TDS 194C vs 194J: What’s the difference?

In India, the Tax Deducted at Source (TDS) mechanism plays a significant role in ensuring tax compliance and timely revenue collection for the government. Under the Income Tax Act, 1961, TDS is deducted at the time of making payments for various services and contracts. Among the many provisions in the act, Sections 194C and 194J are two key sections that address TDS on different types of payments. Section 194C primarily deals with payments made to contractors for work contracts, while Section 194J is applicable to payments for professional or technical services, royalty, and certain other types of income.

The two sections serve different purposes and have distinct rates, thresholds, and applicable rules. Understanding the differences between these two sections is crucial for businesses, professionals, and individuals to ensure they comply with tax regulations and avoid penalties.

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Table of Contents

• What is TDS 194C and 194J?

• What is Section 194C?

• What is Section 194J?

• Key Differences Between Section 194C and Section 194J

• Specific Scenarios and Applicability of TDS Sections 194C and 194J

• TDS Rate Changes for FY 2024-25 and FY 2025-26

• Conclusion

• FAQs

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What is TDS 194C and 194J?

TDS under Sections 194C and 194J of the Income Tax Act, 1961, deals with the deduction of tax at source on payments made for different types of services. Section 194C applies to payments made to contractors or subcontractors for work contracts, including construction, repairs, and maintenance, with TDS rates of 1% for individuals or HUFs and 2% for others, applicable when payments exceed Rs. 30,000 per contract or Rs. 1,00,000 in aggregate.

Section 194J, on the other hand, covers payments for professional or technical services, royalty, and director fees (excluding salary), with TDS rates of 10% for professional services and 2% for technical services, applicable when payments exceed Rs. 30,000 during the financial year. Both sections require TDS to be deducted at the time of payment or crediting, with quarterly filing of TDS returns in Form 26Q and issuance of Form 16A to the payee.

What is Section 194C?

Section 194C of the Income Tax Act, 1961, governs TDS on payments made to contractors or subcontractors for executing any kind of work contract. It applies when a business or individual hires a contractor to perform physical work or services. This can include various sectors, such as construction, repair, maintenance, transportation, and other similar work.

1. Applicability to Construction, Repair, and Other Related Work: Section 194C is typically applied in scenarios where a contractor is hired to carry out tasks that involve the execution of physical work. This includes construction projects, electrical work, transportation services, and repairs. Whether or not materials are provided by the contractor does not impact the applicability of this section, making it a versatile provision for a range of physical contracts.

   
   

2. TDS Rates and Threshold Limits:

   
   

   • TDS Rate: For payments made to individual contractors or Hindu Undivided Families (HUFs), the TDS rate is 1%. For payments to other entities such as companies or firms, the rate increases to 2%.

   • Threshold Limit: TDS must be deducted only if the payment to the contractor exceeds Rs. 30,000 per contract or Rs. 1,00,000 in aggregate during the financial year. If these thresholds are not exceeded, there is no obligation to deduct TDS.

   
   

3. Time of Deduction and Filing: TDS under Section 194C must be deducted either at the time of crediting the payment to the contractor's account or at the time the payment is made, whichever occurs first. This ensures timely deduction and compliance with tax regulations. The TDS amount must be deposited with the government within the prescribed timelines. Additionally, quarterly TDS return filings in Form 26Q are required, and the deductor must provide the contractor with a TDS certificate in Form 16A.

   
   

What is Section 194J?

Section 194J of the Income Tax Act, 1961, applies to payments made for professional or technical services, as well as royalties and director's fees (excluding salary). It focuses on services that require specialized knowledge, expertise, or intellectual input, as opposed to physical labor or work contracts under Section 194C.

1. Types of Payments Covered Under Section 194J: Section 194J covers a wide array of payments, including:

2. Professional Services: Payments made for services such as legal, medical, accountancy, architectural, and consultancy services.

3. Technical Services: Payments for services related to technical consultancy, managerial services, or services provided by call centers.

4. Royalties: Payments made for the use of intellectual property or technology.

5. Director's Fees (excluding salary): Payments made to directors for services rendered that are not related to their salaried position.

6. TDS Rates and Threshold Limits:

7. TDS Rate: Payments for professional or technical services attract a TDS rate of 10%. For payments related to technical services provided by call centers, the TDS rate is 2%. Additionally, if the deductee does not provide a PAN, the TDS rate is raised to 20%.

8. Threshold Limit: TDS under Section 194J is applicable only when the total payment for professional or technical services exceeds Rs. 30,000 in a financial year. If the payment does not cross this limit, TDS is not required to be deducted.

9. Time of Deduction and Filing: Similar to Section 194C, TDS under Section 194J must be deducted either at the time of crediting the amount to the payee's account or when the payment is made. The TDS deducted must be deposited with the government according to the prescribed timelines. Additionally, businesses must file quarterly returns in Form 26Q and issue Form 16A to the payee to reflect the TDS deducted.

