fails to do so in accordance with Chapter Section 115-O(2), the second proviso to Section 194B, or sections 192 to 196D, the deductor may be subject to a penalty under Income Tax Act Section 271C. The amount of the penalty may be the same as the TDS that he neglected to deposit or deduct. Section 221 of the Act may impose additional penalties on the assessee if the assessee refuses to pay the tax demand made by the assessing officer. The length of the payment delay will determine the penalty amount, which cannot be greater than the tax demand.
Prosecution: A person faces a minimum punishment of three months in jail and a maximum sentence of seven years in prison if they deduct taxes at source and are required to deposit the money to the government but fail to do so.
Illustrations
Illustration 1: In F.Y. 2023–2024, Mr. A used Mr. B's professional services. The first payment of Rs. 50,000 was made in April, and a second payment of Rs. 20,000 was made in December. In three different situations, let's examine the TDS liability for both payments for the financial year 2023–2024.
Mr. A is not subject to an audit under Section 44AB: Mr. A is not required to withhold tax from his payment to Mr. B since he is not liable for a tax audit under Section 44AB.
Mr. A has taken service for personal use and is subject to an audit under Section 44AB: Although Mr.A did accept expert help, it was for a private reason. For this reason, there is no need to deduct TDS when paying for these services.
In F.Y. 2023–2024, Mr. A is subject to a tax audit under Section 44AB because he hired a professional service for business purposes: TDS @10% must be deducted at the time of payment or account credit, whichever comes first, if Mr. A is subject to a tax audit and uses professional services for business purposes. This is as a result of the transaction exceeding the Rs. 30,000 threshold limit.
Similarly, TDS ought to be withheld from each and every payment made to Mr. B because the transaction amount surpassed the threshold limit during the financial year. The tax would thus also be withheld at source from the second payment of Rs. 22,000.
Illustration 2: Mr. C, an Indian resident, has been hired by a badminton club as its coach. He will receive an annual salary of Rs. 10 lakh. Is the club responsible for withholding TDS from this payment? Under section 194J, coaches' services for athletic endeavours are classified as professional services. Additionally, the annual compensation exceeds Rs 30,000. As a result, the Badminton Club may deduct TDS from the compensation due to Coach Mr. C in accordance with section 194J.
Exceptions to TDS under Section 194J
Below are the instances in which Section 194J is not applicable:
Where a person or HUF makes a payment only for personal use
If a non-resident contractor or subcontractor receives paid
The entire amount paid (either all at once or over the course of the fiscal year) does not surpass Rs. 30000
No royalties and non-compete fees (even if commercial) are subject to TDS by individual HUF
Special Considerations on Applicability of Section 194J
The following specific announcements about the implications of section 194J have been made by CBDT:
Any money paid for regular maintenance agreements (including the provision of replacement parts) will be subject to TDS under Section 194C. However, if such payment is received in exchange for providing any technical services, Section 194J shall come into play.
Any payment to employment agencies (such as Monster India or Naukri.com) will incur TDS under the Income Tax Act Section 194J.
If the GST value is displayed separately on the bill, the TDS under this section will only apply to the amount (minus GST).
TDS u/s 194J will apply to any payment (in the form of commission) made by a media house to any advertising agency.
Conclusion
The Tax Deducted at Source (TDS) approach, which is outlined in Section 194J of the Income Tax Act, is a crucial part of the legislation governing the taxation of professional services. Aware of the nuances of Section 194J, stakeholders can complete their tax obligations and promote transparent and accountable financial practices. Despite changes in the regulatory landscape, a tax-compliant and financially stable corporate climate can be maintained by being educated and seeking competent advice.
FAQ
Q1. What is Section 194J of the Income Tax Act?
For certain services, the TDS provisions are governed by Section 194J. Under Section 194J, any person paying a resident person fee for any of these specific services (technical, professional, etc.) must deduct TDS.
Q2. Who has to deduct TDS under Section 194J?
Any person paying a resident for any professional or technical services must deduct TDS, with the exception of individuals and HUF (who will only be responsible if they are subject to an audit under Section 44AB).
