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Udeetta Sarma

December 27, 2024

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Basics of GST

Section 194J - TDS on Professional Fees

Section 194J Of The Income Tax Act,1961 is related to TDS on payment to professional or technical services in India. This section is a significant step towards compliance with tax compliances and is equally beneficial for businesses/ professionals. Adopting a source-based tax collection model helps the government hassle-free and timely payment of taxes, without putting much manual burden on taxpayers for compliance.

In this blog, let us discuss the essentials of Section 194J—its applicability, threshold limits, rates, and compliance requirements—in a detailed manner that can help you digest all about it.

Types of payments covered under Section 194J

All types of payment on which TDS Shall be Deducted are specified under Section 194J. These payments often include professional skills, technical aid and distinct facilities. Here are the main sections:

Professional Fees:

This will include payments made to doctors, lawyers, engineers, architects and other professional service providers, along with chartered accountants or consultants hired for financial valuations, interior designer charges, etc. In addition to that, the list also includes any other profession notified under Section 44AA of the Income Tax Act.

Fees for Technical Services:

Payments, including those made through an autonomous account and received or receivable by a non-resident person towards fees for technical services (not being professional services) to be used outside India.

Royalty Payments:

These refer to payments for the use of copyrights, patents, trademarks or any artistic, literary or scientific work.

Non-Compete Costs:

These are payments made to an individual or entity for agreeing not to compete in certain business activities.

Director's Remuneration:

Any payment made to directors as fees or commissions, except for salary.

Applicability of Section 194J

In case the payer doesn't need to deduct TDS, then Sec 194J will not be eligible. The following are required:

The provisions are applicable concerning professional or technical payments by the Companies, Firms and LLPs that are in the business of trade.
If the assessee- is an individual or HUF to whom TDS provisions of section 44AB apply, he shall have to deduct tax on professional services under section 194J.
Others: Any person or persons, except the individual/HUF/BOI/AOP, responsible for paying any sum to a resident other than an incorporated association of payee under Section 194J.

Any payment made by an individual or HUF for his requirements is excluded from TDS under section 194-C.

To learn more about how to record TDS, refer to How to record TDS on the web.

Threshold Limits under Section 194J

One of the crucial aspects of Section 194J is the threshold limit, which determines whether TDS should be deducted:

Normal Threshold Limit:

TDS is required to be deducted if the payment of a particular nature exceeds ₹30,000/- in total during the financial year. Each type of payment, like professional fees or technical services and royalties, would be considered separately with this threshold. Directors's fees and commissions are not subject to the usual minimum threshold on other payments. It is mandatory to deduct the TDS (Tax Deducted At Source) before paying interest.

For example, if a business pays a consultant ₹25,000/- during the entire financial year, then this payment does not exceed the limit of 30,000 none TDS is required because no exceeds that amount of the threshold part. After this, if your total payments cross ₹30,000, then TDS will have to be deducted from the entire sum, whatever you either paid later or earlier.

Understanding TDS Applicability Under Section 194J: Threshold Limits Explained

As per the provisions of Section 194J of the Income Tax Act, TDS (Tax Deducted at Source) has to be deducted if the payment to a payee in a financial year exceeds ₹30,000. But whether this limit is applicable together for all the different types of payments covered under Section 194J or separately for each category, i.e. professional fees, technical fees, royalty, non-compete fees, etc.

Note that the ₹30,000 threshold is not a limit for cumulative receipts across all services but is computed separately for each slab of payment. For example, professional fees, technical fees and royalty fees are considered separately when we have to check the applicability of TDS.

Illustration of TDS Applicability:

XYZ Ltd made the following payments: Mr During a financial year:

Particulars	Amount
Payment for professional services	₹25,000
Payment for technical services	₹20,000
Total payment tMrr. A	₹45,000

In this case, XYZ Ltd is not required to deduct TDS because neither the payment for professional services nor the payment for technical services individually exceeds the ₹30,000 threshold. The limit is applied separately for each type of payment and not cumulatively across all categories.

Rates of TDS under Section 194J

There are different rates based on the nature of payment for TDS deduction under Section 194J. This is a list of the rates that apply:

Service/Category	TDS Rate
Technical Services	2%
Call Center Operator Payments	2%
Royalty Payments for a Cinematographic Film	2%
Other Royalty Payments	10%
Professional Fees & Other Services	10%
Non-furnishing of PAN (higher rate applicable)	20%

These rates are for payment amounts exceeding the threshold limit. The rate applies to some payments, such as the director’s remuneration, irrespective of the payment amount.

