Understanding Section 194J of the Income Tax Act – TDS on Fees for Professional or Technical Services

Introduction to Section 194J

Section 194J of the Income Tax Act mandates the deduction of tax at source (TDS) on fees paid for professional or technical services. This provision is designed to enhance tax compliance by capturing tax revenues as transactions occur. Section 194J requires entities, however, an individual or Hindu Undivided Family (HUF) whose total sales, gross receipts, or turnover exceed Rs. 1 crore in business or Rs. 50 lakhs in the professional sector during the financial year, will be required to deduct TDS. This approach ensures timely tax collection and promotes fiscal responsibility among service providers and recipients.

Scope of Services Under Section 194J

Section 194J of the Income Tax Act applies to a variety of services where TDS (Tax Deducted at Source) is required. This section broadly covers:

1. Professional Services: This includes payments for legal, medical, engineering, and architectural services, as well as accountancy, auditing, and consultancy services etc.
2. Technical Services: Refers to any consideration for technical, managerial, or consultancy services, including the provision of services of technical or other personnel.
3. Royalties: Payment for the use of or the right to use any industrial, commercial, or scientific equipment, as well as for literary works, patents, inventions, designs, or trademarks.
4. Non-compete Fees: Includes payments for not engaging in any activity in relation to any business, profession, or provision of services in agreement not to compete.

The TDS rates and threshold limits for these categories are specified in the Act, with the requirement that the payer deducts the applicable tax before making the payment to the payee. This ensures tax compliance and streamlines revenue collection directly from the source of income.

Current TDS Rates Under Section 194J

For the latest updates on TDS rates, refer to our article Major TDS Rate Changes Effective from October 2024

Important Threshold Limits

1. Professional Services: TDS is required to be deducted if the amount paid or credited to a resident exceeds ₹30,000 in a single payment or ₹30,000 in aggregate during a financial year.
   (This Limit has been increased from ₹30,000 to ₹50,000 from the F.Y. 2025-26)
2. Technical Services: Similar to professional services, the threshold for TDS deduction for technical services is also ₹30,000 either in a single transaction or in aggregate during the financial year.
3. Royalties: For royalties, the threshold limit is ₹30,000, which applies to both single payments and cumulative payments within the financial year.
4. Non-compete Fees: The threshold for deducting TDS on non-compete fees is also set at ₹30,000 for either individual or aggregate payments during the year.

Example: A software development company enters into various agreements over the financial year:

• Legal Services: Pays ₹20,000 in April, ₹15,000 in August, and ₹10,000 in December to a legal advisor.
• Technical Services: Pays a one-time fee of ₹40,000 in May to an IT consultant.
• Royalties: Pays ₹10,000 each in February, June, and October for the use of a patented technology.

1. Legal Services:

1. • Total Payment: ₹20,000 + ₹15,000 + ₹10,000 = ₹45,000
   • Threshold: ₹30,000
   • TDS Applicability: Since the aggregate exceeds the threshold, TDS should be deducted.
   • TDS Calculation: 10% of ₹45,000 = ₹4,500

2. Technical Services:

1. • Single Payment: ₹40,000
   • Threshold: ₹30,000
   • TDS Applicability: As the payment exceeds the threshold in a single transaction, TDS should be deducted.
   • TDS Calculation: 2% of ₹40,000 = ₹800

3. Royalties:

1. • Total Payment: ₹10,000 x 3 = ₹30,000
   • Threshold: ₹30,000
   • TDS Applicability: Since the aggregate meets exactly at the threshold, TDS should be deducted.
   • TDS Calculation: 10% of ₹30,000 = ₹3000 (assuming the lower rate for the specific type of royalty)

Exemptions and Exceptions

Section 194J of the Income Tax Act includes several exemptions and exceptions where TDS provisions do not apply:

