Section 194J TDS of the Income Tax Act

Section 194J of the Income Tax Act 1961 is a crucial provision that governs Tax Deducted at Source (TDS) on fees for professional and technical services in India. This section plays a significant role for freelancers, consultants, and business owners by outlining how TDS should be applied to payments made for legal, medical, engineering, and managerial services. Understanding Section 194J is essential for ensuring compliance and optimising tax liabilities, as it impacts various payments, including those made to lawyers, doctors, architects, and other professionals. This provision helps in efficient tax collection and reduces tax evasion by allowing taxpayers to credit the deducted tax when filing their income tax returns. This article provides complete information on Section 194J TDS of the Income Tax Act. IndiaFilings helps you to file TDS returns on time with expert assistance!! [shortcode_35]

What is Section 194J TDS?

Section 194J of the Income Tax Act 1961 outlines the Tax Deducted at Source (TDS) provisions on payments made for professional and technical services. This section mandates that any payer, except individuals and Hindu Undivided Families (HUFs), must deduct TDS at rates of 10% or 2%, depending on the nature and amount of the payment when paying a resident. If the payee does not provide a Permanent Account Number (PAN), the TDS rate increases to 20%. For non-resident Indians, technical service fees are subject to TDS at 20% under Section 195. Section 194J applies to a wide range of professional fees, including those paid to lawyers, doctors, engineers, architects, chartered accountants, and interior decorators. It also covers management, technical, and consulting services.

What is Section 194J TDS Threshold Limit?

Under Section 194J of the Income Tax Act, the threshold limit for deducting tax is ₹30,000. This means that TDS must be deducted if the professional or technical services payment exceeds ₹30,000 in a financial year. It is important to note that this limit applies to each payment individually. For example, suppose a company pays ₹25,000 to a lawyer in January and ₹35,000 in June for different legal services. In that case, TDS will only apply to the ₹35,000 payment since it exceeds the ₹30,000 threshold. Each payment is considered separately, so even if the total costs to a single professional or service provider exceed ₹30,000, TDS is only required if an individual payment surpasses this limit.

Types of Payments Covered Under Section 194J

Section 194J of the Income Tax Act mandates that certain payments made to residents or non-residents must be subject to Tax Deducted at Source (TDS). This section aims to ensure that the government receives the necessary tax revenue. Let's delve into the specific types of payments covered under this section:

Professional Fees:

Professional fees refer to payments made to individuals for their expertise in various fields, including:

Medicine
Law
Architecture
Engineering
Accountancy
Advertising
Interior design
Technical consulting
Other professions as notified by the CBDT

Under Section 44AA, the CBDT has notified additional professions that are liable to TDS on professional fees, such as:

Company secretaries
Approved representatives
Film artists
Athletes
Analysts
Event coordinators
Anchors
Umpires
Referees
Physiotherapists
Trainers
Coaches
Team doctors
Sports columnists

Technical Service Fees:

Technical service fees encompass payments made for:

Management services
Technical services
Consulting services

However, it's important to note that this does not include payments that the recipient considers as compensation. Technical services involve providing expertise or knowledge in a specific field, while managerial services often pertain to the operation and management of a client's business. Consultancy services involve offering advice and guidance to clients. The Supreme Court has ruled that human services generally fall under the category of technical services, excluding those rendered by robots or machines.

Royalty:

Royalty payments are made to individuals for the transfer or use of their intellectual property rights, such as:

Copyright
Patent
Trademark

These payments can include license fees for using a brand name or other intellectual property. Royalty payments are typically made for:

Transfer of ownership or use of intellectual property
Utilization of inventions, patents, or designs
Providing information on using recipes, patents, or innovations
Transfer of rights for radio broadcasts related to scientific discoveries, literary works, motion pictures, or videotapes (excluding payments for purchase, distribution, or display)
Supplying information regarding expertise in technology, industry, commerce, or science

Non-Compete Fees:

Non-compete fees are payments made to individuals to prevent them from disclosing or using certain information, such as:

Patents
Trademarks
Franchises
Know-how
Commercial or business rights
Licenses
Information related to manufacturing, processing, or other temporary services.

