The Implication of TDS u/s 194J: How It Impacts Professional Payments in India

1. What is TDS under Section 194J?

Section 194J of the Income Tax Act, 1961, states the deduction of tax at source from payments made in relation to professional and technical services, including royalty payments. Under the provision of this section, any person making payments for such services is required to deduct TDS before making the payment to the recipient.

2. Who is Required to Deduct TDS Under Section 194J?

The person making the payment for professional or technical services is responsible for deducting TDS and this includes:

Individuals
Companies
Partnership firms
Government entities
Public sector undertakings

These parties must deduct TDS on any payments made for professional or technical services to a resident.

3. What are Professional Services Covered Under Section 194J?

Professional services covered u/s 194J of the Act are as under:

Legal services: Fees paid to lawyers, legal consultants, and legal firms.
Medical services: Fees paid to doctors, medical consultants, and hospitals.
Accounting services: Payments made to chartered accountants, auditors, and tax consultants.
Architectural services: Payments for services provided by architects.
Engineering and technical services: Payments made for technical consultancy, including services provided by engineers, technical advisors, and software consultants.

As mentioned above, these are some examples and this list may include more services.

4. What are Technical Services Under Section 194J?

Technical services refer to services that involve the application of scientific or technological knowledge to solve problems. This includes:

Consultancy services: Technical advice or services related to technology, research, and development.
Software services: Payments for software development, IT consultancy, or software licensing.
Engineering services: Technical consultancy or design and drafting work related to engineering.
Royalty payments: Payments made for the use of intellectual property, patents, or technical know-how.

5. What is the TDS Rate Under Section 194J?

The TDS rate under Section 194J is generally 10% of the amount paid for professional and the rate is 2% in case of professional technical services. There are fewer exceptions as under:

If the payee does not provide a PAN (Permanent Account Number), the TDS rate is 20%.
The TDS rate of 10% applies to royalties and fees for technical services (FTS), unless otherwise specified by the provisions in the Income Tax Act.

6. What is the Threshold Limit for TDS Under Section 194J?

TDS is required to be deducted under Section 194J only if the amount of payment exceeds a certain threshold. As of the current provisions:

The threshold limit for TDS deduction is ₹30,000 in aggregate during a financial year.
If the total payments for professional or technical services exceed ₹30,000 in a financial year, TDS must be deducted.
If the payment is less than ₹30,000, no TDS is required to be deducted.

7. How is TDS Under Section 194J Different from Other TDS Provisions?

TDS provisions under Section 194J are specifically related to professional and technical services. The key difference between Section 194J and other sections (like Section 194C for contracts or Section 192 for salaries) is the nature of the services involved. Section 194J applies to specialized services that require professional expertise, unlike other provisions that deal with more routine contractual payments or salary-related deductions.

8. When Should TDS Be Deducted Under Section 194J?

The TDS must be deducted at the time of:

Payment: When the payment is actually made to the recipient, or
Credit: When the amount is credited to the account of the payee, whichever occurs earlier.

For example, if a company is paying ₹50,000 to a consultant for services, and the payment is made in the following month, TDS must be deducted when the payment is made, not when the invoice was raised.

9. Is TDS Deducted Only on Payments Made to Individuals?

No, TDS under Section 194J is applicable to payments made to both individuals and entities (such as companies, partnerships, LLPs, etc.) for professional and technical services.

However, in case of payments made to non-residents, Section 194J may not apply, and the provisions of Section 195 (TDS on payments to non-residents) would be relevant.

10. Are Any Exemptions Available Under Section 194J?

Yes, several exemptions apply to the provisions of Section 194J. Some of the key exemptions include:

Government or local authority: Payments made to the government, local authorities, or certain public bodies may be exempt from TDS under Section 194J.
Payments for non-business purposes: If the payments are made for personal services or are unrelated to the business or profession of the payer, TDS is not applicable.
Payments made to specified entities: Some payments made to specified institutions like educational bodies, charitable organizations, and others may also be exempt from TDS under Section 194J.

11. How is TDS Under Section 194J Calculated?

TDS is calculated as a percentage of the payment made for professional or technical services. For example, if a company pays ₹1,00,000 to a consultant, the TDS will be calculated at the rate of 10%:

TDS Amount = ₹2,00,000 × 10% = ₹20,000

Thus, ₹20,000 will be deducted as TDS from the total payment of ₹2,00,000, and the net amount paid to the consultant will be ₹180,000.

12. What Happens If TDS Is Not Deducted Under Section 194J?

If TDS is not deducted as per Section 194J, the following consequences can arise:

Penalty for Non-Deduction: Under Section 271C of the Income Tax Act, the person responsible for deducting TDS can face penalties ranging from 100% to 300% of the amount that should have been deducted.
Interest: Interest may be levied under Sections 201 and 220 for delayed payment of TDS.
Disallowance of Expenses: If TDS is not deducted, the expenses related to professional or technical services might be disallowed under Section 40(a)(ia), resulting in the non-deduction of TDS leading to higher tax liability.

13. How Should TDS Deducted Under Section 194J Be Deposited?

The TDS deducted under Section 194J must be deposited with the government within the following time frame:

For payments made in the month: The due date of TDS is 7^th of the subsequent month i.e. TDS must be deposited within 7 days from the end of the month in which the deduction was made.
For the month of March: TDS for payments made in March must be deposited by April 30th.

TDS can be deposited online as well as through bank counters.

14. What Forms Are Used for TDS Returns Under Section 194J?

Once the TDS is deducted, the deductor must file TDS returns. The key forms used for filing TDS returns are:

Form 26Q: For payments made to residents for non-salary payments, including professional and technical services.
Form 16A: A TDS certificate issued to the payee, showing the amount of TDS deducted and deposited with the government.

The deductor must also provide the TDS certificate (Form 16A) to the payee within the prescribed time limit.

15. How TDS credit can be claimed?

The payee can claim credit for the TDS deducted under Section 194J when filing their Income Tax Return (ITR). The payee must verify the TDS deduction in their Form 26AS and can claim the tax credit while filing the return.