For professionals and individuals who are offering technical services, the Government of India has made it easy to collect taxes by deducting them from the sources of income. TDS on professional fees or fees for technical services falls under Section 194J and is charged at a rate of 10% when payments are made to residents.
Examples of careers where TDS is deducted at the source includes professions such as law, architecture, interior design, medicine, advertising, etc. Tax payments made by individuals working in these professions are classified under the 194J TDS Section.
What is Section 194J of the Income Tax Act?
According to Section 194J of Income Tax Act, a person employed in professional or technical services is liable to pay income tax at the prescribed rate of 10% directly from their income sources.
The rules and regulations of the Government of India also state that individuals should get their financial accounts audited if their sales, gross receipts, or annual business turnover exceeds the monetary limits defined under sections 44AB (a) and 44AB (b) of the Income Tax Act of India.
What is the Purpose of TDS?
TDS provisions were introduced to the nation by the Central Board of Direct Taxes under the Income Tax Act, 1961. TDS is a form of direct tax and advance tax that is paid to the Government, and taxpayers who provide professional or technical services become liable to pay it under Section 194J
The Government introduced TDS for the following reasons:
- To decrease the time required between tax paid to the Government and payments received through income sources.
- To prevent cases of tax evasion by individuals and companies.
- To reduce tax burdens and liabilities for taxpayers by introducing the model of ‘paying tax as they earn.’
- To minimize the burden faced by tax collection agencies.
Types of Payments Covered Under 194J TDS
These types of payments are covered under the 194J TDS Section:
- Director fees or fees paid as remunerations (excluding salary)
- Professional fees
- Fees for technical services
- Royalty fees
- Non-compete fees include fees paid for not rendering specific professional services or for withholding technical knowledge.
Rates of Deductions
- Any payments made to Indian residents who do not furnish their PAN number to the Income Tax Department will be subjected to a TDS deduction rate of 20%
- Indian residents covered under this section are expected to pay 10% TDS from payments received via professional or technical services.
- From April 1, 2020, onwards, TDS for technical services are applied at a reduced rate of 2% for deductions.
- For payments made to call centre operators, TDS will be deducted from their income sources at a reduced rate of 2%, with effect from April 1, 2017
- Rates of deduction for professionals who receive payments in the form of royalty fees is 10%. This deduction applies to the sales, distribution, and release of cinematographic films as well.
194J Limit for Tax Deductions
Individuals engaging in professional and technical services do not have to pay TDS if:
- Payments received for providing professional services do not total more than Rs 30,000 in the assessment year.
- Individuals who are providing technical services do not earn more than Rs 30,000 in that year.
- Royalty fees received is no more than Rs 30,000 in a year.
- Film Directors have to pay TDS tax deductions, even if their revenue is low, which is generated through sales of films, distribution, and production.
In general, if payments received throughout the year do not exceed Rs 30,000 in a year as a whole, individuals would be exempted from paying TDS. However, in most cases, professionals do have to pay TDS since they have significant earnings from such services.
Examples of TDS Liability
Let’s take an example where Mr John pays Mr Matthew for his professional services. Mr John makes a payment of Rs 60,000 on April 21, 2021, and approaches him again, paying Rs 22,000 on September 01, 2021
His TDS liability will be based on these three scenarios for F.Y. 2021-22:
- Case 1 - Mr John is not liable for audit under Section 44AB
- Case 2 - Mr John has opted for services for personal purposes and is liable for Income Tax Audit under 44AB
- Case 3 - Tax audit is applicable for Mr John as he has taken services for business purposes during FY 2021-22
Mr John does not have to pay TDS since he is not liable for the audit.
Mr John has taken services, but that was for personal reasons. Hence he does not have to pay TDS while paying Mr Matthew.
Mr John availed of Mr Matthew’s services for business purposes and is liable to pay TDS. He will be charged at a rate of 10% and will be required to make deductions while making payments.
This deduction is because his total payments during the year exceeded the threshold limit of Rs 30,000, which is Rs 82,000 during FY 2021-22
The total TDS he will have to pay is Rs 8,200. If Mr John does not furnish a registered PAN number for his payments, he will be charged Rs 16,400 on TDS in that assessment year.
Who Should Pay TDS Under Section 194J?
TDS has to be paid by the following businesses and individuals:
- Those who are getting their financial accounts audited by the Income Tax Department and HUFs (Hindu Undivided Families)
- Individuals who are paying rent money that exceeds Rs 50,000 for the given year
- Anyone paying fees for availing professional services from lawyers, doctors, designers, engineers, architects, etc.
The only exception to these rules is if you are not liable to make TDS payments during an assessment year according to the income tax rates prescribed by the Government. In this case, you can file Form 15G or Form 15H, and banks will not deduct TDS from your source accounts.
Penalties for Late Deductions or Non-Deductions
There are consequences for professionals who do not deduct TDS or fail to pay TDS too late:
- Disallowance of expenditure - 30% of disallowance of expenditure is allowed by the Government in the year expenditure is claimed (according to profit and loss accounts). But that 30% is re-allowed the year when TDS is paid.
- For late payments - In case, TDS is deducted from the credit source, but payments have not been made yet to the Government, the taxpayer will be charged an interest of 1.5% per month until the date on which they make TDS payments to the Government, starting from the date they start receiving payments.
- For no deductions - In cases where TDS has not been deducted from the source, interest payable is 1% to the Government. This penalty starts from the date deductions were to be made until the date actual deductions are made.
Deadline for Paying TDS
For payments made before March 1
7th day beginning from the end of the month
7th day beginning from the end of the month
For payments made in March
Tax is deducted on the payment date to the payee, but the corresponding challan is deposited before the 7th day, starting from the end of the month.
We hope you have understood the importance of filing your TDS under Section 194J and paying the necessary fees to the Government. TDS fee payments make it convenient to file your ITR every year and track total expenditure.
When you pay TDS fees, you are eligible to ask for a refund from the Government, and the online process reduces the need for handling physical paperwork. TDS payments can be made with just a few clicks, and making online TDS payments on professional or technical services is very easy.