What is TDS under section 194J?

3rd December 2021

What is TDS under section 194J?

The deduction of tax at source or TDS has been very helpful in the collection of taxes in the country by targeting the source of income itself. It also eases the taxpayer’s burden of paying tax when it is time to file their income tax returns. That is because, they get credit for the taxes deducted at source.

One of the most important and common type of payments that a business entity makes is towards professional fees or fees for technical services. Some illustrative examples of professional fees are fees paid to a lawyer, doctor, engineer, architect, chartered accountant, interior decorators, advertisers, etc. Technical services would include the rendering of managerial, technical or consultancy services. Such payments made to residents are covered under section 194J.

According to the rules and regulations of Section 194J of the Income Tax Act, 1961, a person must deduct their Tax Deducted at Source (TDS) when certain payments are made to a certain resident.

Who all are liable to deduct tax?

Every person other than an Individual or Hindu Undivided Family, who is making a payment in the nature of fees for professional or technical services is liable to deduct tax at source. Individuals and Hindu Undivided Family whose total sales, gross receipts or turnover from the business or profession carried on by him exceed one crore rupees in case of business or fifty lakh rupees in case of profession, during the financial year immediately preceding the financial year are liable to deduct tax at source under section 194J.

In simple terms, we can state that:

Individuals/HUF having turnover/gross receipts less than the threshold limit: Not liable to deduct TDS.

Every other person: Liable to deduct TDS.

Note: No Individual or HUF shall deduct tax at source on the sum by way of fees for professional services in case such sum is credited or paid exclusively for personal purpose of such individual or any member of Hindu Undivided family.

Types of payments covered under Section 194J

An individual should deduct TDS when the following payments are made to a resident, in a fiscal year (higher than Rs.30,000):

Amount charged as professional services fee
Amount charged as technical service fee
Non-compete fee according to the Income Tax Act of Section 28(VA)
Royalty

Professional Services

It implies the services carried out by an individual in the medical, architectural, legal, medical or engineering profession. Other services include accountancy, interior decoration, advertising, technical consultancy or any other profession that is accepted by the Board under Section 44AA.
Other services that are accepted under Section 44AA are film artists, company secretaries, and authorized representatives.
Sportspersons, event managers, commentators, anchors, umpires and referees, coaches and trainers, physiotherapists, team physicians and sports columnists also come under it.

Technical Services

It implies the services rendered by an individual for consultancy, technical or managerial services.

Services such as assembly, mining, construction are not considered as technical services as income from the same would come under the head salary of the recipient.

Non-Compete Fees

Non-Compete Fees for Section 194J implies the amount received either in cash or kind in return for an agreement that binds the person from sharing any patent, license, franchise, trademark, know-how or any commercial or business rights, technique or information likely to be used elsewhere for manufacture, processing or any other provisional service.

Royalty

Royalty for the purpose of this section means consideration for:

Transfer of rights for an invention, secret formula, model, design, trademark or patent.
Use of an invention, model, patent, etc.
Sharing any information related to the use of an invention, patent, formula, etc.
Use or right to use the equipment for industrial, scientific or commercial purposes.
Transfer of rights related to literary work, scientific findings, films or videotapes for radio broadcasting, no consideration for the sale, exhibition or distribution of the same.

Specific Cases

TDS deduction is also applicable under Section 194J on certain specific cases, decided by the case laws and circulars of the department:

Medical services rendered in hospitals.
Professional fees charged by film artists from advertising agencies.
Amount given to recruitment agencies and HR consultancy.
Payment made by companies to share registrars.

Key Points in Section 194J on TDS

Under Section 194J, Rs.30,000 is the maximum limit which is applicable to each item or payment independently.
TDS under this section is also applicable on commission or remuneration or fees given to a company’s director, even though the amount is not a part of the main salary. In these cases, the Rs.30,000 limit is not applicable.

Now, the question arises What is the rate of TDS to be deducted? The rates are as follows:

Any payment covered under this section shall be subject to TDS at the rate of 10%.
From 1 April 2020, the payment of fees for technical service shall be subject to TDS at the rate of 2%.
With effect from 01.04.2017, the tax on payments made to operators of call centres shall be deducted at a reduced rate of 2%.
In case the payee does not furnish his PAN then the rate of deduction would be 20%.

Note: No surcharge, education cess shall be added to the above rates. Hence tax will be deducted at source at the basic rate.

The rates of deduction can be summarised with the help of the table below:

Services	Applicable Rate
Professional services, Royalty, Non-compete fees, Director’s remuneration.	10%
Technical Services & services of call centre.	2%

Note: The payment of fees shall be above INR 30,000 in all the cases except payment made to the director.