Q3. What is the threshold to deduct TDS under Section 194J?
If the annual payment for professional or technical services covered by this section exceeds Rs 30,000, TDS must be withheld under Section 194J.
Q4. Which services come under Section 194J?
Under Section 194J, the following services are eligible for TDS deduction: royalty, non-compete fees, professional and technical services, and compensation paid to the company's directors (but not salaries).
Q5. How can I check the TDS under Section 194J?
By requesting Form 16 from deductors or submitting Form 26AS through the TRACES utility or the income tax e-filing website, you can review the specifics of your TDS.
Q6. How can I claim TDS under section 194J?
The payee may obtain a refund of the TDS by filing an income tax return if their gross net income for the year is less than the taxable income and the TDS is excluded under section 194J.
Q7. What is the rate of TDS applicable under Section 194J?
The TDS rate under Section 194J is 10% in general for professional and technical services, but it will differ in fees for certain specified services at the rate of 2% for the payments to call centers and 10% in case of royalties where the payee is author of the same.
Q8. What are the exceptions to TDS deduction under Section 194J?
Yes, TDS under Section 194J need not be deducted where the amount paid or payable to a resident during the financial year does not exceed Rs 30,000. Also, there is no requirement for deduction at source by an individual or HUF payers not subject to audit in the previous financial year.
Q9. What are the consequences of non-compliance with Section 194J?
Failure to deduct or deposit TDS under Section 194J may attract penalties and interest charges. The deductor will be liable to pay interest on the delayed payment and, at the same time, might have to bear a penalty equal to the amount of TDS that has not been deducted or deposited.
Q10. Can TDS deducted under Section 194J be adjusted against other income tax liabilities?
Yes, the TDS deducted under Section 194J can be credited against the total income tax liability of the recipient for the relevant financial year when filing their income tax returns.
Q11. How does Section 194J apply to foreign payments?
Section 194J solely deals with payments to residents. If it involves payments to non-residents for technical or professional services, then Section 195 of the Income Tax Act becomes applicable for deducting TDS on payment to non-residents.
Q12. Is there any surcharge or cess applicable on TDS deducted under Section 194J?
No, surcharge and cess are not applicable on TDS deductions under Section 194J for resident individuals. However, for non-residents or special cases, surcharge and cess may apply based on specific provisions.
Q13. Are there any special rates for TDS under Section 194J for senior citizens?
No, Section 194J does not provide any specific exemptions or reduced TDS rates for senior citizens. The same TDS rates apply, regardless of the recipient's age.
Q14. What happens if the deductee does not have a PAN?
If the recipient of the payment (deductee) does not provide their PAN, TDS is deducted at a higher rate of 20% under Section 206AA, even if the standard rate under Section 194J is lower.
Q15. Is GST considered while calculating TDS under Section 194J?
No, TDS is deducted only on the base amount (excluding GST). If the invoice includes GST, TDS should be calculated only on the service or fee amount before GST.
Q16. How do I deposit the TDS deducted under Section 194J?
TDS deducted under Section 194J must be deposited with the government using Challan ITNS 281. It should be paid on or before the 7th of the following month in which the deduction was made.
Q17. What is the due date for issuing the TDS certificate (Form 16A) for payments covered under Section 194J?
The deductor is required to issue the TDS certificate (Form 16A) to the recipient within 15 days from the due date for furnishing the quarterly TDS return.
Q18. How does Section 194J apply to freelancers and consultants?
Freelancers and consultants providing professional or technical services fall under Section 194J, and the payer must deduct TDS at 10% if the annual payment exceeds Rs. 30,000.
Q19. Are reimbursements included in TDS under Section 194J?
If reimbursements are included in the total invoice amount without being distinctly mentioned, TDS under Section 194J will apply to the entire amount. However, if the reimbursements are separately identified, TDS may not be applicable on them.
Q20. Can TDS under Section 194J be deducted on advance payments?
Yes, TDS under Section 194J must be deducted on advance payments if they pertain to professional or technical services. TDS must be deducted at the time of credit or payment, whichever is earlier.
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