   
   

Key Differences Between Section 194C and Section 194J:

Understanding the differences between Sections 194C and 194J is essential for businesses and professionals to ensure they are deducting TDS correctly based on the type of payment they are making. Below is a detailed comparison of these two provisions:

1. Nature of Payment

• Section 194C: This section applies to payments made to contractors or subcontractors for executing a work contract. It pertains to physical work or services rendered by contractors, such as construction, repairs, or transportation services. The key factor is that the payment is related to tangible work or services.

• Section 194J: This section covers payments made for professional or technical services, including royalties, director's fees (excluding salary), and payments for intellectual work. It applies to individuals or entities that provide specialized knowledge or skills, such as legal, medical, architectural, or consultancy services.

  
  

2. TDS Rates

• Section 194C:

• 1% for payments made to an individual or Hindu Undivided Family (HUF).

• 2% for payments made to entities like companies or firms.

• Section 194J:

• 10% for professional or technical services and royalties.

• 2% for payments made for technical services related to call centers.

• 20% if the deductee does not provide a PAN.

  
  

3. Applicability and Examples

• Section 194C: This section is applicable to payments made to contractors for physical work contracts. Examples include:

• Construction work (e.g., building a house or office complex)

• Repair and maintenance work

• Transportation services (e.g., hiring a transport contractor)

• Section 194J: This section applies to payments for professional, technical services, and royalties. Examples include:

• Payments to consultants (legal, medical, or architectural)

• Director's fees (excluding salary)

• Payments for technical consultancy services (e.g., IT support or engineering)

• Royalty payments (e.g., payments for the use of intellectual property)

  
  

4. Threshold Limits

• Section 194C: TDS is applicable if the payment to the contractor exceeds Rs. 30,000 per contract or Rs. 1,00,000 aggregate during the financial year. Payments below these limits are not subject to TDS.

• Section 194J: TDS is applicable only if the total payment during the financial year exceeds Rs. 30,000. Payments below this threshold do not require TDS deduction.

  
  

5. Time of Deduction

• Section 194C: TDS must be deducted at the time of crediting the contractor's account or at the time of making the payment, whichever is earlier. This ensures that TDS is deducted promptly in line with the work being completed or paid for.

• Section 194J: Similarly, for Section 194J, TDS is deducted at the time of crediting the service provider's account or when the payment is made, whichever occurs first. This timing ensures that TDS is applied in sync with the provision of the service or the payment for it.

  
  

6. Filing Requirements (Form 26Q)

• Section 194C: TDS must be filed in Form 26Q on a quarterly basis. Form 26Q contains the details of the TDS deducted, and businesses must ensure that the contractor receives a TDS certificate (Form 16A).

• Section 194J: Similar to Section 194C, TDS under Section 194J also requires quarterly filing in Form 26Q. Businesses need to provide the service provider with a Form 16A to acknowledge the TDS deduction.

Specific Scenarios and Applicability of TDS Sections 194C and 194J

When Section 194C Applies:

• Section 194C is applicable when businesses or individuals make payments to contractors for physical work contracts. Common scenarios include:

• Construction projects (e.g., building construction, roadwork)

• Repairs and maintenance (e.g., machinery maintenance, plumbing)

• Transportation services (e.g., freight or delivery services)

For example, a company paying a contractor for office renovation or a construction company hiring labor for building a new facility would be required to deduct TDS under Section 194C.

When Section 194J Applies:

• Section 194J applies when payments are made for professional services, technical services, royalties, or director’s fees. It is relevant for services that require intellectual input or expertise.

• Consultancy services (e.g., legal, accounting, management consulting)

• Royalties for intellectual property usage

• Director’s fees (non-salary payments)

For example, if a business hires a legal consultant or pays director’s fees for board members, TDS must be deducted under Section 194J.

Practical Examples:

• Consultancy Firm Payment (Section 194J): A company hires a consultancy firm for business strategy advice. The fee paid exceeds Rs. 30,000 during the year, making Section 194J applicable at a 10% TDS rate.

• Contractor Payment (Section 194C): A manufacturing company hires a contractor to repair its machinery for a cost exceeding Rs. 30,000. The company will apply Section 194C at a 2% TDS rate for a non-individual contractor.

  
  

TDS Rate Changes for FY 2024-25 and FY 2025-26

While the core provisions of Sections 194C and 194J are expected to remain unchanged for FY 2024-25 and FY 2025-26, businesses must be aware of the following updates and clarifications:

1. TDS Rates for Section 194C: The rates of 1% for individual/HUF contractors and 2% for others are expected to continue. However, businesses should monitor any potential amendments to the TDS rates as part of annual tax updates.

2. TDS Rates for Section 194J: The TDS rates of 10% for professional services and 2% for technical services will remain in place. It's crucial for businesses to ensure compliance with PAN requirements to avoid the 20% deduction in case PAN is not provided.

3. Threshold Limit Updates: The threshold limit of Rs. 30,000 for Section 194J remains unchanged. However, businesses should verify whether there are any sector-specific exemptions or updates in the financial year's tax notices.

4. Impact on Businesses: With consistent rates, businesses and contractors need to ensure that TDS is deducted on time and at the correct rates to avoid penalties. This also includes ensuring timely filing of Form 26Q and issuing Form 16A for the deducted TDS.

