Section 194JB of Income Tax Act: Definition, Applicability, & TDS rates

Section 194JB of Income Tax Act: Definition, Applicability, & TDS rates

The Section 194J (i.e. Fees for Professional or Technical Services) is divided into two sub-sections, 194J(a) and 194J(b), effective from August 7 2020. Section 194JB of Income Tax Act made provisions for Tax Deducted at Source (TDS) on payments made to professional services. The payer deducts the TDS amount at the time of credit to the payee. The applicable TDS rates differ based on whether the payee has a PAN or not. Professionals need to understand the workings of Section 194JB to ensure tax compliance and proper financial planning. This article will delve into this section, its applicability, exemptions, TDS rates, and more.

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What is Section 194JB?

Section 194JB of Income Tax Act requires that any person, excluding individuals and Hindu Undivided Families (HUF) not subject to a tax audit, must deduct Tax Deducted at Source (TDS) when paying fees for professional services. This section is particularly significant for businesses and organisations that work with professionals, such as consultants, architects, lawyers, medical writers, and other service providers. The TDS is deducted at a specified TDS rate, ensuring compliance and accountability in professional fee transactions.

Importance of Section 194JB of Income Tax Act

The following points emphasise the importance of Section 194JB of Income Tax Act, 

• Prevents Tax Evasion: This section helps reduce the risk of tax evasion and promotes financial accountability by collecting tax at the time of payment.
• Facilitates Accurate Tax Reporting: Proper TDS deduction and reporting under the section help ensure accurate tax reporting, minimising discrepancies during assessments.
• Avoids Penalties for Non-compliance: Complying with TDS requirements helps businesses prevent penalties and interest charges, reducing potential financial liabilities.
• Ensures Timely Revenue Collection: This section contributes to a steady government revenue stream by facilitating timely tax collection.
• Enhances Transparency in Transactions: Improves transparency in business transactions by mandating documentation and reporting for professional service payments.
• Supports Professional Relationships: Timely TDS deduction and deposit can help businesses maintain positive relationships with professionals and service providers.
• Broad Applicability Across Sectors: The provisions apply to businesses and individuals making payments for professional services, ensuring comprehensive compliance.

Section 194JB TDS rates for Taxpayers

Under Section 194JB of Income Tax Act, the tax deduction at source (TDS) rates applicable to taxpayers for professional payments are clearly defined. The current 194JB TDS rates are as follows:

• 2% TDS Rate for PAN holders: A TDS rate of 2% is applicable on the total payment made to professionals if the aggregate amount exceeds ₹30,000 in a financial year. This rate applies to payments for professional services rendered, ensuring that a reasonable portion of the payment is deducted for tax purposes.
• 10% TDS Rate for Non-PAN Holders: If a professional does not provide their Permanent Account Number (PAN), the TDS rate increases to 10%. This higher rate serves as a measure to encourage compliance and ensure that all professionals are registered for tax purposes.

Section 194JB – Applicability

Section 194JB of Income Tax Act applies to payments made to professionals for various services, ensuring that tax is deducted at source (TDS). Businesses and organisations must ensure that TDS is deducted at a specified rate. The following are falls under the Section 194JB applicability:

• Resident Individuals
• Hindu Undivided Families (HUFs), 
• Association of Persons (AOPs)
• Body of Individuals (BOIs) 
• Any Professional service providers (legal, consultancy, marketing, etc.)

Section 194JB – Exceptions and Exemptions

While Section 194JB of Income Tax Act is designed to ensure the collection of tax on payments made for professional and technical services, some specific exceptions and exemptions apply:

• Threshold Limit: TDS under Section 194JB is not applicable if the total payment to a professional does not exceed ₹30,000 in a financial year. This threshold ensures that the TDS compliance process does not burden small payments.
• Individuals and Hindu Undivided Families (HUFs): Individuals and HUFs who are not subject to a tax audit are exempt from the obligation to deduct TDS under this section. This exemption benefits smaller taxpayers, simplifying compliance and reducing administrative overhead.
• Payments to Government Entities: Payments made to the government or certain specified entities are exempt from TDS under Section 194JB. This exemption recognises the unique nature of transactions involving government bodies and facilitates smoother financial dealings.

Taxpayers’ Responsibility under Section 194JB

In Section 194JB TDS, both the payer and payee have a certain responsibility, which we have discussed below.

• Payer: The payer (business or organisation) must ensure that TDS is deducted at a specified rate and deposited to the Central government on time. It helps the payer to prevent the penalties and interest charges due to non-compliance with Section 194JB of Income Tax Act. 
• Payee: The payee (professionals) can claim the TDS deducted under Section 194JB while filing the income tax return. It is helpful to provide the PAN to the payer to avoid the higher TDS rates. 

TDS Filing Requirements for Payers

To comply with Section 194JB of Income Tax Act, businesses and organisations must follow the specific TDS filing requirements. These include the following steps:

1. TDS Deduction: When making payments to professionals, payers must deduct TDS at 2% of the total payment amount. If the professional does not provide their Permanent Account Number (PAN), the TDS rate increases to 10%. 
2. TDS Deposit: Payers must deposit the deducted amount with the government by the 7th of the month after deducting the TDS. This timely deposit is critical to ensure compliance with tax regulations and prevent late payment penalties.
3. TDS Return filing: Payers must also file quarterly TDS returns using Form 26Q. Filing these returns accurately and on time is essential for maintaining compliance and meeting all obligations.

Also read: Penalty for late filing of TDS returns

How to Calculate TDS under Section 194JB?

Calculating TDS under Section 194JB involves a systematic approach that consists of the following steps:

1. Determine the Total Payment: Identify the total amount paid to the professional during the financial year.
2. Check the Threshold Limit: Assess whether the total payment exceeds ₹30,000. If the payment does not exceed this limit, TDS is not applicable.
3. Identify the Applicable TDS Rate: If the payment exceeds ₹30,000, apply the TDS rate of 2%. If the professional has not provided their Permanent Account Number (PAN), the TDS rate applicable will be 10%.
4. Calculate the TDS Amount: Multiply the total payment by the applicable TDS rate to compute the TDS amount that needs to be deducted.

Examples:

Case 1: A company pays ₹60,000 to a freelance accountant for their services during the financial year. The accountant has provided their PAN.

• Total payment: ₹60,000
• TDS rate: 2%
• TDS amount: ₹60,000 * 2% = ₹1,200

Case 2: A company pays ₹35,000 to a freelance writer for their services during the financial year. The writer has not provided their PAN.

• Total payment: ₹35,000
• TDS rate: 10%
• TDS amount: ₹35,000 * 10% = ₹3,500

These examples demonstrate how the TDS rate varies depending on whether the professional has provided their PAN.

Which ITR form is applicable for 194JB Section?

Professionals who get a TDS deduction under Section 194JB must file the ITR-3 income tax return form to claim the TDS (if applicable). This form is specifically designed for individuals and Hindu Undivided Families (HUFs) having income from business or profession.

Here is an ITR-3 Form attached below for your reference, 

Conclusion

Section 194JB of Income Tax Act is a crucial provision for businesses and individuals dealing with professional services. By mandating the Tax Deducted at Source (TDS) deduction, this section helps prevent tax evasion, ensure accurate tax reporting, and avoid penalties for non-compliance. Understanding the applicability, exemptions, TDS rates, and filing requirements under Section 194JB is essential for maintaining compliance and managing tax obligations effectively. By adhering to the provisions of this section, businesses and individuals can contribute to the overall tax administration system and promote financial transparency.

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