Applying for TDS at a Lower Rate

According to Section 197, the person receiving payment can apply for a reduction of rate in TDS, by filling in Form 13 and sending it to the assessing officer.

If approved by the officer, a certificate stating a deduction in the TDS is issued to the assesses.

Time Limit to Deposit TDS under Section 194J

The following guidelines on time limit for depositing TDS under the section must be followed:

If the TDS deduction under Section 194J is made by the government or on behalf of the government, the deposit has to be made on the same day.
In other cases, TDS can be deposited within a week from the month-end in which the tax deduction has been made.
If the payment is made on the last day of the fiscal year, the TDS deposit must happen within two months from that financial year’s end in which it was credited.

3rd December 2021

What is TDS under section 194J?

What is TDS under section 194J?

According to the rules and regulations of Section 194J of the Income Tax Act, 1961, a person must deduct their Tax Deducted at Source (TDS) when certain payments are made to a certain resident.

Who all are liable to deduct tax?

In simple terms, we can state that:

Individuals/HUF having turnover/gross receipts less than the threshold limit: Not liable to deduct TDS.

Every other person: Liable to deduct TDS.

Note: No Individual or HUF shall deduct tax at source on the sum by way of fees for professional services in case such sum is credited or paid exclusively for personal purpose of such individual or any member of Hindu Undivided family.

Types of payments covered under Section 194J

An individual should deduct TDS when the following payments are made to a resident, in a fiscal year (higher than Rs.30,000):

Amount charged as professional services fee

Amount charged as technical service fee

Non-compete fee according to the Income Tax Act of Section 28(VA)

Royalty

Professional Services

It implies the services carried out by an individual in the medical, architectural, legal, medical or engineering profession. Other services include accountancy, interior decoration, advertising, technical consultancy or any other profession that is accepted by the Board under Section 44AA.

Other services that are accepted under Section 44AA are film artists, company secretaries, and authorized representatives.

Sportspersons, event managers, commentators, anchors, umpires and referees, coaches and trainers, physiotherapists, team physicians and sports columnists also come under it.

Technical Services

It implies the services rendered by an individual for consultancy, technical or managerial services.

Services such as assembly, mining, construction are not considered as technical services as income from the same would come under the head salary of the recipient.

Non-Compete Fees

Royalty

Royalty for the purpose of this section means consideration for:

Transfer of rights for an invention, secret formula, model, design, trademark or patent.

Use of an invention, model, patent, etc.

Sharing any information related to the use of an invention, patent, formula, etc.

Use or right to use the equipment for industrial, scientific or commercial purposes.

Transfer of rights related to literary work, scientific findings, films or videotapes for radio broadcasting, no consideration for the sale, exhibition or distribution of the same.

Specific Cases

TDS deduction is also applicable under Section 194J on certain specific cases, decided by the case laws and circulars of the department:

Medical services rendered in hospitals.

Professional fees charged by film artists from advertising agencies.

Amount given to recruitment agencies and HR consultancy.

Payment made by companies to share registrars.

Key Points in Section 194J on TDS

Under Section 194J, Rs.30,000 is the maximum limit which is applicable to each item or payment independently.

TDS under this section is also applicable on commission or remuneration or fees given to a company’s director, even though the amount is not a part of the main salary. In these cases, the Rs.30,000 limit is not applicable.

Now, the question arises What is the rate of TDS to be deducted? The rates are as follows:

Any payment covered under this section shall be subject to TDS at the rate of 10%.

From 1 April 2020, the payment of fees for technical service shall be subject to TDS at the rate of 2%.

With effect from 01.04.2017, the tax on payments made to operators of call centres shall be deducted at a reduced rate of 2%.

In case the payee does not furnish his PAN then the rate of deduction would be 20%.

Note: No surcharge, education cess shall be added to the above rates. Hence tax will be deducted at source at the basic rate.

The rates of deduction can be summarised with the help of the table below:

Services

Applicable Rate

Professional services, Royalty, Non-compete fees, Director’s remuneration.

10%

Technical Services & services of call centre.

2%

Note: The payment of fees shall be above INR 30,000 in all the cases except payment made to the director.

Applying for TDS at a Lower Rate

According to Section 197, the person receiving payment can apply for a reduction of rate in TDS, by filling in Form 13 and sending it to the assessing officer.

If approved by the officer, a certificate stating a deduction in the TDS is issued to the assesses.

Time Limit to Deposit TDS under Section 194J

The following guidelines on time limit for depositing TDS under the section must be followed:

If the TDS deduction under Section 194J is made by the government or on behalf of the government, the deposit has to be made on the same day.

In other cases, TDS can be deposited within a week from the month-end in which the tax deduction has been made.

If the payment is made on the last day of the fiscal year, the TDS deposit must happen within two months from that financial year’s end in which it was credited.

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