Tax Deduction at Source (TDS)

For quick and efficient tax collection, the Income Tax Act has incorporated a tax deduction system at the point of income generation. This system is termed “Tax Deducted at Source,” or TDS. Under this method, tax is deducted from the source of income. Tax is deducted by the payer and is remitted to the Government by the payer on behalf of the payee. 

Salary, interest, commission, brokerage, professional fees, royalty, contract payments, and other payments are all included in the requirements for tax deduction at source. In respect of payments to which the TDS provisions apply, the payer has to deduct tax at source on the payments made by him and deposit the tax deducted by him to the credit of the Government.

In today’s article, we will discuss the Tax deducted at Source on Payments to Contractors/professionals by Individuals/HUFs.

What is Section 194M? 

Section 194M of the Income Tax Act mandates that individuals or HUFs deduct TDS if they pay more than ₹50,000 to a resident individual in a fiscal year. This comprises commissions (excluding insurance commissions), brokerage, contractual fees, and professional expenses. This section focuses on individuals and HUFs who are not subject to tax audits. 

Furthermore, it assures TDS compliance for those who do not have to deduct taxes under Sections 194C, 194H, or 194J. Section 194M provides tax accountability for individuals and HUFs who do not meet the standard tax deduction requirements by filling these gaps.

Payment to Contractors/Professional by the Individual /HUF – A Comprehensive Analysis of Section 194M of the Income Tax Act, 1961

Introduction: Section 194M is introduced in Budget 2019, effective September 1, 2019. This provision was introduced to cover those cases where payments are made to resident contractors or professionals by individuals and Hindu Undivided Families (HUFs).

Comprehensive Analysis:

1. Applicability:

• Applicable to Individuals and Hindu Undivided Families (HUFs) who are not covered under tax audit. As a result, sections 194C, 194J, and 194H do not allow for tax deductions.
• Payments to resident contractors for completing any work by the contract.
• Payment by way of fees for professional services.
• Payment about commission (not being commission referred under section 194LD) or brokerage 

2. Threshold Limit:

• Consideration paid/payable exceeds ₹50,00,000 during a financial year.

3. Rate of TDS:

• The Budget 2024, has reduced the TDS rate to 2% w.e.f 01.10.2024. Earlier TDS rate was 5%.

4. Due date of Deduction:

• Tax must be deducted at the time the payee’s account is credited or when the payment is made, whichever comes first.

5. Deposit of TDS and TDS Return:

• There is no need to obtain a TAN to deposit the TDS under this section. The TDS Deducted must be uploaded using Challan-cum-statement Form 26QD within 30 days of the end of the month in which the deduction was effected.

6. The meaning of the Contract will be the same as specified in clause (iii) of Explanation to Section 194C: Contract includes sub-contract

7. “professional services” refers to work done by a person in the legal, medical, engineering, or architectural fields and in accounting, technical consulting, interior design, advertising, or any other field that the Board lists for section 44AA or this section.

8. Commissions or brokerage encompass any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services given (not being professional services) or for any services in the course of buying or selling of goods or about any transaction relating to any asset, valuable article or thing, not being securities;

9. TDS Certificate: Within 15 days of submitting Form 26QD, the deductor must send the payee a TDS certificate (Form 16D).

The steps to furnish the 26QD are as follows;

1. Go to e-File >>E-Pay Tax >> New Payment>> TDS on payment to Resident Contractors and Professionals>> Select the residential status of the deductee. 
2. Furnish the deductor details, there is no need to take the TAN number by the deductor. 
3. Details of the deductee i.e. PAN of the person being deducted, Aadhaar of the payee, Name of the deductee, the type of deductee, the place of residence, phone number, and email address.
4. Add amount etc
5. Final submit and make payment 

The steps to generate the Form 16D are as follows;

1. Login to the traces
2. The taxpayer’s user ID is PAN
3. Navigate to form 16B/16C/16D
4. Select the required details i.e. form type, Assessment year, Acknowledgement number, and PAN of Deductee
5. Download the form 16D
6. The authorized person’s information will appear on the screen. Post that click on submit. 
7. A request number will be generated. Now form 16D can be downloaded from the tab “ downloads”.  

Example: Mr. ABC HUF, a HUF who is not liable for a tax audit, hires a professional for renovation work and pays ₹55,00,000 during the financial year. Since the payment exceeds ₹50,00,000, HUF must deduct TDS under Section 194M at 2% on ₹55,00,000 (i.e., ₹1,10,000 as TDS).

Conclusion:

TDS rates for contractors are important to ensure compliance with the Income Tax Act, especially when payment limits are exceeded. Understanding the rules for taxing contractors is essential to correctly deduct TDS on payments. Managing tax deductions for contractors, particularly for resident contractors, is crucial. Knowing the TDS threshold for contractors helps avoid any complications.

Section 194M simplifies the compliance burden for individuals and HUFs while ensuring that significant payments for contractual and professional services do not go untaxed. It serves as a robust mechanism to promote tax compliance in transactions involving non-business entities.