TDS On Payment – Section 194M: Contractor & Professional

Section 194M mandates a 5% TDS on payments exceeding ₹50 lakh made by individuals or HUFs to contractors and professionals. The article covers the purpose, applicability, deduction process, and exceptions to ensure compliance and prevent tax evasion.

TDS on payment is a mechanism to ensure tax collection at the source of income. Section 194M was introduced to bring certain high-value payments made by individuals and Hindu Undivided Families (HUFs) under the TDS framework. It applies when payments to resident contractors or professionals exceed ₹50 lakh in a financial year. This section simplifies compliance by allowing TDS deduction without requiring a TAN (Tax Deduction and Collection Account Number). Understanding Section 194M is crucial for individuals and HUFs engaging in large financial transactions to avoid penalties and ensure tax compliance.

Role of the Deductor in TDS Compliance

TDS is a way of collecting tax at the source of income. The deductor is responsible for deducting the TDS on payment and depositing it to the government on behalf of the deductee. TDS is applicable on various types of income, and the rate of TDS depends on the type and amount of income.

Section 194M and Online TDS Filing for Businesses

The process of TDS filing has become very simple and convenient with the introduction of the Online filing of TDS system. Online TDS filing can be done through the TRACES (TDS Reconciliation Analysis and Correction Enabling System) portal. This portal is maintained by the Income Tax Department of India. Companies and businesses can use this portal to file their TDS returns, download TDS certificates, and track the status of their TDS returns.

Importance of Online TDS Filing: TDS on Payment

1. Ensures Compliance with Tax Laws

• • As per the Income Tax Act of 1961, online TDS filing ensures compliance with Indian tax laws.
  • It is mandatory for individuals and organizations to deduct TDS on payments made to others and deposit it with the government.

2. Simplifies TDS Return Filing

• • • Online TDS filing eliminates the need for physical documentation and manual submission of TDS returns.
    • With the online system, returns can be filed quickly and accurately, reducing human errors.

3. Enables Easy Tracking and Timely Deposits

• • • • The online mode allows businesses and individuals to track TDS on Payment in real-time.
      • It helps in ensuring timely deposits with the government, preventing penalties for late TDS payments and non-compliance.

4.     Minimizes Human Errors for Accurate TDS Returns

• • • • • Electronic filing ensures automated processing, reducing the chances of incorrect TDS calculations.
        • This is especially important under Section 194M, where individuals and HUFs making high-value payments to professionals or contractors must deduct TDS correctly.

What is the TDS limit for contractors?

The TDS limit for contractors depends on the applicable section under the Income Tax Act:

1. Section 194C (For Businesses & Organizations)

   • TDS applies if the payment to a contractor exceeds ₹30,000 for a single transaction or ₹1,00,000 in a financial year.
   • TDS Rate:
     • 1% if paid to an individual/HUF
     • 2% if paid to a company/firm

1. Section 194M (For Individuals & HUFs)

   • Applicable when individuals or HUFs (who are not required to deduct TDS under 194C) make payments exceeding ₹50 lakh in a financial year to a contractor.
   • TDS Rate: 5% (No TAN required; payment is made via Form 26QD).

What is the professional tax rate for TDS?

The TDS rate for professionals depends on the section under which tax is deducted:

1. Section 194J (TDS on Professional Fees & Technical Services)

• Applicable when payments exceed ₹30,000 in a financial year for professional or technical services.
• TDS Rate:
  • 10% for professional services (e.g., legal, medical, consultancy, architecture, etc.).
  • 2% for technical services, royalty (not for sale distribution), and call center payments.
• Who deducts TDS? Businesses, organizations, and individuals (if under tax audit).

2. Section 194M (For Individuals & HUFs)

• Applicable when an individual or HUF (not liable for tax audit) pays more than ₹50 lakh per year to professionals.
• TDS Rate: 5% (No TAN required; payment via Form 26QD).

Accurate TDS calculation formula and results with our TDS calculator. Learn how to calculate TDS on salary.

Benefits of TDS Under Sec 194M

1. No TAN Requirement – Individuals and HUFs can deduct TDS without needing a TAN.
2. Ensures Tax Compliance – Helps businesses and professionals comply with Section 194M TDS regulations.
3. Applicable to High-Value Transactions – Applies when payments exceed ₹50 lakh in a financial year.
4. Easy Online TDS Filing – File TDS on payment through Form 26QD on TRACES.
5. Reduces Tax Burden – Professionals and contractors get TDS credit, lowering final tax liability.
6. Avoids Penalties – Timely deduction and deposit of TDS under Section 194M prevent penalties.
7. Financial Transparency – Keeps records of contractor and professional payments for tax compliance.

Common Mistakes to Avoid While Deducting TDS Under Section 194M

1. Failing to Deduct TDS on Time

   • Many individuals and HUFs forget to deduct TDS at the time of making payments to contractors or professionals. TDS must be deducted when the payment is made or credited, whichever is earlier.

2. Incorrect TDS Rate Application

   • The applicable TDS rate under Section 194M is 5%. Some deductors mistakenly apply the TDS rate for businesses (1%-2%) under Section 194C, leading to under-deduction and potential penalties.

3. Not Using Form 26QD for TDS Payment

   • Unlike other TDS sections that require a TAN (Tax Deduction and Collection Account Number), individuals and HUFs under Section 194M must deposit TDS using Form 26QD. Failing to do so may lead to non-compliance.

