Since September 1, 2019, individuals and Hindu Undivided Families (HUFs) must deduct Tax Deducted at Source (TDS) under Section 194M when paying over ₹50 lakh to contractors, professionals, or for commissions and brokerage within a financial year.
The deduction occurs at the time of payment or when the amount is credited, whichever happens first. Under Section 194M, a 2% tax must be withheld on these payments.
In this article, we cover:
- Who should deduct tax under Section 194M?
- Applicable TDS rates
- Threshold limits
- Timing of tax deductions
- Deposit and filing procedures
- TDS Certificates to be issued
- Frequently Asked Questions (FAQs)
Who Should Deduct TDS Under Section 194M?
Section 194M applies to individuals or Hindu Undivided Families (HUFs) making payments to contractors, professionals, or for commissions and brokerage that go above a certain limit, and whose accounts are not required to be audited under sections 44AB(a) and 44AB(b) of the Income Tax Act.
The payee can be any resident of India, including individuals, companies, or firms, as long as they have provided contractual or professional services, or services involving commission or brokerage.
Before this section, only those individuals and HUFs whose accounts were required to be tax audited had to deduct TDS on such payments under sections 194C (TDS on payment to a contractor), 194J (TDS on payment on professional fees) and 194H (Commission or brokerage) of the Act.
If the individual or HUF is liable to deduct tax (TDS) under section 194C, 194H and 194J, they do not have to deduct tax at source under Section 194M.
TDS Rate under Section 194M
Under section 194M of the Income Tax Act, the TDS rate is 2% on payments made to contractors or professionals, for commissions and brokerage, by individuals or Hindu Undivided Families (HUFs) who are not required to get their accounts tax audited under section 44AB(a) and 44AB(b) of the Income tax act.
Important Changes: the TDS rate has decreased from 5% to 2%, effective October 1, 2024. This reduction aims to lower the tax burden and improve liquidity for individuals and businesses.
When applicable, TDS at the rate of 2% under section 194M should be deducted at the time of payment or crediting the amount, whichever is earlier.
The TDS rate at which the tax has to be deducted under section 194M is 2% unless the payee has obtained a lower withholding tax certificate from the department.
If the deductee doesn’t have a PAN (Permanent Account Number), the tax deducted at source (TDS) will be at a rate of 20%. This means the government takes a bigger cut because they can’t verify the recipient’s tax status. It’s always better for the recipient to provide their PAN to avoid this higher deduction.
If an individual or HUF whose accounts are tax audited then the rate of tax under section 194C is 2% and under 194J is 10%. In case of section 194H, the TDS rate is 5%.
Threshold Limit for TDS Deduction Under Section 194M
Under Section 194M of the Income Tax Act, the threshold limit for TDS deduction is ₹50,00,000.
This means that TDS is applicable only if the total payment to a single contractor or professional exceeds this amount in a financial year.
Timing of Tax Deduction Under Section 194M
Under Section 194M of the Income Tax Act, TDS must be deducted at the earliest of the following:
- At the Time of Payment: When the actual payment is made to the contractor or professional.
- At the Time of Credit: When the amount is credited to the payee’s account.
Proper documentation should be maintained for compliance and accurate reporting in TDS returns.
Deposit, Filing of TDS return and Certificate to be issued
TDS deducted under Section 194M must be deposited with the government. The person who deducts tax under section 194M must submit Form 26QD. This form needs to be filed within 30 days after the end of the month when the payment was made.
For example, if you made a payment on December 1, 2023, you must file the form by January 30, 2024.
The person who deducts tax under section 194M must provide a TDS certificate using Form No. 16D to the payee within 15 days after the due date for submitting Form 26QD.
Example
- Scenario: An individual pays a contractor ₹60,00,000 for services rendered in a financial year.
- TDS Deduction: TDS of 2% on ₹60,00,000 = ₹1,20,000.
- Payment of TDS: The individual must deposit ₹1,20,000 with the government and report this in the TDS return.
Frequently Asked Questions (FAQs)
Who needs to deduct tax (TDS) under Section 194M?
