To better collect taxes, the deduction of tax at source, also known as TDS, has proven to be a valuable tool. The stress of paying taxes and submitting income tax returns is lightened for taxpayers because of TDS. This is because, on submitting a tax return, they may claim a credit for taxes withheld at the source.
For a company, paying for professional or technical services is one of the most prevalent and crucial types of payments. The terms legal fees, medical costs, engineering fees, architectural fees, chartered accountant fees, interior designer fees and advertising expenses are all examples of professional fees. The provision of management, technical, or consulting services would be considered examples of technical services. Such payments given to residents are governed by section 194J (194JA/194JB).
Types of payments subject to Section 194J
The following categories of monetary assistance are considered to fall within the purview of this section:
Professional Services
It refers to the work that a person in the fields of architecture, engineering, medicine, or the law does in their capacity as a member of their respective profession. Other services include accounting, interior decorating, marketing, technical consultation, or any other occupation that is approved by the Board in accordance with Section 44AA.
Film artists, business secretaries, and authorised agents are examples of the kinds of professionals whose work may be compensated under Section 44AA.
In addition to athletes and event management, it includes presenters, hosts, referees and regulators, athletic trainers, therapists, team doctors, and sports columnists.
Technical Services
It refers to the services that a person provides for clients in the areas of management, consulting, or technical assistance.
Assembling products, working in mines, or building structures are not regarded to be technical services since the money earned from these activities would be included in the recipient’s overall wage.
Non-compete fees
Non-compete fees, as defined by Section 194J, refer to the monetary or non-monetary compensation that a person receives in exchange for an agreement that prohibits them from disclosing any patent, licence, limited partnership, copyright laws, know-how, or any other professional or trade rights, procedure, or documentation that is likely to be used somewhere else for the purpose of the manufacturing process, handling, or any other preliminary service.
Royalty
In the context of this section, “royalty” refers to consideration for the following:
- The act of transferring legal ownership of an invention, proprietary information, prototype, layout, copyright, or patent.
- Utilisation of anything such as innovation, model, patent, etc.
- The disclosure of any information about the application of technology, patent, or formula, among other things.
- The use of the technology for industrial, educational, or business reasons, or the authority to use the facilities for such reasons.
- The transfer of rights pertaining to a piece of literature, scientific results, movies or video recordings for radio transmission, with no compensation for the sale, display, or dissemination of the same.
See also: All about TDS on cash withdrawal under Section 194N
Specific cases of Section 194J
A TDS deduction may also be available under Section 194J in the following instances, as ruled by the department’s case laws and circulars:
- Services related to medicine that are provided by hospitals
- Professional fees extracted from advertising companies by film artists working in the industry
- The amount that is paid to recruiting agencies and HR consulting firms
- The fee that corporations pay to registrars for their services
Important elements of Section 194J
- According to Section 194J, the maximum limit that may be applied to any item or payment on its own is 30,000 Indian Rupees.
- Even if the sum is not considered part of the director’s primary income, TDS is nevertheless required to be withheld from commissions, remuneration, or fees that are granted to the director of a firm. In situations like this, the maximum of Rs. 30,000 does not apply.
See also: Section 194A: TDS on interest
Filing for TDS at a reduced rate
In accordance with Section 197, the individual who is getting payment has the ability to make a request for a decrease in the TDS rate by completing Form 13 and submitting it to the evaluating authority. The official reviews the request and decides whether or not to accept it before issuing a certificate to the assessee that states a reduction in the TDS.
Time limit for TDS deposits under Section 194J
In accordance with the provisions of the section, the following time limit rules for the deposit of TDS must be adhered to:
- It is necessary to deposit any TDS deducted under Section 194J the same day as the deduction is made.
- Less than a week after the end of the month wherein the tax deduction occurred, TDS may be transferred to the bank.
- It must be deposited within two months of the fiscal year’s closure if a payment has been made on the final day of the fiscal year.
- Depending on the circumstances, the assessing officer may allow for quarterly TDS deductions.
Implications of insufficient or late TDS deduction
The consequences of either failing to deduct the tax or deducting it beyond the due date are as follows:
Deduction of a portion of the expense
According to this new rule, 30 per cent of all expenditures will be rejected, but 30 per cent of those prohibited expenditures will be eligible for reimbursement when the TDS is paid.
Interest charged till the date of payment
TDS and interest must be paid together to the government if tax is not paid on time. The following is the process that is used to establish the interest rate:
- If no tax deductions have been made, interest must be paid at a rate of one per cent per month or part of a month beginning on the day that such tax was needed to be deducted and continuing until the date that genuine deductions have been made.
- When tax has been withheld but not compensated to the government, interest must be paid at a rate of 1.5 per cent per month or part of a month beginning on the date such tax was withheld and continuing until the date payment is made to the government. This rule applies from the date such tax was withheld until the date payment is made.
FAQs
How can I validate my Section 194J tax deduction?
You may check the accuracy of the information on your TDS by requesting a Form 16 from the personnel who deducted money from your paycheck or by accessing a Form 26AS through the TRACES utility or an income tax website that allows electronic filing.
Under Section 194J, what is the maximum amount of TDS that may be deducted?
If the payment for technical or professional services that are covered under this section is more than Rs 30,000 per year, then a TDS deduction is needed to be made in accordance with Section 194J of the Income Tax Act.