Section 194M

What Is Meaning of ‘Work’, ‘Contract’, and ‘Professional Services’ in Section 194M?

Section 194M borrows meaning from the wider TDS framework, so the terms should be understood in a practical, real-world sense:

‘Work’

• “Work” is broad and commonly includes activities such as:
• construction, renovation, repairs
• event execution, manpower supply
• fabrication, printing, packaging
• routine service contracts where a deliverable is created or executed

If you are paying someone to “get something done” (often involving labour, execution, or delivery), it often falls within the idea of work.

‘Contract’

A contract here doesn’t mean you need a formal legal agreement (though it helps). It simply refers to an arrangement where a person is hired to carry out work or provide a service for a consideration. Even a work order, invoice-based engagement, or email confirmation can reflect a contractual relationship.

‘Professional Services’

Professional services generally refer to services provided by people with specialised knowledge or professional qualification. Common examples include:

• legal services
• chartered accountancy and audit services
• consultancy and advisory services
• architectural and technical services
• medical or similar professional services (where applicable)

A practical way to separate “work” vs “professional services”:

• Work = execution-driven, often labour or deliverable-based
• Professional services = expertise-driven, advisory or specialised services

Purpose of Section 194M

Section 194M was introduced to ensure that substantial payments made by individuals and HUFs are taxed appropriately. Under the previous provisions of Section 194C (contract work), Section 194H (commission or brokerage), and Section 194J (professional services), individuals or HUFs were exempt from TDS obligations if they were not required to undergo a tax audit under Section 44AB. This exemption led to significant payments being made without TDS, resulting in the potential for tax evasion.

By introducing Section 194M, the government has expanded the scope of TDS to cover payments made by individuals and HUFs for contract work, commission, or professional services, ensuring that these payments are subject to TDS and, thereby, proper taxation.

Who Must Deduct TDS under Section 194M?

The responsibility to deduct TDS under Section 194M lies with any individual or HUF making payments to residents for contract work, commission, or professional services. However, the section applies only to those individuals and HUFs who are not already required to deduct TDS under Sections 194C, 194H, or 194J.

The provision specifically targets individuals and HUFs who are engaged in significant transactions but are not subjected to tax audits, thus broadening the TDS base and enhancing compliance.

Types of Payments Covered under Section 194M

Section 194M applies to the following types of payments:

Contract Work (Section 194C): Payments made for carrying out work or supply of labour under a contract. This includes payments to contractors for construction, repair work, or other contractual services.

Commission or Brokerage (Section 194H): Payments made to agents, intermediaries, or service providers for services rendered in the form of commission, brokerage, or any other payment related to business or professional activities.

Professional Services (Section 194J): Payments made for professional services rendered by professionals such as lawyers, doctors, accountants, architects, or consultants. These services are provided in the course of their professional practice.

When to Deduct TDS under Section 194M?

TDS under Section 194M should be deducted at the time of either crediting the payment to the recipient's account or making the payment, whichever occurs earlier. This means that the deduction must happen when the payment is made (via cheque, cash, or any other mode) or when it is credited to the payee's account.

The timing of the deduction is essential as it ensures that tax is deducted at the earliest event, preventing delays in remitting the TDS.

Rate of TDS under Section 194M

The rate of TDS under Section 194M is 5% of the payment amount. However, there was a temporary reduction to 3.75% from May 14, 2020, to March 31, 2021, as part of the government's COVID-19 relief measures. The rate reverted to 5% from April 1, 2021.

This TDS rate is applicable to the entire payment made to the contractor, professional, or agent, not just the portion that exceeds the ₹50 lakh threshold limit.

Due Date For Depositing TDS Under Section 194M

When tax is deducted under Section 194M, the person responsible for the deduction must deposit the TDS with the government and submit a challan-cum-statement in Form 26QD. The filing and payment must generally be completed within 30 days from the end of the month in which the payment was made or the TDS was deducted.

For instance, if a payment subject to TDS under Section 194M is made on 10 July, the deductor must file Form 26QD and deposit the tax on or before 30 August. This timeline ensures that the deducted tax is promptly reported to the Income Tax Department.

It is important to note that individuals or HUFs deducting tax under this section are not required to obtain a TAN (Tax Deduction Account Number). Instead, they can complete the compliance using their PAN while filing Form 26QD.

Failing to deposit the TDS within the prescribed time may result in interest and penalties, so it is advisable to complete the filing soon after the deduction is made.

Threshold Limit for TDS under Section 194M

Section 194M has a threshold limit of ₹50 lakh. This means that TDS will only be applicable if the total payments made to a resident exceed ₹50 lakh in a financial year. If the aggregate payments do not cross this threshold, there is no obligation to deduct TDS under Section 194M.

This provision reduces the compliance burden for smaller transactions and ensures that only larger payments are subjected to TDS, simplifying the process for smaller taxpayers.

Certificate Of Tax Deducted Under Section 194M

After depositing the TDS and filing Form 26QD, the deductor must issue a TDS certificate in Form 16D to the person receiving the payment. This certificate serves as proof that tax has been deducted and deposited with the government.

The certificate must be issued within 15 days from the due date of filing Form 26QD. Once the challan-cum-statement is processed, Form 16D can be downloaded from the TRACES portal and shared with the payee.

For the recipient, this document is important because it allows them to claim credit for the deducted tax while filing their income tax return. The details of the deduction also appear in their Form 26AS or Annual Information Statement, ensuring transparency in tax reporting.

Compliance Requirements under Section 194M

To ensure that TDS is correctly deducted and remitted, individuals and HUFs must comply with the following steps:

Filing of Challan-Cum-Statement: After deducting TDS, the payer must deposit the TDS with the government. This should be done by the 7th of the month following the month in which the TDS was deducted. The payer must also file Form 26QD, which serves as a challan-cum-statement for TDS deducted under Section 194M.

Issuance of TDS Certificate (Form 16D): The payer is required to issue a TDS certificate in Form 16D to the deductee. This certificate should be provided within 15 days from the end of the month in which the tax is deposited.

No TAN Requirement: A notable aspect of Section 194M is that individuals and HUFs who deduct TDS under this section are not required to obtain a Tax Deduction and Collection Account Number (TAN). They can use their PAN to fulfil the TDS obligations.

Example of TDS Calculation under Section 194M

Let’s consider an example to understand the application of Section 194M:

• ₹60 lakh paid for construction work (contractor)
• ₹65 lakh paid for professional services (interior decorator)
• ₹40 lakh paid for painting services

In this case, the individual is required to deduct TDS on the entire ₹60 lakh and ₹65 lakh payments, as they exceed the ₹50 lakh threshold. The calculation will be as follows:

• Construction work (₹60 lakh): TDS = ₹60 lakh × 5% = ₹3,00,000
• Professional services (₹65 lakh): TDS = ₹65 lakh × 5% = ₹3,25,000
• Painting services (₹40 lakh): No TDS, as the amount is below ₹50 lakh.

Conclusion

Section 194M of the Income Tax Act has made it easier for the government to collect taxes on substantial payments made by individuals and HUFs. By requiring TDS on payments for contract work, professional services, and commission, the provision helps reduce tax evasion and ensures that more taxpayers contribute to the country’s revenue.

It is important for individuals and HUFs to understand their obligations under this section to remain compliant and avoid penalties. By adhering to the TDS provisions, they contribute to a more efficient and transparent tax system in India.