4. Late Deposit of TDS to the Government

   • TDS deducted must be deposited with the government by the 7th of the following month. Late deposits attract interest at 1.5% per month until the payment is made.

5. Not Issuing the TDS Certificate (Form 16D)

   • After depositing TDS, Form 16D (TDS certificate) must be generated and provided to the deductee (contractor or professional). Neglecting this step can lead to compliance issues.

6. Incorrect PAN Details

   • If the contractor’s or professional’s PAN is incorrect or not provided, a higher TDS rate of 20% may be deducted instead of 5%, causing unnecessary tax burdens.

7. Wrong Section Selection in TDS Payment

   • While making the payment through the TRACES portal, some taxpayers mistakenly select the wrong section (e.g., 194C or 194J instead of 194M), leading to errors in TDS records.

8. Ignoring Threshold Limit

   • Section 194M applies only when the total payment exceeds ₹50 lakh in a financial year. Some deductors start deducting TDS below the threshold or forget to deduct when exceeding the limit.

How to Avoid These Mistakes?

1. Use a TDS calculator to determine the correct deduction amount.
2. Ensure PAN details are correct before making payments.
3. Deposit TDS before the due date to avoid penalties and interest.
4. Use Form 26QD and provide Form 16D to the deductee for compliance.
5. Consult a tax expert like Vakilsearch to simplify your TDS filing process.

Conclusion:

TDS on Payment under Section 194M plays a crucial role in ensuring tax compliance for individuals and HUFs making high-value payments to contractors and professionals. By mandating TDS deduction on payments exceeding ₹50 lakh, this section simplifies tax collection while eliminating the need for a TAN.

With the online TDS filing system, deductors can easily comply with tax laws, file returns, and issue TDS certificates through the TRACES portal. This process not only reduces manual errors but also prevents penalties associated with late deposits and non-compliance.

For businesses and individuals, understanding the TDS on Payment rules under Section 194M is essential for financial transparency and seamless tax management. VakilSearch can assist in streamlining your TDS filing process, ensuring compliance with tax regulations, and helping you avoid legal complications.

FAQs

What is Section 194M in TDS?

Section 194M is a provision under the Income Tax Act, 1961, which requires individuals and HUFs (Hindu Undivided Families) who are not required to get their accounts audited, but are making payments to contractors or professionals exceeding Rs. 50 lakh in a financial year, to deduct TDS at the rate of 5%.

What is the difference between 194M and 194IA?

Section 194M and Section 194IA are both provisions under the Income Tax Act, 1961, related to TDS on payments made to residents. However, Section 194IA applies to TDS on payment of rent exceeding Rs. 50,000 per month, while Section 194M applies to TDS on payments made to contractors or professionals exceeding Rs. 50 lakh in a financial year.

What is Section 194IA?

Section 194IA is a provision under the Income Tax Act, 1961, which requires individuals and HUFs (Hindu Undivided Families) to deduct TDS at the rate of 5% on rent payments exceeding Rs. 50,000 per month. The TDS must be deducted at the time of credit of rent to the account of the payee or at the time of payment, whichever is earlier.

What is Section 194IB?

Section 194IB is a provision under the Income Tax Act, 1961, which requires individuals and HUFs (Hindu Undivided Families) who are not required to get their accounts audited, but are making payments to non-individuals (such as companies, firms and LLPs) exceeding Rs. 50,000 per month, to deduct TDS.

Is Section 194S taxable?

Yes, Section 194S is taxable. It is a provision under the Income Tax Act, 1961, which requires individuals and HUFs (Hindu Undivided Families) to deduct TDS at the rate of 1% on payment of any sum to a resident person for winning from lotteries, crossword puzzles, card games, and other games of any sort.

Who is required to deduct TDS under Section 194M?

As per Section 194M, any individual or HUF (Hindu Undivided Family) who is not required to get their accounts audited under Section 44AB of the Income Tax Act, 1961, and is making payment to a resident contractor or professional exceeding Rs. 50 lakh in a financial year, is required to deduct TDS at the rate of 5%.

What are the specified payments under Section 194M?

The specified payments under Section 194M are payments made to a resident contractor or professional for carrying out any work, including supply of labour for carrying out any work, or for rendering any professional services, such as legal, medical, engineering, architectural, accounting, technical consultancy, or interior decoration services.

What is the TDS rate under Section 194M?

The TDS rate under Section 194M is 5% of the sum paid or credited to the contractor or professional. However, if the contractor or professional does not provide their PAN details, the TDS rate increases to 20%.

Are there any exemptions or thresholds for TDS under Section 194IA?

Yes, there is an exemption threshold for TDS under Section 194IA. TDS is not required to be deducted if the annual rent paid is less than Rs. 6,00,000. However, if the rent paid exceeds Rs. 6,00,000 in a financial year, TDS must be deducted at the rate of 5%.

What are the consequences of not deducting TDS under these sections?

If TDS is not deducted under these sections, the deductor may be liable to pay interest, penalty, and other consequences as per the Income Tax Act, 1961. The interest rate for the delay in depositing TDS is 1.5% per month or part of the month, and the penalty for non-deduction or non-payment of TDS can be up to the amount of TDS. Additionally, the deductor may also face prosecution under the Income Tax Act, 1961.

Read More:

• How to File TDS Return
• TDS Calculation on Salary
• Last Date for TDS Return