TDS (Tax Deducted at Source) applies to fees for professional or technical services under Section 194J of the Indian Income Tax Act. If the payment reaches a certain level, the payer is required to deduct TDS at a specific rate. This clause ensures that taxes are pre-subtracted from payments made to experts or technical service providers.
Introduction
TDS is one of the most effective tools for raising taxes in the country because it targets income at the source. Professional or technical fees are among the most critical and common payments a business entity makes.
Tax deductions have been made easy by the Government of India for professionals and individuals providing technical services. Payments for professional or technical services to residents are subject to a TDS of 10%.
A lawyer, doctor, chartered accountant, interior decorator, engineer, architect, advertiser, etc., are some illustrative examples of professional fees. Management, technical, and consultancy services fall under technical services. Section 194J covers such payments made to residents.
Keep reading to learn more about section 194J income tax act and TDS on professional fees limit for FY 2023-24.
Did You Know? Technical Services are subject to 194J(a) of the Income Tax Act, and Professional Services are subject to 194J(b) of the Income Tax Act.
What Is Section 194J of the Income Tax Act?
TDS deductions are allowed for payments made to professionals and technical service providers under Section 194J of the Income Tax Act. This section covers all forms of payment, including salaries and professional fees, except in certain circumstances.
This section's prescribed income tax rate is 10% for professionals and technical service employees. Additionally, following sections 44AB (a) and 44AB (b) of the Income Tax Act, individuals who exceed the monetary threshold for gross receipts, sales, or business turnover must have their financial accounts audited.
Purpose of TDS
As per Income Tax Act 1961, the Central Board of Direct Taxes introduced TDS provisions to the nation. Taxpayers providing professional or technical services become liable for TDS under section 194J as a direct tax and advance tax paid to the government.
Due to the following reasons, the government introduced TDS:
- The aim is to decrease the time between paying taxes to the government and receiving payments from income sources.
- Preventing individuals and companies from evading taxes.
- To minimise liabilities and tax burdens for taxpayers by implementing the model of 'paying tax as you earn.'
- To minimise tax collection agencies' burdens.
Payment Types Covered Under 194J
Under this section, residents are eligible to receive the following payments:
- Fees for professional services
- Technical services fees
- The compensation paid to directors other than their salaries (for example, sitting fees to attend board meetings)
- Royalty
- Non-compete fees (i.e., fees paid to refrain from conducting a business or profession for a specific period and within a particular geographical area) or expenses paid not to share technical knowledge.
Explanation of Various Terms
The section below explains the professional and technical services, royalty and non-compete fees.
Professional Services
This term refers to services rendered by a person to carry out medical, legal, architectural, or engineering professions. A profession notified by the CBDT Board under Section 44AA can include accounting, advertising, interior decoration, technical consultancy, etc.
CBDT has notified the professions of a company secretary, film artist, and authorised representative under Section 44AA. The CBDT has also notified sportspeople, commentators, umpires and referees, event managers, anchors, physiotherapists, team physicians, coaches and trainers, and sports columnists under Section 194J.
Technical Services
According to income tax rules, 'fees for technical services' refer to managerial, technical, and consultancy services but not to salaries paid to the recipients.
- Technical service providers are those with technical expertise or knowledge of technology.
- A managerial service involves running and managing the client's business.
- Advisory services assist clients in developing their businesses by providing advice and consultation.
- Technical service includes human-provided services following the Supreme Court's decision. A machine or robot would not provide any service.
Royalty
A royalty is a payment made for:
- The transfer or use of an invention, model, design, trademark, or patent.
- The use of patents, inventions, and designs.
- Providing information regarding an invention, patent, formula, or other resource.
- Including scientific discoveries, literary works, films, and videotapes for radio broadcast, but not sales, exhibitions, or distribution of cinematographic films.
- Information about technical, industrial, commercial, and scientific knowledge, experience, or skills.
Non-compete Fees
In non-compete fees, a payment is made in cash or an agreement enforcing that they will not share licenses, patents, trademarks, franchises, know-how, commercial or business rights, or information that may be used elsewhere for processing, manufacture, or any other provisional service.
194J Tax Deduction Threshold Limit
The tax must be deducted when professional and technical services are paid greater than ₹30,000 during the year. This ₹30,000 maximum limit applies to each item or payment separately.
ABC company paid Mr XYZ ₹25,000 as royalty and ₹20,000 as fees for technical services. Mr PK's payments to ABC company are not subject to TDS deduction. Each item, such as royalty and technical fees, has a limit of ₹30,000.
The same does not apply to a company's payments (commissions, fees, or remuneration) to a director. No matter how small the amount, the tax must be deducted.
Section 194J Tax Deduction Rate
|
Payment nature |
Tax deduction rate |
|
Payments for technical services |
2% |
|
Amounts paid to call centre operators |
2% |
|
Royalties are paid on cinematographic films sold, distributed, or exhibited. |
2% |
|
Payments for all other services (such as professional services) |
10% |
|
The payee provides no PAN |
20% |
Section 194J: Who Should Pay TDS?
Individuals and businesses have to pay TDS:
- Audited financial accounts of HUFs (Hindu Undivided Families) and those undergoing audits by the Income Tax Department.
- Those who pay more than ₹50,000 in rent in a given year.
- A person who pays a fee for professional services from a lawyer, doctor, designer, engineer, architect, etc.
- During an assessment year, if you don't have to make TDS payments by the government's income tax rates, these rules do not apply to you. Banks will not deduct TDS from your source accounts if you file Form 15G or 15H.
TDS Liability Example
Take the example of Mr John paying Mr Matthew for his professional services. On April 21, 2021, John pays ₹60,000, and on September 1, 2021, he pays ₹22,000
Based on these three scenarios, his TDS liability for FY 2021-22 will be as follows:
|
Case |
Scenario |
TDS Liability |
|
1 |
Mr John is not liable to audit |
No TDS applicable |
|
2 |
Personal services, an audit under 44AB |
No TDS applicable |
|
3 |
Business services, audit under 44AB |
₹8,200 (10% of ₹82,000) |
|
4 |
Business services, audit under 44AB, no PAN |
₹16,400 (20% of ₹82000) |
Late Deductions or Non-Deductions Penalties
Professionals who fail to deduct TDS or fail to pay TDS on time face the following consequences:
1. Disallowance of Expenditure - The Government allows 30% of disallowance in the year expenditure is claimed (according to profit and loss accounts). When TDS is paid, that 30% is re-allowed.
2. For Late Payments - If TDS has been deducted from the credit source, and payments have not yet been made to the government, the taxpayer will be charged 1.5% interest per month until the date on which they make TDS payments to the government, starting from the date they start receiving them.
3. For No Deductions - The government pays interest of 1% if no TDS is deducted from the source. The penalty begins on the date deductions should have been made and ends on the date actual deductions were made.
TDS Payment Deadline
|
Payment Period |
Non-Government Deductions |
Government Deductions |
|
Payments made before March 1 |
7th day starting from the end of the month |
7th day beginning from the end of the month |
|
Payments made in March |
Apr 30th |
Tax is deducted from the payee's payment, but the challan is deposited before the 7th day of the month beginning from the end. |
Conclusion
Hopefully, you have understood the importance of filing your TDS under Section 194J and paying the required fees. You can easily file your ITR and track your total expenditures with TDS fee payments.
When you pay TDS fees, you are entitled to a refund from the government, and the online process eliminates the need to handle physical paperwork. Paying TDS online for professional or technical services takes just a few clicks.
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