Table of Contents
Introduction
Section 194J of Income Tax Act stipulates that any person responsible for making payments to a professional or technical service provider shall deduct tax at source (TDS) on the payment made. This section defines the applicability of TDS in various situations and provides an overview of the procedures and guidelines followed by a payer while deducting TDS. In this article, we will discuss 194J of Income Tax Act in detail and provide an insight into the various provisions of this section.
What is Section 194J?
Section 194J of Income Tax Act is a section regarding TDS deduction for payments made to professionals and technical service providers. This section applies to all types of payments, including salary and fees for professional services, except for certain specified cases. It requires the payer to deduct income tax at source from the payment amount before it is paid out to the professional or technical service provider.
Types of Payments in 194J
● Fees for professional services such as legal or technical consultancy, accounting, etc.
● Fees for technical services such as software development, website design, maintenance, etc.
● Royalty payments for using copyrights, patents, or trademarks owned by the service provider.
● Salary to directors or employees of a company.
Amendments in TDS Section 194J
The Finance Act of 2020 has introduced a few amendments in Section 194J regarding the deduction of TDS. According to these amendments, if the gross amount paid to a service provider exceeds Rs. 50 lakhs in any particular financial year, the payer must deduct tax at source at 5% on such payment. Additionally, the payer must deposit such tax with the income tax department within 7 days from the payment date.
TDS is to be withdrawn at the rate of 2% on payments made to contractors or subcontractors for carrying out works contracts.
Who Can Deduct TDS under Section 194J?
The payer liable for deducting TDS under Section 194J is any person (individual, partnership firm, company, or trust) making payment to a professional or technical service provider. Such a payer is responsible for deducting relevant taxes from the payments made and deposited with the income tax department. Moreover, if the payment amount exceeds Rs. 10 lakhs in one financial year, the payer must obtain a Tax Deduction Account Number (TAN) from the income tax department.
Section 194J of Income Tax Act TDS rate
|
TDS Rate |
Situation |
|
2% |
Fees paid for any technical service, such as software development or website design and maintenance |
|
2% |
Payments to contractors or subcontractors for work contracts |
|
5% |
Payments exceeding Rs. 50 lakhs in any particular financial year to a professional or technical service provider. |
|
10% |
salary paid to directors of the company or employees earning more than Rs. 15000 per month ( excluding certain specified cases). |
|
10% |
Royalty payments to a copyright, patent, or trademark owner |
|
20% |
Payments made where the payee does not furnish their PAN |
Payments that are Protected by Section 194J
The following payments are exempted from TDS deduction under Section 194J of Income Tax Act:
● Amount is charged as professional service fees
● Amount charged as technical service fees
● Royalty payments made to the owner of a copyright, patent, or trademark
● Payments made to contractors and subcontractors for carrying out works contracts
● Reimbursement of expenses incurred by an employee in the course of their employment.
Professional services
Section 194J applies to payments made for professional services. Professional services include legal, medical, engineering, and architectural consultancy services and interior decoration, accountancy, and bookkeeping services. The payer must deduct TDS at 2% from such payment before it is paid to the service provider. Even the services covered under 44ABA of the Income Tax Act are subject to TDS under Section 194J.
Technical services
If payment is made for any technical service, TDS has to be deducted at 2%, as prescribed by Section 194J. Technical services include software development, website design and maintenance, audio or video recording, and related activities like photography or editing work. This provision also applies to payments made for research and other similar activities.
Royalty payments
194J mandates that 10% TDS should be deducted from royalty payments made to a person considering the transfer of copyright, patent, or trademark owned by them. Royalty payments can refer to license fees for using another person's intellectual property or a brand name.
Payment to contractors and subcontractors
2% TDS is applicable on payments made to contractors or subcontractors for working contracts as per 194J of the Income Tax Act. Works contracts can include services relating to construction, repairs, renovation, and other related activities involving the transfer of tangible goods and the provision of services.
Thus, Section 194J of the Income Tax Act applies to different categories of payments, such as payment. Therefore, payers are advised to comply with their TDS obligations under 194J to avoid any penalties or legal implications.
Consequences of Non-Deduction or Late Deduction
● Interest on delayed payment of TDS: The person responsible for deducting the tax is liable to pay interest at 1% per month or part of a month until the tax is deducted.
● Penalty on non-deduction: As per Section 271C of the Income Tax Act, if any person fails to deduct, or after deduction fails to pay the TDS within the specified time limit, they can be liable to a penalty which is equal to the amount of tax which is not deducted or paid.
● Disallowance of expenditure: If the person responsible for deducting and depositing taxes does not comply with their obligations, then the expenditure incurred by the payer may not be allowed as a deduction from their income.
Applying for TDS at a Lower Rate
If a person believes they are eligible to be exempted from TDS deduction under 194J of Income Tax Act, they can apply for a lower rate of TDS or even complete exemption. It can be done by submitting an application in Form 13 along with the required documents as prescribed by the department.
Time Limit to Deposit TDS under Section 194J
Once the TDS is deducted from the payment, it must be deposited to the credit of the Central Government within the due date specified in section 139(1) of Income Tax Act. Generally, under Section 194J, for any financial year, TDS is to be deposited on or else before the 7th day of the next month in which tax was deducted.
Frequently Asked Questions
The amount of TDS deducted can be confirmed by obtaining a copy of Form 26AS from the income tax website. It is an important document to verify whether taxes have been paid and will help in understanding the amount of TDS deducted under Section 194J for any particular financial year.
TDS to be deducted under Section 194J is generally 10% for professional fees, technical fees, and royalty payments. However, the rate of TDS applicable on payments made to contractors or subcontractors is 2%. Additionally, lower rates or complete exemptions can also be applied after making an application in Form 13.
Yes, payments made to a model in exchange for the use of their services or intellectual property rights may be subject to TDS deduction under 194J of the Income Tax Act. The TDS rate applicable is 10%. However, lower rates or complete exemptions can also be applied after applying in Form 13.
As per 194J of the Income Tax Act, any person making specified payments such as fees for professional or technical services, royalty payments, and payments to contractors and subcontractors in cash or cheque must deduct TDS at the prescribed rate.
The Section 194J of Income Tax Act covers payments made for professional fees, technical fees, royalty payments, and remuneration/fees or commissions paid to agents. It also covers payments made to contractors and subcontractors. Payers are advised to comply with their TDS obligations under Section 194J to avoid any penalties or legal implications.
Since the director is an employee of the company, Section 194J does not apply to the salary payment. Instead, taxes must be deducted as per the provisions under Section 192 of the Income Tax Act. However, any payments made to directors over and above their salaries, such as fees or commission, will be subject to TDS deduction under Section 194J.
If a person's income qualifies for Sections 192 and 194J, they should file their taxes using ITR-2. This form can be used by individuals having income from salary, single house property, and other sources (including winning from lotteries and racehorses) and have claimed exemption under sections 10 or 11.
No, a stipend is not subject to professional tax under Section 194J. This section only applies to payments made for professional services or technical services, royalty payments, and payments to contractors and subcontractors.
To claim TDS under Section 194J, the payer must deduct taxes at the applicable rate and then deposit it within 7 days of the next month in which the tax has been deducted. The deductor must also file quarterly TDS returns on or before the due date in Form 24Q.