Section 194J - TDS for Professional or Technical Services

Introduction

Section 194J of the Income Tax Act, 1961, deals with the deduction of tax at source (TDS) for professional or technical services. This section applies to payments made to professionals or technical service providers, such as architects, engineers, lawyers, and chartered accountants, for rendering services in India.

Under Section 194J, the person making the payment is required to deduct TDS at the rate of 10% if the total amount payable during a financial year exceeds Rs. 25,000. However, if the payment is made to a government or a local authority, the TDS rate is 20%.

The TDS under Section 194J is required to be deducted at the time of payment or credit of amount in a bank account, whichever is earlier. The deductor is also required to issue a TDS certificate (Form 16A) to the payee within 15 days of deducting TDS.

It’s essential for both the deductor and payee to keep proper records and maintain documentation related to TDS under Section 194J. Failure to do so may result in penalties and interest charges.

Types of Payments in 194J

According to Section 194J of the Income Tax Act, the types of payments that are subject to tax deduction at source (TDS) are:

Professional fees: These are the fees paid for services provided by a person who carries on medical, legal, architectural, engineering, accountancy, advertising, interior decoration, technical consultancy or any other notified profession.
Technical fees: These are the fees paid for services that involve technical, managerial or consultancy expertise.
Royalty: This is the payment made for the transfer or usage of any intellectual property rights, such as patents, trademarks, designs, inventions, etc..
Non-compete fees: These are the fees paid to a person for not carrying on any business or profession in a specified area or time, or for not sharing any technical knowledge or know-how¹ ².
Remuneration or fees to directors: These are the payments made to a director of a company, other than salary, such as sitting fees, commission, etc..

The rate of TDS varies depending on the nature of the payment, as shown in the table below:

Payment type	Threshold limit	TDS rate
Professional fees	Rs. 30,000	10%
Technical fees and payment to call centers	Rs. 30,000	2%
Royalty (except for cinematographic films)	Rs. 30,000	10%
Royalty (for cinematographic films)	Rs. 30,000	2%
Non-compete fees	Rs. 30,000	10%
Remuneration or fees to directors	NIL	10%

Amendments in TDS Section 194J

Section 194J of the Income Tax Act deals with the deduction of tax at source (TDS) for payments made to residents for professional or technical services, royalty, or non-compete fees. The Finance Act of 2020 has introduced some changes in this section, which are as follows:

The rate of TDS for fees for technical services (other than professional services) has been reduced from 10% to 2%, to align it with the rate of TDS for works contract under section 194C.
The rate of TDS for other payments covered under section 194J, such as professional services, royalty, or non-compete fees, remains unchanged at 10%.
The threshold limit for deducting TDS under section 194J has been increased from Rs. 30,000 to Rs. 50,000 per financial year for payments made to a resident individual or a Hindu Undivided Family (HUF) who is engaged only in the business of operation of call center.
The rate of TDS for payments made to a resident individual or a HUF exceeding Rs. 50 lakhs per financial year for carrying on any business or profession, other than the above-mentioned call center business, has been reduced from 10% to 5%.

Who Can Deduct TDS under Section 194J?

Any person or entity making payments for professional or technical services to a resident individual or a Hindu Undivided Family (HUF) is required to deduct TDS under Section 194J of the Income Tax Act, 1961. This includes individuals, companies, partnership firms, and government agencies. However, if the payment is made to a company or a firm that is liable to pay income tax under the Act, TDS is not required to be deducted under Section 194J. Instead, such entities are required to pay self-assessed taxes based on their income.

Section 194J of Income Tax Act TDS rate

Under Section 194J of the Income Tax Act, 1961, the rate of TDS for professional or technical services is 10% if the total amount payable during a financial year exceeds Rs. 25,000. However, if the payment is made to a government or a local authority, the TDS rate is 20%. This means that the deductor is required to deduct TDS at the applicable rate and pay it to the government on behalf of the payee. The deductor is also required to issue a TDS certificate (Form 16A) to the payee within 15 days of deducting TDS.

Payments that are Protected by Section 194J

Section 194J of the Income Tax Act, 1961, deals with the deduction of tax at source (TDS) from payments made to residents for professional or technical services, royalty, remuneration to directors, or non-compete fees. The types of payments that are protected by Section 194J are:

Professional fees: These are the fees paid for services rendered by a person who carries on a medical, legal, engineering, architectural, accountancy, advertising, or any other notified profession. The rate of TDS is 10%.
Fees for technical services: These are the fees paid for services that involve technical, managerial, or consultancy expertise. The rate of TDS is 2% (10% up to FY 2019-20).
Royalty: This is the payment made for the transfer of rights or usage of an invention, trademark, patent, design, model, etc. The rate of TDS is 10%, except for royalty in the nature of consideration for sale, distribution, or exhibition of cinematographic films, which is 2%.
Remuneration to directors: This is the payment made to a director of a company, other than salary, such as sitting fees, commission, etc. The rate of TDS is 10%.
Non-compete fees: These are the fees paid to a person for not carrying on any business or profession in competition with the payer, or for not sharing any technical knowledge or know-how. The rate of TDS is 10%.

Professional services

Section 194J is a provision introduced in the Income Tax Act, 1961 by the Finance Act, 2013. It mandates deduction of tax at source (TDS) on payments made to contractors for carrying out construction work exceeding Rs. 30 lakh in a financial year. The rate of TDS is 1% of the total amount payable to the contractor, excluding GST and cess. This provision aims to curb tax evasion and ensure compliance with income tax laws in the construction sector.

How to Download Form 16?

Section 194J of the Income Tax Act, 1961 is specifically related to deduction of tax at source (TDS) on payments made to contractors for carrying out construction work exceeding Rs. 30 lakh in a financial year. It does not cover payments made for technical services.

Technical services are defined under Section 9(1)(zg) of the Income Tax Act, 1961, and include services provided in connection with:

– Engineering, design, architecture, interior decoration, and supervision of construction, completion, repair, maintenance, renovation, or alteration of a building or structure;
– Consultancy services in the fields of science, engineering, technology, or management;
– Rendering of services by an architect or interior decorator;
– Services by a technical or scientific expert or specialist or a consultant or advisor in any scientific, technical, or other specialized field;
– Services provided by an advocate in connection with any arbitration proceedings; and
– Services provided by a legal practitioner for providing any legal service.

Applying for TDS at a Lower Rate

As per Section 194J of the Income Tax Act, 1961, the rate of TDS on payments made to contractors for construction work is 1% of the total amount payable, excluding GST and cess. However, if the contractor provides a declaration in Form 13, stating that his annual income from such contracts is likely to be less than Rs. 30 lakh during the financial year, the deductor can apply for TDS at a lower rate.

The lower rate of TDS is 0.7% of the total amount payable, excluding GST and cess. The deductor should obtain a copy of the declaration from the contractor and quote it in the TDS statement while making the payment. The deductor should also file an annual return in Form 26QC, declaring the details of TDS deducted under Section 194J, along with Form 13 provided by the contractor.

It is essential to note that the lower rate of TDS will be applicable only for the financial year for which the declaration is provided by the contractor. If the annual income of the contractor exceeds Rs. 30 lakh during any subsequent financial year, he will be liable to pay self-assessment tax on such income, and there will be no TDS liability on payments made to him during that financial year.