Section 194J: TDS on fees for professional or technical services

Section 194J plays a crucial role in the TDS framework in India, specifically targeting payments for professional and technical services. 

Understanding provisions of section 194J is essential for both businesses and professionals to ensure compliance and avoid penalties. 

Section 194J of the Income Tax Act, 1961, mandates the deduction of tax at source (TDS) on payments made towards professional or technical services.

Overview of TDS under Section 194J

Tax Deducted at Source (TDS) is a means of collecting income tax in India, where a certain percentage of income is deducted at the source of payment. 

This system helps ensure that tax is collected efficiently and minimizes tax evasion.

Section 194J of the Income Tax Act, 1961, deals specifically with the deduction of tax (TDS) on payments made for professional and technical services, as well as on royalty payments.

The provision of section 194J aims to tax income derived from specific services at the point of payment or credit, ensuring that tax is collected from those earning income in these categories.

Section 194J applies to a person making payments to a resident for specific services such as professional and technical services.

However, if the person is an individual or HUF and not subject to tax audit under section 44AB(a) and 44AB(B) during the preceding financial year, tax is not required to be deducted under section 194J while making above payments.

Types of Payments Covered under section 194J

Section 194J of the Income Tax Act, 1961, specifically addresses tax deductions (TDS) on various types of payments related to professional and technical services, as well as royalty payments.

Here’s a detailed look at the types of payments covered under this section:

• Fees for professional services.
• Fees for technical services.
• Remuneration or fees or commission paid to directors (excluding salary).
• Royalty payments.
• Non-compete fees.

Based on above list, here are few example of services where the person responsible for making payment is required to deduct tax under section 194J:

• Payments made to consultants providing expertise in various fields, such as management, finance, marketing, or human resources.
• Fees paid to lawyers, legal advisors, or firms for legal consultations or representation.
• Payments made to doctors, medical professionals, or healthcare providers for their services.
• Fees paid to accountants, auditors, and tax consultants for financial and tax advisory services.
• Payments made to architects for design and planning services related to construction projects.
• Payments for technical consulting, design, and engineering services
• Fees for software development, IT consulting, system integration, and related services.
• Payments for research and development activities undertaken by professionals or firms.
• Payments for services related to telecommunications, such as network management or installation.
• Payments for the use of patents, copyrights, trademarks, or any intellectual property rights.
• Payments made to franchisors for the right to operate under a particular brand or business model.
• Fees paid for the licensing of software products or technology.
• Any sum received for not carrying out any activity or for not sharing any know-how or patents etc

TDS Rates under section 194J

Under Section 194J of the Income Tax Act, 1961, the rates for Tax Deducted at Source (TDS) vary based on the nature of the payment. 

Here’s a breakdown of the applicable TDS rates under section 194J:

• 10% for professional services, royalty, and non-compete fees.
• 2% for technical services (not being professional services) and payments to call centers.

In certain cases, if the recipient provides a lower deduction certificate from the Income Tax Department, the TDS rate may be reduced.

The rates mentioned above do not include any additional surcharge or health and education cess, which may be applicable in certain cases.

Threshold Limits for tax deduction under section 194J (TDS)

TDS under Section 194J is applicable when the total payment for professional or technical services, or royalty payments, exceeds 30,000 rupees in a financial year.

The 30,000 rupees threshold applies to the total payments made to a single payee during the financial year. Once the cumulative amount exceeds this limit, tax must be deducted (TDS) on the entire amount, not just the amount exceeding 30,000 rupees.

If multiple payments are made to the same payee within the financial year, the limit of 30,000 rupees is cumulative. 

For instance, if you make several payments of 10,000 rupees each to a consultant, tax must be deducted (TDS) once the total amount exceeds 30,000 rupees.

Time of tax deduction under section 194J

TDS under Section 194J must be deducted at the time of crediting the amount to the payee’s account or at the time of payment, whichever occurs first.

This means that if you are recording the expense in your books, tax should be deducted (TDS) when the amount is credited to the payee’s account, even if it has not been paid out yet.

If a company provides a consultancy fee of 50,000 rupees to a consultant and records this expense on March 15, the company must deduct tax (TDS) at that time, even if the payment is actually made on April 5 of the following financial year.

It’s crucial to maintain proper documentation showing when the deduction was made, as this will be important for TDS returns and in case of any tax audits.

Filing requirements for tax deduction under section 194J (TDS)

Before deducting tax (TDS), the deductor must obtain a Tax Deduction Account Number (TAN).

TAN is a unique identifier that is essential for all TDS related activities.

Tax must be deducted (TDS) at the applicable rate at the time of crediting the amount to the payee’s account or at the time of payment, whichever occurs first.

The deducted TDS amount must be deposited with the government within the stipulated due dates:

• For payments made in March: TDS must be deposited by April 30 of the financial year.
• For other months: TDS should be deposited by the 7th day of the following month.

It’s essential for deductors to ensure proper compliance with TDS provisions, including timely deposit of the deducted TDS amount and filing TDS returns.