Timing of TDS Deduction

Section 194J required timely deductions to fulfil the compliance goals of tax. TDS must be deducted at the earlier of:

Credit to the account of Payee: It enters customer payment in the period when it is credited, even if payment is now actually made.

Paid On: When the Payment was made from Cash, Cheque and their status as received.

This rule is imposed by the government to make sure that taxes are collected promptly, and non-compliance will also be on the lower end due to proper enforcement of this section.

Deposit of TDS

Once the TDS is deducted, it becomes incumbent on the payer to deposit that tax with the rest of the government. Here are the timelines:

For Non-Government Entities:

Payments made anytime in April to February: Deposit the same month by the 7th calendar day of the following month.

Payments for March: Submit by 30th April.

For Government Entities:

The deposit of TDS has to be made on the same day as Payment.

Non-compliance with these deadlines can attract penalties and interest, making timely deposits a critical part of compliance.

Compliance and Consequences of Non-Compliance

In case the provisions of Section 194J are not complied with, it results in:

Interest on Late deduction/deposit:

Interest is payable by the deductor for a delay in TDS or deposit.

Disallowance of Expenses:

The amount for which TDS was not deducted or deposited within the due date will be disallowed while arriving at taxable income.

Penalties:

Businesses are now susceptible to paying additional penalties as the recurring offences will add up and cost you an arm by not abiding by GDPR.

You might also be interested in learning about the Difference Between TDS and TCS.

Exceptions to Section 194J

There are some exceptions where payment attracts TDS under Section 194J:

Individually or in HUF, paid money for personal purposes
Payments of Individuals or HUFs who are not liable to get their accounts audited u/s 44AB during the preceding financial year.
Payments below the prescribed threshold limits (subject to non-applicability of director's remuneration)

Illustrative Examples

Professional Fees Less Than the Threshold:

The payment of ₹20,000 to the freelance graphic designer does not cross 30,000 and will be exempted from TDS.

Controller Transactions Above Threshold:

In the same year, if there are two transactions of ₹20,000 to a consultant in instalments done by the company, then after the aggregate value becomes more than 30K, TDS needs to be deducted.

Director's Remuneration:

Sitting fees of ₹10,000 paid to a director are subject to TDS at 10% even if the amount is less than ₹30,000 because there are no thresholds for such payments.

Recent Amendments to Section 194J

Some of the key amendments to Section 194J under the Finance Ac, 2020 are below outlined for easy understanding and clarity with minimum disputes:

1. However, to bring a difference between other professional services remaining in the net of TDS at 10%, TDS on technical services was brought down from the existing basic rate @10% to a lower level @2%.

2. Separate component of ST in Invoice: No TDS to be deducted on the payment toward the service tax part.

Conclusion

One of the indispensable sections for effective TDS compliance in India is section 194J of the Income Tax Act. This step helps in aligning the professional and technical services providers at source, leading to ease of tax compliance as well as a reduction in risks on account of evasion. Taxpayers have to be aware of the different sections mentioned in this, their threshold limits, rates and compliance time so that they don't make a mistake that will lead them to penalties.

Professionals and businesses must be diligent in complying with the provisions of Section 194J and keep a close watch on any amendments to these laws, as this ambiguity certainly does not convey a transparent or compliant taxation environment.

Make Your TDS Compliance Easy with Swipe

TDS deductions and compliance can indeed be managed complexly, but what if I told you it has an easy solution? Be it compliance with tax laws such as Section 194J or any other legal requirements, you will be able to increase your financial efficiency by using powerful features offered under Swipe, which allows quick and easy calculation, deduction and depositing of TDS for every transaction without missing a deadline. The sky is the limit — be it professional fees, technical services or director remuneration, Swipe has you covered.

Enable your business with proper TDS management and put all the tax complexities to us. Be free to focus on Growth. Begin your easy compliance journey now through Swipe.

FAQ

1. What is Section 194J of the Income Tax Act?

TDS is deducted on professional fees, technical services, royalties, etc., payments under section 194J for collecting tax at the source timely.

2. What is the Applicability Limit for TDS under section 194J?

Except for the director’s remuneration type of payment, has no minimum threshold else the per return limit is ₹30,000 each for all kinds of payments in a financial year.

3. What Is The TDS Rate For Technical Services under Section 194J?

The TDS on Technical Services is 2%, and on the other hand, with Professional fees, it would cut down to a total of 10% deduction.

4. On what amounts should TDS be deducted under Section 194J?

If paying direct credit (whether at the time of actual payment or some earlier date to the creditor's bank account), Tax Deduction on Source has to be deducted.

5 . Are personal payments made by individuals or HUFs subject to TDS under Section 194J?

Personal payments on behalf of any individual or HUF are not covered by TDS provisions under section 194J.

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