These payments can be made in cash or in kind. By understanding these types of payments, individuals and businesses can ensure compliance with Section 194J and avoid penalties.

Who is Liable to Deduct TDS under Section 194J?

Section 194J mandates that certain individuals or entities withhold TDS when paying for professional or technical services. However, there are specific exemptions for certain individuals and Hindu Undivided Families (HUFs). Individuals and HUFs are exempt from TDS under Section 194J if:

Business Income: The individual or HUF is operating a business whose total income from the previous financial year does not exceed Rs 1 crore.
Professional Income: The individual or HUF continues in their profession, and their total income from the previous financial year does not exceed Rs 50 lakh.

Section 194J TDS Rates

The rate of Tax Deducted at Source (TDS) under Section 194J varies depending on the nature of the payment. Here's a breakdown of the applicable TDS rates and threshold limits:

Payment Type	Tax Deduction Rate	Threshold Limit
Technical Service Fees	2%	Rs. 30,000
Call Center Operator Payments	2%	Rs. 30,000
Film Royalty	2%	Rs. 30,000
Other Royalty	10%	Rs. 30,000
Professional Services & Other Payments	10%	Rs. 30,000
No PAN Provided	20%	Rs. 30,000
Director Remuneration	10%	Nil

What is the Time Limit for the Deposit of 194J TDS?

The time limit for depositing TDS under Section 194J varies depending on the payment type and whether the deductor is a government or non-government entity.

Non-Government Deductors:

Payments made before March 1st: The TDS must be deposited within 7 days from the end of the month the payment was made.
Payments made in March: The TDS must be deposited by April 30th.

Government Deductors:

Payments made before March 1st: The TDS must be deposited within 7 days from the end of the month the payment was made.
Payments made in March: The TDS must be deposited by April 30th.

Note: For payments made in March where the professional or technical fees are paid to the payee on the same day, the challan for the corresponding TDS can be deposited by the 7th day from the end of March.

Penalties for Non-Deducting or Late Deduction of TDS under Section 194J

Failing to deduct or remit TDS under Section 194J can result in significant penalties and consequences. These include:

Disallowance of Expenditure:

Non-resident payments: Any payments made to non-residents without withholding TDS or timely remittance can be disallowed as expenses under Section 40(a)(ia) of the Income Tax Act. However, this disallowance can be reversed if the TDS is subsequently withheld or remitted.
Resident payments: Payments made to residents without withholding TDS or timely remittance can result in a 30% disallowance under Section 40(a)(ia).

Levy of Interest:

Non-deduction or late deduction: If TDS is not deducted or is deducted late, interest will be charged on the TDS amount from the date it was due to the payment date. The interest rate is 1% per month or part thereof.
Late payment: If the TDS is deducted but not paid to the government on time, interest will be charged on the total TDS amount from the date of deduction to the date of payment. The interest rate is 1.5% per month or part thereof.

Levy of Penalty:

Non-deduction or late deduction: A penalty equal to the amount of the non-deducted or late-deducted TDS can be imposed under Section 271C of the Income Tax Act.
Non-payment of tax demand: If the assessee fails to pay the tax demand made by the assessing officer, additional penalties can be imposed under Section 221 of the Income Tax Act. The penalty amount is based on the duration of the payment delay and cannot exceed the tax demand.

Prosecution:

Non-remittance of TDS: In severe cases of non-remittance of TDS, the offender may face prosecution with a minimum imprisonment of three months and a maximum of seven years.

Conclusion

Section 194J of the Income Tax Act is a crucial provision for individuals and businesses involved in professional and technical services in India. Understanding the TDS requirements outlined in this section is essential for ensuring compliance with tax laws and avoiding penalties. Taxpayers can contribute to efficient tax collection and avoid legal repercussions by accurately deducting and remitting TDS on applicable payments. We hope you got a lot of information, including the comprehensive overview of Section 194J, the types of payments covered, the applicable TDS rates, threshold limits, time limits for deposit, and potential penalties for non-compliance. Streamline your TDS return filing with IndiaFilings experts!! [shortcode_35]