1. Individuals and HUFs: Those not audited in the previous financial year are exempt from TDS deduction for payments made. (Companies, LLP , PF are always required to deduct TDS irrespective of the Turnover limit)
2. Lower or No TDS Certificates: Recipients can obtain certificates for reduced or zero TDS deduction.(by applying Form 13)
3. Payments below Threshold: No TDS is required if payments to a single party do not exceed ₹30,000 annually.
4. Transport Operators: Exemption for transporters owning ten or fewer goods vehicles. In case of Transporters, declaration mentioning that he is not holding more than 10 trucks at any time during the year is required to be taken. Otherwise TDS is required to be deducted at the applicable rates.
5. Educational and Medical Institutions: Specific institutions may be exempt based on government criteria.
6. Business Exemptions: Certain business processes may also qualify for TDS exemptions under special conditions. (Bank Interest exempted from TDS)

Due Dates for TDS Payment Under Section 194J

For TDS under Section 194J of the Income Tax Act, it is essential to adhere to specific due dates for depositing the deducted tax with the government. Here are the due dates:

1. For Payments Made During April to February: The due date for depositing TDS for any month from April to February is the 7th of the following month. For example, for TDS deducted in August, the payment should be made by September 7th.
2. For Payments Made in March: The TDS deducted in March needs to be deposited by April 30th. This allows for a slightly extended period due to the end of the financial year adjustments.

It is crucial for businesses and other deductors to adhere to these timelines to avoid penalties for late payment. Ensuring timely deposit of TDS helps in maintaining compliance with tax laws and aids in the smooth finalization of the accounts at the year-end.

Consequences of Late Deduction/Non-Deduction of TDS

If TDS is not deducted on time or is deducted but not paid, there are significant consequences:

1. Interest Charges: Interest is imposed if TDS is deducted late at a rate of 1% per month or part of a month from the date on which TDS was supposed to be deducted until the date it is actually deducted. Furthermore, if TDS is deducted but not remitted to the government, the interest rate increases to 1.5% per month or part of a month from the date of deduction until the date of payment.
2. Disallowance of Expenses: For expenses where TDS was not deducted, the payer cannot claim a deduction of these expenses from their Profits and Gains of Business or Profession (PGBP) income. Specifically, 30% of the payment made will be disallowed as an expenditure.

FAQ’s

Here are 10 unique FAQs about Section 194J of the Income Tax Act, which covers TDS on fees for professional or technical services:

1. What services are considered professional under Section 194J?
   • Professional services under Section 194J include legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, and any other service as notified by the CBDT.
2. Is TDS applicable on all technical service payments under Section 194J?
   • Yes, TDS is applicable on technical service payments if the amount exceeds the threshold limit of ₹30,000 in a financial year.
3. Are there any exceptions to TDS deduction under Section 194J for small businesses?
   • Small businesses that are not subject to tax audit are exempt from deducting TDS on such payments unless they exceed the specified threshold.
4. How is TDS calculated if the payment spans multiple financial years?
   • TDS should be deducted based on the payment schedule and the applicable rate for each financial year as per the provisions under Section 194J.
5. What happens if I fail to deduct TDS under Section 194J?
   • Failure to deduct TDS can result in penalties, interest charges, and disallowance of expenses under Income Tax Act provisions.
6. Can I claim a refund if too much TDS is deducted under Section 194J?
   • Yes, if TDS has been over-deducted, the deductee can claim a refund by filing their income tax return and showing the excess deduction as a refund claim.
7. Does TDS under Section 194J apply to payments made to non-residents?
   • No, Section 194J specifically applies to payments made to residents of India. Payments made to non-residents are covered under Section 195.
8. What documentation should I collect from the service provider for Section 194J compliance?
   • Collect the PAN of the service provider and ensure you have a proper invoice or agreement detailing the nature of the service and the amount paid.
9. When are the TDS certificates issued under Section 194J?
   • TDS certificates must be issued quarterly using Form 16A within fifteen days from the due date for furnishing the quarterly statement of TDS.
10. How do recent changes to Section 194J impact TDS on royalties?

• The rate for TDS on royalties was adjusted in recent finance acts. It’s essential to check the current rate applicable at the time of the transaction to ensure compliance.

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