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TDS Rate under Section 194C for Individuals vs TDS Rate under Section 194J for Professional Services

  • Writer: Nimisha Panda
    Nimisha Panda
  • May 30
  • 10 min read

Explore the differences between the TDS rate under Section 194C for individuals and Section 194J for professional services, with a focus on their application, threshold limits, and recent amendments in the financial year 2024-25. While both sections govern the deduction of Tax Deducted at Source (TDS), they are applicable to different types of payments. Section 194C applies to payments made to contractors and subcontractors, primarily for carrying out work like construction and maintenance, while Section 194J pertains to payments made for professional and technical services such as consultancy, legal, and medical services. We will thoroughly break down each section, explain how they work, and highlight the amendments introduced in Budget 2024, ensuring a clear understanding of these provisions.

Table of Contents

What is the TDS rate under Section 194C for individuals vs TDS rate under Section 194J for professional services?

The TDS rate under Section 194C for individuals is 1% on payments made to contractors for carrying out work, such as construction or maintenance, with a threshold of ₹30,000 for a single payment and ₹1,00,000 for aggregate payments in a financial year. In contrast, Section 194J applies to professional and technical services, with a TDS rate of 10% for general professional services and 2% for technical services. If the payee does not provide a PAN, the TDS rate under Section 194J increases to 20%. These rates apply if the individual's turnover exceeds ₹1 crore (business) or ₹50 lakh (profession). Additionally, the amendments introduced in Budget 2024 ensure that professional services are no longer treated under Section 194C, but strictly under Section 194J from October 1, 2024.


TDS Rate under Section 194C for Individuals

Under Section 194C, TDS is applicable to payments made by individuals (or Hindu Undivided Families) to contractors for the execution of any type of work. This could include construction, repairs, maintenance, or supply of labor for various projects. For individuals and HUFs, the TDS rate is 1% of the payment made to the contractor. However, TDS under this section is subject to certain threshold limits. Specifically, TDS is not applicable if the payment for a single contract does not exceed ₹30,000 or if the aggregate payments made to a contractor during a financial year do not exceed ₹1,00,000.

It’s important to note that the thresholds are designed to ease the compliance burden on individuals, especially those dealing with smaller contracts. Additionally, the Budget 2024 amendment introduced a significant change regarding professional services, stating that professional service payments are now excluded from Section 194C and will be governed under Section 194J instead, starting from October 1, 2024. This change helps to clearly distinguish between payments for general work and those for specialized services.


TDS Rate under Section 194J for Professional Services

Section 194J governs TDS deductions on payments made to individuals or entities providing professional or technical services. This section applies to a variety of service providers, including but not limited to consultants, legal professionals, medical practitioners, engineers, and chartered accountants. The TDS rate under Section 194J varies depending on the nature of the service:

  • For professional services (e.g., consultancy, legal services), the TDS rate is 10%.

  • For technical services (e.g., IT consulting, technical advice), the TDS rate is 2%.

Additionally, if the payee fails to provide their Permanent Account Number (PAN), the TDS rate is increased to 20%. A critical feature of Section 194J is its threshold limit: no TDS is required if the payment to the professional does not exceed ₹30,000 in a financial year. It is also worth mentioning that Section 194J applies to individuals, HUFs, and businesses whose gross receipts in the previous financial year exceed ₹1 crore (for businesses) or ₹50 lakh (for professionals).

Budget 2024 further clarified the scope of Section 194J, ensuring that payments for professional and technical services are treated distinctly from other kinds of work payments, as professional services were previously a grey area under Section 194C.


Key Differences between Section 194C and Section 194J

Below is a detailed comparison between Section 194C and Section 194J, highlighting the key differences in their applicability, TDS rates, and conditions:

Feature

Section 194C (Individuals)

Section 194J (Professional Services)

Applicable To

Contractors/Subcontractors

Professionals/Technical consultants

TDS Rate

1% (individuals)

10% (professional services), 2% (technical services)

Threshold Limit

₹30,000 (per contract), ₹1,00,000 (aggregate)

₹30,000 (aggregate per year)

PAN Requirement

Not specified

20% if PAN is not provided

Amendment (Budget 2024)

Professional services excluded from "work"

Clarifies the exclusive applicability of Section 194J

Effective Date of Amendment

October 1, 2024

October 1, 2024

Amendments in Budget 2024

The 2024 Budget brought significant changes to both Sections 194C and 194J to clarify the application of TDS deductions on professional services. One of the key amendments introduced was the explicit exclusion of professional services from the definition of "work" under Section 194C. This ensures that payments for services such as consultancy, legal advice, and medical services will no longer be subject to the lower 1% TDS rate under Section 194C. Instead, they must now be governed under Section 194J, which applies the 10% rate for professional services and 2% for technical services.


