In FY 2021-22, Section 194J requires tax deduction at source @10% from amounts credited or paid to a person for professional services if the such amount or aggregate of such amounts exceeds ₹30,000.
Overview of Section 194J of the Income Tax Act
TDS(Tax Deducted at Source) is an indirect tax charged on an individual’s income. In simple terms, when any person or company makes payments such as professional fees, salary, technical or commission, interest, rent, and so on, they must deduct a predetermined percentage as tax from their total payment and remit it to the government. The person liable to deduct tax at source is known as Deductor. And the person entitled to receive payment post-deduction is known as Deductee. Let’s us know about Section 194J in this blog.
Transactions Covered Under Section 194J
As per Section 194J TDS rate of the Income Tax Act, 1961 following payments would be liable for TDS deduction:
- Fees for professional services performed by an individual in medicine, architecture, law or engineering. This also includes professions mentioned in Section 44AA, plus the services rendered by sportspersons, actors, physical trainers, and event managers.
- Consultants, managers or technicians carry out charges for technical services.
- Remunerations paid to the company’s director, such as sitting fees and fees paid for attending board meetings (excluding salary).
- Royalty payments are made considering literature or scientific work, patent or copyright, design & invention, etc.
- Non-competing fees are paid under a contract for sharing business operations and technical know-how like a trademark, license, franchise name or any right of similar nature.
Types of Payments Covered
The following categories of payments made to residents are encompassed within this section:
- Compensation for professional services rendered.
- Charges for technical services provided.
- Payments made to directors, excluding their regular salary. This includes fees for attending board meetings, for instance.
- Royalty payments.
- Payments characterized as non-compete fees, which refer to fees paid to refrain from engaging in any business or profession for a specified period and within specific geographical limits, or fees paid to withhold any technical knowledge or know-how.
Persons Responsible to Deduct TDS Section 194J
Every person making payments in nature of the services mentioned above is liable to deduct tax at source:
- If an individual/HUF is running a business where his turnover/gross sales/total receipts exceed ₹1 crore during the preceding financial year.
- If an individual /HUF is carrying on the profession and where his turnover/gross sales/total receipts exceed ₹50 lakhs during the preceding financial year.
This means those entities required to execute tax audits in the previous year must mandatorily deduct tax.
Exemption Limit for Section 194J Deduction
- Tax is to be deducted for companies and individuals, including call centre operators providing technical/professional services, only if the payment amount is higher than ₹ 30,000 in any year.
- Tax is to be deducted for payments made to the company’s director, irrespective of the threshold limit.
Rate of Tax Deduction Under Section 194J
As covered in this section, all payments are subject to a standard 194J TDS rate of 10%. However, if the Deductee does not provide the PAN number to the Deductor, the TDS deduction takes place at the rate of 20%.
Note: TDS at 2% must be deducted on payment to call centres effective from 01.04.2017.
Time Limit for Section 194J TDS Rate
Section 194J TDS Rate shall be deducted –
When the actual payment of service is made or the entry related to such deduction is made in the accounts, whichever comes earlier.
Time Limit for Payment u/s 194J TDS Rate
| Payment | TDS deducted by the non-government deductor | TDS deducted by the government |
| Before 1st March | Deposit must be done by the 7th day of the subsequent month | Deposit must be done by the 7th day of the subsequent month |
| During the month of March | Deposit must be made by 30th April of the same calendar year | The deposit can be made on the same day but challan needs to be produced by 7th of the subsequent month |
Consequences of Late Deduction & Non-Deduction of Tax
If there is a delay or default in tax deduction or tax payment, the following penalties shall be applicable:
- Late deduction or non-deduction of tax under section 194J can result in consequences such as penalty, interest, disallowance of expenses, and legal proceedings.
- In the case of non-deduction of TDS, the tax benefit claimed instead of such service expenditure will be reduced. 30% of the expenditure shall be turned down in the financial year in which such transaction was carried out. However, this 30% shall be re-allowed only when the TDS is timely deducted and paid to the government.
- In case of delay of TDS payment, a penal interest shall be levied along with the TDS amount.
- If no tax has been deducted, interest @ 1% p.m or part of the month shall be chargeable from the date when the tax was required to be deducted to when the tax is actually deducted.
- In the case where the tax was rightly deducted but was not paid, interest @ the rate of 1.5% p.m. or part of the month shall be chargeable from when the tax was deducted to when the tax was paid to the government.
