If you are a business owner or a professional making payments to other professionals or technical experts, understanding Section 194J of the Income Tax Act, 1961 is essential.
This section governs the deduction of Tax Deducted at Source (TDS) from such payments made to residents. Missteps in compliance can lead to penalties, so it’s important to stay informed.
By the end of this guide, you’ll have a clear understanding of Section 194J, its implications for your business, and practical tips to ensure compliance.
What is Section 194J?
Section 194J applies to payments made by any person (except individuals or Hindu Undivided Families not covered under tax audit) to residents for specific services, including:
- Professional services
- Technical services
- Royalty
- Non-compete fees (as specified under Section 28(VA))
These payments are subject to TDS, regardless of the mode of payment—cash, cheque, or electronic transfer.
What are the types of Payments Covered under Section 194J?
1. Professional Services
Services rendered by professionals in fields such as legal, medical, engineering, architecture, accountancy, interior decoration, and other notified professions fall under this category.
Notified professions include:
- Authorized representatives
- Film artists (including directors, editors, and musicians)
- Company secretaries
- Sports professionals (players, coaches, and associations)
- Event managers and fashion designers
2. Technical Services
These include managerial, technical, or consultancy services such as:
- Software development
- Digital marketing
- Quality control and testing
- Training and advisory services
3. Royalty
Royalty payments include:
- Rights transfer for patents, trademarks, and copyrights
- Use of industrial, commercial, or scientific equipment
- Access to technical knowledge and expertise
4. Non-Compete Fees
Payments made to prevent a person or entity from competing in business or profession are categorized as non-compete fees.
What are the Rates and Thresholds for Deducting TDS under Section 194J?
The rates and thresholds for deducting TDS under Section 194J are as follows:
- For fees for professional services, technical services, royalty, and non-compete fees, the rate of TDS is 10%.
- For fees for technical services in the nature of royalty, the rate of TDS is 2%.
- The threshold for deducting TDS under Section 194J is Rs. 30,000 per financial year for each type of payment. This means that if the total amount of payment made to a resident for any type of payment covered under Section 194J exceeds Rs. 30,000 in a financial year, TDS has to be deducted.
- The rate of TDS is subject to surcharge and cess, as applicable, depending on the status and income of the deductee (the person receiving the payment).
- The rate of TDS is also subject to the provisions of the Double Taxation Avoidance Agreement (DTAA), if any, between India and the country of residence of the deductee.
When and How to Deduct TDS under Section 194J:
Timing:
- Deduct TDS when payment is credited or made, whichever comes earlier.
Deposit Timeline:
- Deposit TDS by the 7th of the following month for payments made between April and February.
- For March payments, deposit TDS by April 30th.
TDS Return Filing:
- File quarterly TDS returns using Form 26Q by the following due dates:
- Q1: July 31st
- Q2: October 31st
- Q3: January 31st
- Q4: May 31st
TDS Certificate Issuance:
- Issue Form 16A quarterly by:
- August 15th, November 15th, February 15th, and June 15th for respective quarters.
How to Apply for a Lower Rate of TDS under Section 194J?
The deductee can apply for a lower rate of TDS under Section 197 if he/she satisfies the following conditions:
- The deductee has filed the income tax return for the previous year.
- The deductee has paid the tax due on the income declared in the return.
- The deductee estimates that the tax liability for the current year will be lower than the TDS amount.
The deductee has to make an application in Form 13 to the Assessing Officer (AO), along with the following documents:
- A copy of the PAN card.
- A copy of the income tax return for the previous year.
- A copy of the computation of income and tax liability for the current year.
- A copy of the TDS certificates received for the current year.
- A copy of the invoices or agreements for the payments covered under Section 194J.
- Any other relevant documents or information.
The person in charge (AO) will review your request and papers. If everything seems genuine, they might give you a certificate for a lower TDS rate under Section 197. This certificate will mention the new rate, the TDS amount, the deductor's details, and how long it's valid.
You need to give this certificate to the deductor. They will then deduct TDS at the specified rate in the certificate, not the usual rate.
What are the Consequences of Non-compliance with Section 194J?
Failure to Deduct or Deposit TDS:
- Interest:
- 1% per month for delay in deduction.
- 1.5% per month for delay in deposit.
Penalties:
- Equal to the TDS amount under Sections 271C and 271CA.
Prosecution:
- Imprisonment (3 months to 7 years) under Sections 276B and 276BB.
Failure to File TDS Returns or Issue Certificates:
- Late Filing Fee: Rs. 200 per day, capped at the total TDS amount.
- Penalty: Rs. 10,000 to Rs. 1,00,000 under Section 271H.
- Prosecution: Imprisonment (3 months to 7 years) under Section 276CC.
Tips and Best Practices to Comply with Section 194J
Follow these tips to comply with Section 194J and avoid mistakes or penalties:
- Verify PAN and residential status of recipients before payments. 2 .Deduct TDS at the correct rate and deposit it promptly.
- File accurate TDS returns and issue certificates on time.
- Maintain detailed records of all payments and deductions.
- Use accounting software to automate TDS compliance and reduce errors.
- If eligible, apply for a lower TDS rate to avoid excess deductions.
Also Read: TDS on Purchase of Goods: Understanding Section 194Q and Its Implications
Frequently Asked Questions
1. Are individuals required to deduct TDS under Section 194J?
No, unless they are covered under tax audit provisions.
2. Is TDS applicable if the annual payment doesn’t exceed Rs. 30,000?
No, TDS is not required for payments below this threshold.
3. Can TDS be refunded if deducted in excess?
Yes, the recipient can claim a refund while filing their income tax return.
Understanding Section 194J is important for smooth business operations and avoiding legal hassles.
By following the outlined steps and best practices, you can ensure compliance and focus on growing your business. Keep yourself updated on tax laws to stay ahead!