This clarification addresses previous confusion regarding the treatment of professional services and ensures that they are subject to the correct TDS rates. The amendment is set to take effect from October 1, 2024, further distinguishing payments for work and professional services in the Income Tax Act.


Examples to Understand the Application of TDS

To better understand how TDS is applied under these sections, consider the following examples:

  1. Example 1: Section 194C (Individuals) An individual pays a contractor ₹1,50,000 for renovating their home. Since the payment exceeds ₹30,000 for a single contract, TDS is applicable at the rate of 1%. Therefore, the individual will deduct ₹1,500 as TDS from the payment.

  2. Example 2: Section 194J (Professional Services) An individual pays ₹50,000 to a chartered accountant for tax consultancy services. Since the payment exceeds ₹30,000 and the TDS rate for professional services is 10%, the TDS deducted will be ₹5,000, assuming the individual's turnover exceeds the specified limits.


How to Calculate TDS under Section 194C and Section 194J

Here is a step-by-step breakdown of how to calculate TDS under both sections:

  1. Section 194C (Individuals):

    1. Determine the total payment to the contractor (e.g., ₹1,50,000).

    2. Check if the payment exceeds ₹30,000 for a single contract or ₹1,00,000 in aggregate for the year.

    3. If applicable, apply the 1% TDS rate on the total payment (₹1,50,000 × 1% = ₹1,500).

    4. Deduct ₹1,500 as TDS and remit to the government.


  2. Section 194J (Professional Services):

    1. Determine the total payment to the professional (e.g., ₹50,000).

    2. Check if the payment exceeds ₹30,000 in a financial year.

    3. Apply the 10% TDS rate on the payment (₹50,000 × 10% = ₹5,000).

    4. Deduct ₹5,000 as TDS and remit to the government.


Common Queries about TDS Rates under Section 194C and 194J

This section answers some frequently asked questions (FAQs) regarding TDS deductions under Section 194C and Section 194J:

  1. Can payments for professional services be subjected to 1% TDS under Section 194C? No, from October 1, 2024, professional services are excluded from Section 194C and are subject to TDS under Section 194J at the correct rate.

  2. What happens if the payee does not provide their PAN? If the payee does not provide a PAN under Section 194J, TDS will be deducted at 20%.

  3. Is TDS applicable on small payments under Section 194C and 194J? No, TDS is not applicable if the payment does not exceed the threshold limit of ₹30,000 for Section 194C or ₹30,000 for Section 194J.

  4. How do I calculate TDS if my payment is above the threshold? Apply the respective TDS rate (1% for Section 194C or 10% for Section 194J) on the payment amount exceeding the threshold limit.


Conclusion

In conclusion, understanding the TDS rates under Section 194C for individuals and Section 194J for professional services is essential for proper compliance with tax regulations. The amendments introduced in Budget 2024 ensure that payments for professional services are no longer incorrectly subjected to the TDS rate under Section 194C, with a clear distinction now made under Section 194J. Ensuring the correct application of these provisions will help avoid penalties and streamline TDS deductions.


Frequently Asked Question (FAQs)

  1. Can professional services be subjected to 1% TDS under Section 194C?

    No, professional services are no longer subjected to 1% TDS under Section 194C. With the Budget 2024 amendment, payments for professional services are explicitly excluded from Section 194C and must now be deducted under Section 194J, which carries a higher TDS rate of 10% for professional services and 2% for technical services. This change aims to resolve the confusion between the two sections and ensures proper tax deduction at the applicable rates.


  2. What happens if the payee does not have a PAN under Section 194J?

    If the payee does not provide their Permanent Account Number (PAN) under Section 194J, the TDS rate is increased to 20%. This higher rate is designed to encourage individuals and businesses to furnish their PAN for smoother processing and accurate tax deductions. Therefore, to avoid this higher rate, it’s crucial for payees to provide their PAN details to the deductor.


