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Section 194J

TDS (Tax deduction at source) has been proven to be a very successful method of collecting tax in the country. It has made life easy for both the government and taxpayers. It has helped the government curb the evasion of tax to a certain extent by making it mandatory for all business entities to deduct tax if certain expenses exceed the threshold limit. Moreover, it also ensures the government gets money through the inflow of taxes throughout the year. It also reduces the burden on taxpayers since tax deduction gets split throughout the year and they get credit for tax deducted at source.

Consultant fees or technical fees are one of the most common types of payment made by the business entity. Some of the common types of consultant or professional charges are fees paid to doctor, engineer, consultant, chartered accountant, lawyer, architect, interior decorator, advertiser etc.

Types of payments covered

The different types of payments covered under this section are:

  1. Consultant or Professional fees
  2. Charges or fees for technical services
  3. Fees paid to the directors of the company excluding salary (For e.g., board meeting sitting fees)
  4. Royalty
  5. Non-compete charges or fees (payment made to not operate a specific business or profession for a specific duration of time and within certain geographical boundaries) or fees paid to not share any technical information.

Threshold Limit for Deducting Tax

If the payment is greater than INR 30,000 in a year then tax has to be deducted. However, there is no limit set for payments given to the director of the company. No matter how small the amount is, the tax will need to be deduced before the payment is made to the director.

Persons Liable to Deduct Tax

Every individual, who is giving out the payment in the nature of fees for professional or technical services, is responsible to deduct tax at source with the following exceptions:

  • HUF or Individual operating a business:If the turnover of the business is less than INR 1 crore during the past financial year.

  • HUF or Individual operating a profession : If the turnover of the business is less than INR 50 lakh during the past financial year. In simple words, all entities other than HUF or individuals who are not mandated to carry out the tax audit in the following year need to deduct tax at source.

Key Points in Section 194J on TDS

As per Section 194J, each item or independent payment has a threshold maximum limit of INR 30,000. TDS under this section also applies for the fees or remuneration paid to the company’s director even if the payment is not part of the main salary. In such cases, the INR 30,000 limit does not apply here.

Applying for TDS at a Lower Rate:

As per section 197, the individual who is getting the payment can apply for a reduction of the rate in TDS by filling in form 13 and sending it to the assessing officer.

If the officer approves the form then a certificate mentioning the deduction in the TDS is given to the assessee.

Rate of Deduction of Tax

All payments coming under this section shall be subject to a 10% rate of TDS.

However, with effect from 1st April 2017, tax on the salaries given to the employees of the call centre will be deducted at a reduced rate of 2%. In case the receipt does not give his/her PAN number, the rate of deduction will be increased to 20%.

Time of Deduction

The tax has to be deducted at source at the time of passing the entry in the accounts or when giving the actual payment of the expenditure, whichever comes earlier.

Consequences of Non-Deduction or Late Deduction

Excluded as part of the expenditure

30% of the expenditure shall be excluded in the year in which the expenditure is claimed (taken to the profit and loss account). However, the 30% excluded shall be included in the year in which the TDS is paid to the Income Tax Department.

Interest charged until date of payment

If there is a delay in the tax payment, interest needs to be paid along with the TDS to the Income Tax Department. The rate of interest is will be decided in the following manner:

a. Where there was no deduction of tax was made: Interest needs to pay at 1% per month/part of the month from the date on which such tax was supposed to be paid up to the date of actual deduction.

b. Where tax was deducted but was not paid to the government: Interest needs to be paid at 1.5% per month/part of the month from the date on which such tax was deducted up to the date of payment to the Income Tax Department.

Time limit for payment of tax

Non – Government deductorGovernment deductor
Payment done before 1stMarchSeventh day from the end of the monthSeventh day from the end of the month
Payment done in the month of MarchApril 30thPayment of tax is done on the date of payment to the payee but the corresponding challan is deposited by the seventh day from the end of the month

Frequently Asked Questions

At what moment deduction of TDS is done under section 194J?

Under section 194J, deduction of TDS is done at the time of actual payment of charges or at the time when account of the payee is credited, whichever is earlier.

What is the rate of deduction under Section 194J of the Income Tax Act?

The rate of deduction under Section 194J of the Income Tax Act is 10%. However, if the individual is running the business of a call centre then the rate of deduction is 2%.

Under section 194J if an adverting agency is making payment for a film artist for his/her services, what will be the rate of TDS deduction?

Film artist can be cameraman, director, actor etc. Under Section 194J, the deduction will be done at the rate of 5% (refer Tax circular number 714, dated 3rd August 1995).

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