Section 194J of the Income Tax Act: TDS on Professional & Technical Fees

Section 194J of the Income Tax Act, 1961, mandates the deduction of Tax Deducted at Source (TDS) on certain payments made to residents for professional and technical services. This section plays a crucial role in ensuring that tax is collected at the point of income generation for specific service categories.

What Payments Are Covered?

Section 194J applies to payments made to residents for the following services:

• Fees for Professional Services: This includes services rendered by individuals in professions such as legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, advertising, film artists, and sports persons.
• Fees for Technical Services: Payments for services of a managerial, technical, or consultancy nature. This can include software development, website design and maintenance, audio or video recording, photography, editing, and research.
• Royalty Payments: Payments by way of royalty.
• Directors' Remuneration: Any remuneration, fees, or commission (excluding salary covered under Section 192) paid to a director of a company.
• Non-Compete Fees: Payments made for not carrying out certain business activities or sharing know-how.

Who is Required to Deduct TDS?

Any person (excluding an individual or a Hindu Undivided Family (HUF)) making such specified payments is liable to deduct TDS.

Exception for Individuals & HUFs: Individuals and HUFs are liable to deduct TDS under Section 194J ONLY if their total sales, gross receipts, or turnover from their business or profession exceeded the limits specified under Section 44AB (for tax audit) in the immediately preceding financial year.

TDS Rates Under Section 194J

The TDS rates under Section 194J are as follows:

• 2%:
  • Fees for technical services.
  • Payments to call center operators.
  • Royalty for the sale, distribution, or screening of cinematographic films.
• 10%:
  • Fees for professional services.
  • Other royalty payments not covered under the 2% rate.
  • Remuneration, fees, or commission paid to a director.
  • Non-compete fees.
• 20%: If the payee does not provide a valid Permanent Account Number (PAN), as per Section 206AA.

No Surcharge or Health & Education Cess is applicable on these TDS rates.

Threshold Limit for TDS Deduction

TDS under Section 194J is generally required to be deducted if the payment for professional or technical services exceeds a specific limit in a financial year:

• ₹30,000: For fees for professional services and technical services. (Note: This threshold is changing to ₹50,000 annually from April 1, 2025).
• No Threshold: For director's remuneration, TDS is applicable even for payments below ₹30,000.
• For royalty payments and non-compete fees, the threshold is also ₹30,000.

Important: If the aggregate payments to a single person for all covered services exceed the threshold in a financial year, TDS becomes applicable on the entire amount paid.

Time of Tax Deduction

The deductor must deduct TDS under Section 194J at the earlier of the following two events:

• At the time of credit of such sum to the account of the payee.
• At the time of actual payment of such sum (whether in cash, by issue of a cheque or draft, or by any other mode).

Exceptions (When TDS is Not Applicable)

TDS under Section 194J is typically not required in the following scenarios:

• When an individual or HUF makes a payment for their personal use.
• When the payer is an individual or HUF not liable for audit under Section 44AB in the preceding financial year.
• If the total payment does not exceed the specified threshold limit for the financial year.

Compliance and Penalties

Deductors under Section 194J have specific compliance obligations:

• Obtain TAN: The deductor must obtain a Tax Deduction and Collection Account Number (TAN).
• Obtain Payee's PAN: It is mandatory to obtain the PAN of the payee to avoid higher TDS deduction.
• Deposit TDS: The deducted TDS must be deposited to the Central Government's credit by the prescribed due dates.
• File TDS Returns: Quarterly TDS returns in Form 26Q must be filed within the specified due dates.
• Issue TDS Certificates: The deductor must provide Form 16A to the payee as proof of TDS deduction.

Penalties for Non-Compliance: Failure to comply with Section 194J provisions can lead to significant penalties:

• Interest under Section 201(1A) for delay in deduction (1% per month) or delay in deposit (1.5% per month).
• Penalty under Section 271C for failure to deduct TDS.
• Disallowance of 30% of the expenditure under Section 40(a)(ia) if TDS is not deducted or deposited on time.
• Late filing fees for TDS returns (₹200 per day).

Taxability for the Payee

The professional or technical fees received by the payee, even after TDS deduction, remain taxable income. This income is typically categorized under "Profits and Gains from Business or Profession" or "Income from Other Sources," depending on the nature of the service. The payee must report the full income when filing their Income Tax Return (ITR).

The TDS deducted under Section 194J can be claimed as a credit against the payee's final tax liability. The payee can verify the TDS credit in their Form 26AS and reconcile it with the Form 16A provided by the deductor. This credit helps offset the final tax payable or may lead to a tax refund.

Conclusion

Section 194J is a significant provision in the Income Tax Act, aimed at ensuring the collection of tax on various professional, technical, and other specified payments at the source. Both deductors and payees must understand its provisions thoroughly to ensure accurate TDS deduction, timely deposit, and proper reporting. Adhering to these compliance requirements is essential to avoid interest, penalties, and maintain full compliance with income tax laws.