An individual or Hindu Undivided Family (HUF) must deduct tax under Section 194M unless they are already required to deduct tax under sections 194C, 194H, or 194J.
In simple terms, if you’re an individual or a Hindu Undivided Family and you’re making certain payments, you need to take out tax (TDS) as per Section 194M. However, if you already have to deduct tax under other specific sections (like 194C for contracts, 194H for commission, or 194J for professional services), then you don’t need to worry about Section 194M.
What is the TDS rate under Section 194M?
Under Section 194M, the tax that needs to be deducted (TDS) is usually 5%. However, this rate is set to change to 2% starting from October 1, 2024.
If the payee doesn’t provide their PAN (Permanent Account Number), the tax will be deducted at a higher rate of 20%. This is to encourage people to provide their PAN for proper tax tracking.
What is the maximum amount for which no tax needs to be deducted under section 194M?
You don’t have to deduct any tax if the total payments made to a person in a financial year are less than or equal to ₹50 lakhs.
This means that if you’re making payments to someone and the total amount for the whole year is ₹50 lakhs or less, you don’t need to take out any tax from those payments. This rule helps avoid tax deductions on smaller amounts.
Which form should someone file after deducting tax under Section 194M?
The person who deducted tax under Section 194M must file Form 26QD within 30 days after the end of the month when the payment was made.
This helps keep track of the taxes deducted.
Do you need a TAN for tax deduction under section 194M?
If you’re the person or HUF deducting tax and paying it to the government, you don’t need a Tax Deduction Account Number (TAN).
You will use a specific payment form that links to your PAN (Permanent Account Number) and the PAN of the person receiving the payment.
How does the payee get credit for the tax deducted?
When someone deducts tax (TDS) from a payment, they have to pay that tax to the government on or before the deadline. The form they use to make this payment includes the payee’s PAN.
After the tax is paid, the payee can check a document called Form 26AS.
Form 26AS shows all the taxes that have been deducted on their behalf. By looking at this form, the payee can see the amount of tax that was taken out and use this information to claim a credit when they file their tax return. This means they can reduce the amount of tax they owe based on what has already been deducted.
When do you need to deduct tax under section 194M?
You need to deduct tax (TDS) either when the payment is credited to the payee’s account or when the payment is actually made, whichever happens first.
Since many taxpayers don’t keep detailed accounts, it can be unclear what the ‘date of credit’ is. One idea is that the date on the bill could be seen as the credit date. However, a better approach might be that since there are no records, the tax should be deducted when the payment is made.
What happens if you don’t deposit the tax on time under section 194M?
If you’re required to deduct tax (TDS) under section 194M but don’t pay it to the government on time, you’ll incur some penalties:
- Interest Charges: You’ll have to pay extra money as interest on the late payment. This interest can be either 1% or 1.5%, and the specific rate depends on the reason for the delay.
- Legal Action: In certain situations, failing to deposit the tax on time could lead to more serious consequences, including legal prosecution. This means that you could face legal penalties or charges.
In summary, it’s important to pay the deducted tax on time to avoid extra costs and potential legal issues.
What types of payments are covered under section 194M?
For the purposes of section 194M;
- “contract” shall have the meaning assigned to it in clause (iii) of the Explanation to section 194C;
- “commission or brokerage” shall have the meaning assigned to it in section 194H;
- “professional services” shall have the meaning assigned to it in clause (a) of the Explanation to section 194J;
- “work” shall have the meaning assigned to it in clause (iv) of the Explanation to section 194C.
Therefore, Section 194M covers various payments, including:
- Contractual Work: Such as any money paid for services like labor under a contract, advertising, broadcasting, transportation, catering, and manufacturing. This list isn’t complete; other types of contractual payments may also be included. The contract doesn’t have to be written—verbal agreements are also covered if the payment exceeds a certain amount.
- Professional Services: This refers to services from professionals like lawyers, doctors, engineers, architects, accountants, and others. It also includes athletes, umpires and referees, coaches and trainers, team doctors and physiotherapists, event managers, commentators and sports writers.
- Commission or Brokerage: This includes any payment made to someone acting on behalf of another person for services that aren’t professional services, especially in buying or selling goods.
