Section 194J of Income Tax Act: TDS on payment to professionals

Section 194J of the Income Tax Act pertains to the tax deduction on payments made to professionals or for technical services. According to this section, any person responsible for making payments to a professional or for technical services must deduct tax at 10% (effective from 2020) before making the payment. It applies to payments made to individuals, firms, and companies. 

Examples of payments covered under this section include:

• Fees for consultancy, management, or technical services.
• Rent for professional or technical equipment.
• Royalties.

The person responsible for making the payment must deduct the tax and deposit it with the government. Penalties may occur if this section is not completed. The individual or entity receiving the payment must include this amount in their income tax return and pay any additional tax as required.

Section 194J: TDS Rate

The section pertains to TDS (Tax Deducted at Source) on professional or technical fees. The current rate of TDS for this section is 2% for any payment of fees for technical service, payments made to operators of call centres and payment of royalty for sale, distribution or exhibition of cinematographic films. For any other works, the TDS rate is 10%. 

Section 194J: Who must deduct TDS?

The section requires any person responsible for paying any sum to any resident for professional or technical services to deduct tax deducted at source (TDS) at the time of crediting such a sum to the account of the payee or at the time of payment thereof, whichever is earlier. It includes individuals, partnership firms, companies, and other entities responsible for making payments for professional or technical services. 

Section 194J of Income Tax Act: Types of payments covered

The section pertains to tax deductions at source for professional or technical services. This section covers any fees, commissions, or remuneration paid to a professional or technical consultant. 

It includes payments made to:

• Legal professionals (such as lawyers and chartered accountants)
• Technical consultants (such as engineers and architects)
• Management consultants
• Interior decorators
• Film artists
• Company Secretaries
• Any other professional providing similar services

This section also covers payments made for royalties and using any patent, trademark, design, model, plan, secret formula, process, or information concerning the industrial, commercial, or scientific experience.

What do “professional service” and “technical service” mean?

Professional services refer to a range of services provided by highly skilled professionals, such as consultants, accountants, lawyers, and architects. These services are typically offered by individuals or firms that possess specialised knowledge or skills in a particular field.

On the other hand, technical services involve the application of specific technical knowledge or expertise to solve problems or provide assistance. Examples of technical services include IT support, engineering consulting, and laboratory testing. Technical services may be provided by individuals or companies with a high degree of expertise in a particular technical field.

Maximum payment limit to deduct TDS

The maximum payment limit to deduct TDS (tax deducted at source) under Section 194J of the Income Tax Act, 1961, is Rs 30,000. It means that if the payment to a contractor or professional is less than or equal to Rs 30,000, TDS is not required to be deducted. However, if the payment exceeds Rs 30,000, TDS must be deducted at 10%.

For example, if a company pays a consultant Rs. 40,000 for their services, the company will need to deduct TDS of 10% (Rs. 4,000) from the payment and deposit it with the government. The consultant will then receive Rs. 36,000 after TDS has been deducted.

Section 194J of Income Tax Act: Not applicable

This section is not applicable in the following cases:

• If the amount of professional or technical fees, or any other sum referred to in this section, is less than Rs. 30,000 in the financial year.
• If the person paying the sum is an individual or an undivided Hindu family, the sum is not payable to a resident.
• If the sum is paid to the government, any local authority, or any corporation established by or under a Central, State or Provincial Act.
• If the sum is paid to a partnership firm, the firm is not required to file a return of income under section 139(4A) or section 139(4B), section 139(4C) or section 139(4D).
• If the person responsible for paying the fees is a partnership firm, the fees are paid to a firm partner.

Consequences of non-deduction or late deduction

If taxes are not deducted or are deducted late, the individual or business may be subject to penalties and interest charges from the government. Additionally, if taxes are not paid promptly, the individual or business may be at risk of legal action, including fines and imprisonment. Furthermore, non-compliance with tax laws can also result in a loss of credibility and reputation for the individual or business.

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