TDS returns must be filed periodically, generally on a quarterly basis. 

Form 26Q used for filing TDS returns. After filing Form 26Q, tax deducted under section 194J will reflect in the deductee’s account.

Consequences of Non-Compliance

Failing to deduct or remit tax deducted (TDS) on time can lead to penalties, including interest on the delayed payment and additional fines.

Failing to deduct tax (TDS) at the appropriate time can lead to interest and penalties. 

If tax is not deducted (TDS) when due, the deductor may be liable to pay interest at the rate of 1.5% per month on the delayed amount.

The due dates for filing TDS returns are:

After filing the TDS return, the deductor must issue a TDS certificate (Form 16A) to the payee. This certificate serves as proof of tax deduction and can be used by the payee for filing their income tax return.

Lower deduction of tax for Professional fees and others

Taxpayers can apply to the Income Tax Department for a certificate allowing for a lower rate of tax deduction (TDS). 

This is particularly relevant if the recipient of the payment expects to have a lower tax liability than what is prescribed.

To qualify for a lower deduction, the recipient may need to demonstrate that their overall tax liability for the financial year is lower due to deductions or exemptions that they can claim.

If the application is approved, the assessing officer issues a certificate specifying the lower rate at which tax should be deducted (TDS).

The deductor must follow the instructions in the lower deduction certificate. 

If the certificate states a specific rate, tax should be deducted (TDS) at that rate instead of the standard 10%. 

It’s essential for the deductor to keep a copy of the lower deduction certificate and maintain proper records of the payments made and tax deducted (TDS).

When filing TDS returns, the deductor must ensure that the TDS amount reflects the lower deduction. This is particularly important to avoid discrepancies during assessments.

These provisions ensure that taxes are collected at the source of income, easing the taxpayer’s burden when filing returns.

After deduction, the tax deducted amount (TDS) must be deposited with the government within the specified due dates to avoid additional penalties.

Frequently Asked Questions (FAQs)

Who is responsible for deducting tax under section 194J?

Persons responsible for making the above type of payments are required to deduct tax under section 194J.

However, if the person is an individual or HUF and not subject to tax audit under section 44AB(a) and 44AB(B) during the preceding financial year, tax is not required to be deducted while making above payments.

What is the time of tax deduction under section 194J?

Tax has to be deducted at the rate of 10% or 2% under section 194J from the above type of expenses at the time of payment or credit whichever is earlier. 

This means if you have not paid but provisions are created at the end of the financial year, you are required to deduct tax at the rate of 10% or 2%, as applicable under section 194J at the time of credit to the books of accounts.

TDS under section 194J is required to be paid to the tax department on or before the 7th day of the following month in which tax has been deducted.

With effect from 1-6-2017, if a payee being a person engaged only in the business of call center then the rate of TDS under section 194J is 2%.

When tax not to be deducted under section 194J?

Tax should not be deducted under section 194J when aggregate of payments does not exceed Rs 30,000 in a financial year for each of the following nature of payments;

• Fees for professional services, or
• Fees for technical services, or
• Royalty, or
• Any sum received for not carrying out any activity or for not sharing any know-how or patents etc

This means in the above type of expenses, tax has to be deducted under section 194J only when aggregate payments to a person for each nature of expenses exceed Rs 30,000 during the financial year.

There is no threshold limit in the case of remuneration, fees or commission paid to directors of a company. 

This means tax has to be deducted under section 194J (TDS) from remuneration, fees or commission paid to directors irrespective of the amount paid.

No tax has to be deducted under Section 194J, If the sum paid by an individual or HUF is towards professional services exclusively for their personal use.

When expenses are included in an invoice along with the fees of Professional services, tax has to be deducted under section 194J on the gross amount of the bill including claim of reimbursement of actual expenditure.

If the payee has a certificate under Section 197 allowing lower or nil TDS, or if the payee is eligible for tax exemption, the deductor must follow those instructions to deduct tax at such lower rate as mentioned on the certificate issued under section 197.

Under what circumstances there is no need to deduct tax under section 194J (TDS)?

Professional Services means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purposes of section 44AA or of this section.

What is the meaning of expression ‘fees for technical services’ in reference to section 194J? 

Fees for technical services means any consideration for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries”.

Whether TDS under section 194J is also deductible on reimbursements?

TDS under section 194J refer to any sum paid i.e including reimbursements applicable only in cases where bills are raised for the gross amount inclusive of professional fees as well as reimbursement of actual expenses. Circular No. 715 dated 08/08/1995. 

Further Circular No. 720 dated 30/8/1995 provides that the provision of section 194J is not applicable where bills were raised separately by the consultants for reimbursements of actual expenses incurred by them.

At what rate is tax deductible under section 194J by an advertising agency making payments for professional services to a film artist? 

Where an advertising agency makes payments for professional services to a film artist such as an actor, a Cameraman, a director etc, tax will be deducted at the rate of 5%. Please refer Circular No. 714, dated 03/08/1995.