List of Technical Services under Section 194J
Section 194J of the Income Tax Act, 1961 pertains to the deduction of tax at source (TDS) on technical and professional services. The following are the technical services that are covered under Section 194J:
- Any professional services rendered by lawyers, accountants, engineers, architects, consultants, or technical experts.
- Any technical services such as testing, analysis, or quality control services.
- Any services related to advertising, broadcasting, or telecasting.
- Any services related to the development of computer software, websites, and data processing.
- Any services related to the supply of technical personnel, such as engineers or technicians, on a contractual basis.
- Any services related to the provision of technical knowledge, experience, or skill in the form of training or coaching.
- Any services related to the provision of scientific or technical knowledge, experience, or skill, such as research and development.
- Any services related to the use or exploration of mineral resources, such as geological surveys or drilling.
It is important to note that the above list is not exhaustive and that any other technical or professional services may also be covered under Section 194J.
Meaning of Various Terms
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Professional Services
Professional services encompass various fields such as medicine, law, architecture, engineering, accounting, advertising, interior decoration, and technical consultancy. These services also include professions notified by the CBDT Board under Section 44AA, such as film artists, company secretaries, and authorized representatives. Sportspersons, commentators, event managers, anchors, umpires, referees, physiotherapists, coaches and trainers, team physicians, and sports columnists are also included under Section 194J.
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Technical Services
Technical services refer to managerial, technical, and consultancy services provided by individuals with expertise in technology and business administration. However, payments classified as salary by the recipient are not considered as fees for technical services. The Supreme Court has clarified that technical services must be provided by humans and do not include services rendered by machines or robots.
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Royalty
Royalty payments involve the transfer or usage of rights related to inventions, models, designs, trademarks, patents, scientific findings, literary works, films, or commercial knowledge. They also include the provision of information on using inventions, patents, formulas, or technical, industrial, commercial, or scientific knowledge or skills. However, payments for the sale, exhibition, or distribution of cinematographic films are not considered as royalty.
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Non-Compete Fees
Non-compete fees are payments made to prevent individuals from sharing licenses, patents, trademarks, franchises, know-how, or business rights or information for certain specified purposes, such as processing, manufacturing, or providing services.
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Threshold Limit for Tax Deduction
Tax must be deducted at source when the payment for professional or technical services exceeds Rs 30,000 during the year. This limit applies independently to each payment category. For example, if a payment of Rs 25,000 is made as royalty and another payment of Rs 20,000 is made as fees for technical services, TDS is not required as each item falls below the separate Rs 30,000 limit. However, there is no threshold limit for payments (commission, fees, or remuneration) made to directors. Tax must be deducted regardless of the amount.
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Persons Liable to Deduct Tax
All entities, except individuals or Hindu Undivided Families (HUF) not subject to tax audits in the previous year, are responsible for deducting tax at source when making payments for professional or technical services. Individuals or HUFs engaged in business are exempt from TDS if their turnover does not exceed Rs 1 crore, while those engaged in professions are exempt if their turnover does not exceed Rs 50 lakh in the previous financial year.
Applying for TDS at a Lower Rate
Under Section 197, individuals receiving payments have the option to seek a lower rate of Tax Deducted at Source (TDS) by submitting Form 13 to the assessing officer. Upon approval by the officer, the assessee is issued a certificate indicating the reduced TDS deduction.
Section 194J FAQs
How can I verify my tax deducted under Section 194J?
To verify the tax deducted under Section 194J, you can refer to your Form 26AS. It is a consolidated statement that reflects all the tax deducted at source, including TDS under Section 194J.
Does payment of remuneration to the company's director attract Section 194J?
No, payment of remuneration to the company's director does not attract Section 194J. Instead, it falls under a different provision, typically Section 192, which deals with TDS on salaries.
What is Section 194J under the Income Tax Act?
Section 194J of the Income Tax Act pertains to the deduction of Tax at Source (TDS) on fees for professional or technical services. It mandates the deduction of TDS when such payments exceed the specified threshold limit.
Who is liable to deduct TDS under Section 194J?
The person making payment for professional or technical services is liable to deduct TDS under Section 194J. This typically includes businesses, companies, or individuals who engage professionals or technical experts and make payments to them.
Which services are covered under Section 194J?
Section 194J covers a broad range of services, including professional services such as legal, medical, architectural, engineering, accounting, advertising, and technical services. The specific services covered may be notified by the CBDT (Central Board of Direct Taxes) from time to time.
What is the limit to deduct TDS under Section 194J?
As of the current tax regulations, there is no threshold limit specified for the deduction of TDS under Section 194J. It means that TDS must be deducted regardless of the amount of payment made for professional or technical services.
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