Those paying money for professional and technical services have been entrusted with the responsibility to deduct tax at source under income tax laws in India. The provisions made in this regard are explained under Section 194J of the Income Tax Act.
What is Section 194J of the Income Tax Act?
According to Section 194J, taxpayers, not being an individual or a Hindu Undivided Family, responsible for paying a resident any technical or professional fee, deduct 10% TDS at the time of credit of this fee to the account of the payee or at the time of payment in cash, or by issue of a cheque, or draft or by any other mode, whichever is earlier.
The rules of this section also apply to an individual or a HUF in specific circumstances. These two categories of taxpayers will have to deduct TDS under this section when their total sales, gross receipts, or turnover from the business, or profession exceed the monetary limits specified under Clause (a), or Clause (b) of Section 44AB during the financial year immediately preceding the financial year in which such sum is credited.
However, individuals and HUFs are not liable to deduct TDS on such payments credited or paid exclusively for personal purposes, or any member of the undivided family.
Payments covered under Section 194J
- Fees for professional services
- Fees for technical services
- Money paid to directors, excluding salary
- Royalty
- Fees paid to not carry on any business or profession for a specified time and within certain geographical boundaries
- Fees paid to not share any technical knowledge
Section 194J of the Income Tax Act: Threshold limit for deducting tax
No TDS is to be deducted under this section on the following payments:
- Any sums credited or paid, before the first day of July 1995 or
- Where the amount of such sum or the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year does not exceed
(i) Rs 30,000 in the case of fees for professional services referred to in clause (a), or
(ii) Rs 30,000 in the case of fees for technical services
(iii) Rs 30,000 in the case of royalty
Who is liable to deduct TDS under Section 194J?
All the taxpayers paying fees for professional or technical services are liable to deduct tax at source under Section 194J. However, this is not applicable on individuals and HUFs running business if their turnover does not exceed Rs 1 Crore during the previous financial year. For individuals and HUFs carrying on their profession, this liability does not arise if their turnover does not exceed Rs 50 Lakh during the previous financial year.
Rate of TDS under Section 194J
| Type of payment | TDS rate |
| Payment as technical fee | 2% |
| Payment as professional fee | 10% |
| Payments to call centres | 2% |
| Payment of royalty for sale, distribution, or exhibition of cinematographic films | 2% |
| All other payments | 10% |
| If PAN of the payee not submitted | 20% |
Penalty for non-deduction or late deduction of TDS under Section 194J
All professionals and working citizens must make tax payments on time. If the TDS amount is not paid or deducted on time, this would have several outcomes, such as:
Discontinuation of 30% of expenditure
About 30% of the expenditure will be discontinued. The total amount will be re-allowed after the pending TDS is paid to the government.
Additional interests until the date of payment
If there is a delay in tax payment, an extra penalty will be added to the total TDS amount to the government. The rate of interest is determined by either of these two manners:
Where no tax deduction is made or paid to the government
Interest is payable at 1% per month.
Even if the tax is deducted, if it is not paid to the government, interest will be charged. The interest applicable here is 1.5% per month.\
Details on services under TDS
Professional services
People who work as servicemen can be covered under TDS. These services include medical, legal, architectural, or engineering professions. Additionally, people in accountancy, advertising, interior decoration, technical consultancy, and other professions are also included in professional services under TDS. Film artists, company secretaries, and authorised representatives were later introduced under Section 44AA. There are numerous more professions which can be categorised in the professional service section.
Technical services
Technical services also qualify under TDS. All managerial, technical, and consultancy services are linked to technical services. However, it does not consider any payment which acts like a salary for the recipients of the income. Both technical and managerial services, as well as consultancy services, are covered under this section. Consultancy services are recognised as advisory services and act as a necessity for clients and businesses. Technical services like machines and robots do not count under this section.
Royalty
The Royalty section includes all the payments made for the transfer of rights or usage of an invention, trademark, patents, etc.
Use of patents, models, designs, structures, etc.
Additionally, the transfer of rights related to scientific findings, literary research and study, films or videotapes for radio broadcasting can be included. However, any sale, exhibition, or distribution of cinematographic films is excluded from TDS.
Non-compete fees
Non-compete fees can include any payment in cash or kind in return for services and other actions like sharing any licence, patent, franchise, trademark, and commercial or business rights. Additionally, any kind of processing and manufacturing information will also be included.
FAQs
Who deducts tax under Section 194J?
The person making the payment is responsible to deduct TDS under this section.
What are professional services?
Professional services are rendered by a person while carrying on legal, medical, engineering, or architectural profession, or the profession of accountancy, or technical consultancy, or interior decoration, or advertising or other profession as notified for the purpose of Section 44AA.
Are payments made to NRIs covered under the Section 194J?
No, payments made only to residents of India are covered under the Section 194J.
What is the threshold for deducting TDS under Section 194J?
Under this section, TDS must be deducted in case the payment for the professional and technical services is higher than Rs 30,000 during the year. This limit is applicable to each payment independently. So, if a business pays Rs 15,000 payment for technical services and Rs 20,000 payment towards royalty, it is not liable to deduct any TDS even though the aggregate is higher than the Rs 30,000 limit.
When is tax under Section 194 deducted?
TDS under this section is deducted at the time of the passing of such entry in accounts or making the actual payment of the expense, whichever earlier.
| Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at [email protected] |
An alumna of the Indian Institute of Mass Communication, Dhenkanal, Sunita Mishra brings over 16 years of expertise to the fields of legal matters, financial insights, and property market trends. Recognised for her ability to elucidate complex topics, her articles serve as a go-to resource for home buyers navigating intricate subjects. Through her extensive career, she has been associated with esteemed organisations like the Financial Express, Hindustan Times, Network18, All India Radio, and Business Standard.
In addition to her professional accomplishments, Sunita holds an MA degree in Sanskrit, with a specialisation in Indian Philosophy, from Delhi University. Outside of her work schedule, she likes to unwind by practising Yoga, and pursues her passion for travel.
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