   
   

Conclusion

Sections 194C and 194J address different aspects of TDS obligations under the Income Tax Act, 1961. Section 194C focuses on payments made to contractors for physical work or services, while Section 194J is geared towards professional, technical, and royalty-related payments. Both provisions play a crucial role in ensuring that the right amount of tax is deducted at the source, depending on the type of service provided. For businesses and professionals, understanding the distinctions between these sections is vital for tax compliance, timely deductions, and avoiding penalties.

Frequently Asked Questions(FAQs)

1. Which TDS section applies to payments for consultancy services?

Payments made to consultancy firms for advisory services fall under Section 194J. This section is applicable to professional services, which includes consultancy services in areas such as legal, financial, management, medical, and architectural consulting. If the total payment to the consultant exceeds Rs. 30,000 in a financial year, TDS at a rate of 10% must be deducted. For technical services provided by consultants, the TDS rate may be 2%, depending on the nature of the service.

2. How is TDS calculated on payments made to contractors under Section 194C?

Under Section 194C, TDS is deducted from payments made to contractors for the execution of work contracts. The calculation is based on the type of contractor:

1. 1% TDS is applicable if the payment is made to an individual or a Hindu Undivided Family (HUF).

2. 2% TDS is applicable if the payment is made to any other entity, such as a company or firm.

TDS should be deducted when the total payment to the contractor exceeds Rs. 30,000 per contract or Rs. 1,00,000 aggregate during the financial year. The deduction is made at the time the payment is made or credited, whichever comes first.

3. What are the TDS rates under Section 194J for director fees?

Payments made to directors (other than salary) for services provided by them fall under Section 194J. The TDS rate for payments made to directors is typically 10% if the payment is for professional or technical services. If the director does not provide their PAN number, the TDS rate increases to 20% under Section 194J.

4. Is GST included when calculating TDS under Sections 194C and 194J?

No, GST (Goods and Services Tax) is not included when calculating TDS under both Section 194C and Section 194J. The TDS is calculated on the amount excluding GST. If GST is separately mentioned on the invoice, it should not be considered part of the payment amount for TDS calculation. For example, if a contractor issues an invoice for Rs. 1,00,000 plus Rs. 18,000 GST, the TDS would be deducted on Rs. 1,00,000 (excluding the GST).

5. What happens if PAN is not provided for TDS deductions under Sections 194C or 194J?

If the payee (contractor or service provider) does not provide their Permanent Account Number (PAN), the TDS rate is increased:

• For Section 194C, the TDS rate increases to 20%.

• For Section 194J, the TDS rate increases to 20% as well for professional or technical services, and it remains 20% for royalty payments or director fees if PAN is not provided.

It is crucial to ensure that the payee’s PAN is available to avoid higher TDS deductions.

6. When should TDS be deducted under Section 194C?

TDS under Section 194C should be deducted either at the time of crediting the payment to the contractor’s account or when the payment is made, whichever occurs first. This ensures that TDS is deducted promptly in line with the work being completed or paid for. The TDS must be deposited with the government according to prescribed timelines.

7. Are there any exemptions for small payments under Section 194J?

Yes, under Section 194J, TDS is applicable only if the total payment for professional or technical services exceeds Rs. 30,000 in a financial year. If the payments are below this threshold, no TDS needs to be deducted. It’s important for businesses to track payments made throughout the year to ensure TDS is only deducted when the threshold is crossed.

8. What is the threshold limit for TDS under Section 194J?

Under Section 194J, the threshold limit for TDS is Rs. 30,000 in a financial year. This limit applies to professional services, technical services, royalty, and director’s fees (excluding salary). If the total payments made to a service provider in a year exceed this amount, TDS should be deducted at the applicable rate.

9. How do I file TDS returns for Section 194C and Section 194J?

TDS returns for both Section 194C and Section 194J should be filed quarterly in Form 26Q. This form includes the details of all TDS deducted during the quarter. After filing the TDS return, a TDS certificate (Form 16A) must be issued to the contractor or service provider. This certificate reflects the TDS deducted and serves as proof for the payee to claim credit for the TDS.

10. Can TDS be deducted after the payment is made?

TDS must be deducted at the time the payment is made or when it is credited to the payee’s account, whichever is earlier. It is not permissible to deduct TDS after the payment has been made without prior crediting. Timely deduction and deposit are important to avoid penalties.

11. What is the penalty for not filing TDS returns on time?

Failure to file TDS returns on time can result in penalties. The penalty for late filing of TDS returns is Rs. 200 per day of delay until the return is filed. Additionally, if TDS is not deposited within the prescribed timeline, interest is charged at the rate of 1.5% per month or part of the month on the amount of TDS that was due.

12. What forms are used for TDS filing under Sections 194C and 194J?

Both Section 194C and Section 194J require businesses to file their TDS returns using Form 26Q, which is used for reporting TDS deducted on payments other than salary. This form is filed on a quarterly basis. Additionally, businesses must issue Form 16A to contractors or service providers, which acts as a TDS certificate for the deductions made.