  3. Is there a difference in TDS rates for technical services under Section 194J?

    Yes, there is a difference in TDS rates for technical services under Section 194J. While the standard rate for professional services is 10%, the TDS rate for technical services is lower at 2%. This distinction is made to account for the nature of services, with professional services typically involving more complex expertise, while technical services are generally focused on a narrower scope of work, such as IT consulting, engineering, or technical advice.


  4. When does the amendment in Section 194C and 194J apply?

    The amendment introduced in Budget 2024 applies from October 1, 2024. As part of this amendment, payments for professional services will no longer be treated under Section 194C and will instead be governed by Section 194J. This clarification is significant for businesses and individuals who need to ensure they are deducting TDS at the correct rate for professional or technical services.


  5. What is the threshold for TDS deduction under Section 194C?

    Under Section 194C, the TDS threshold is as follows:

    1. ₹30,000 for a single contract payment

    2. ₹1,00,000 for aggregate payments to a contractor in a financial year.

    If the payment does not exceed these limits, no TDS is required. This provision is designed to reduce the compliance burden for smaller payments and ensure that only larger contracts are subjected to TDS.

  6. How does TDS under Section 194J differ for individuals and firms?

    The TDS rate under Section 194J remains the same for both individuals and firms:

    • 10% for professional services

    • 2% for technical services

    The key difference between individuals and firms lies in the eligibility to deduct TDS. If the individual's turnover exceeds ₹50 lakh in the previous financial year, they are required to deduct TDS. Similarly, for firms, the threshold is ₹1 crore in business receipts. Hence, the requirement to deduct TDS under Section 194J applies based on the turnover of the payer.

  7. What are the effective dates for the amendments in Budget 2024?

    The amendments introduced in Budget 2024, including the exclusion of professional services from Section 194C and the clarification under Section 194J, will come into effect on October 1, 2024. This means that from this date onwards, any payments for professional services must be subject to TDS under Section 194J, ensuring that the correct tax rate is applied.


  8. Can payments for professional services be exempt from TDS under any condition?

    Payments for professional services can be exempt from TDS under certain conditions, such as when the total aggregate payment to a professional does not exceed ₹30,000 in a financial year. Additionally, payments made to professionals who provide a valid certificate under Section 197 can be exempted from TDS. This certificate essentially allows the payee to receive payments without any TDS deduction, based on their tax profile and previous returns.


  9. How does the TDS rate for professional services change if the payee is a foreign entity?

    If the payee is a foreign entity providing professional services, the TDS rate under Section 194J remains the same at 10% for professional services or 2% for technical services. However, in cases where the foreign entity does not have a Permanent Establishment (PE) in India, the TDS rate may be subject to the Double Taxation Avoidance Agreement (DTAA) between India and the country of residence of the foreign entity. The rate may be reduced or modified as per the DTAA provisions.


  10. Are there any exemptions for small businesses or individuals under Section 194C and 194J?

    Yes, both small businesses and individuals may benefit from exemptions under these sections:

    For Section 194C, individuals and HUFs are exempt from TDS if the payment does not exceed the specified threshold limits of ₹30,000 (per contract) and ₹1,00,000 (aggregate payments in a year).

    Under Section 194J, small businesses or individuals whose turnover does not exceed ₹50 lakh (in the case of professionals) or ₹1 crore (in the case of businesses) in the preceding year are not required to deduct TDS. Thus, the application of TDS is conditional upon the turnover of the payee.


  11. What are the consequences of non-deduction of TDS under these sections?

    The non-deduction of TDS under Sections 194C or 194J can result in serious consequences, including:

    Interest under Section 201(1A), which is calculated at the rate of 1% per month on the amount of TDS that was not deducted or paid on time.

    Penalties for failure to comply with the TDS deduction requirements, which can be levied under Section 271C. This penalty can be as high as 100% of the TDS amount that should have been deducted.

    Disallowance of expenses under Section 40(a)(ia) for the payer if TDS is not deducted or deposited correctly.


  12. How do these TDS rules apply to cross-border transactions?

    For cross-border transactions, TDS under Section 194C and Section 194J applies in the same manner, but the TDS rate may differ based on the location of the payee. In cases where the payee is a foreign entity, the DTAA (Double Taxation Avoidance Agreement) provisions between India and the foreign country may override the standard TDS rates. If there is a DTAA in place, the TDS rate applicable to foreign entities may be lower than the rate specified under domestic tax law. Additionally, Section 195 applies to payments made to non-residents, where the deductor must ensure that TDS is deducted according to the rate specified in the DTAA or at the default rate, whichever is applicable.



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