The Income Tax Act imposes TDS on professional and technical services under Section 194J. Companies (except individuals and Hindu undivided families) are required to deduct tax when making payments for certain specific services to residents. The objective of Tax Deducted at Source (TDS) is to ensure that tax is collected at the time of payment, thereby providing stable revenue to the government.

By deducting TDS on business services, both the payer and the service provider share the obligation to pay tax and make timely payments. Understanding Section 194J is essential for businesses and professionals since incorrect TDS deductions or deposits can result in penalties and interest costs. 

The service sector contains a variety of services, such as professional fees, technical help, royalties, and payments to directors. This blog will address TDS on services, including rates, restrictions, and services under section 194J.

Section 194J of the Income Tax Act

Section 194J requires the deduction of TDS on professional or technical services where payment exceeds Rs. 30,000 in a fiscal year. TDS rates differ according to the type of service, ranging from 2% for technical services to 10% for professional services. For non-compliance, penalties and interest are imposed.

For non-resident Indians, TDS on technical services is deducted at 20% under Section 195.

Types of Payments Covered

Section 194J applies to the following payments made to residents:

• Professional services
• Technical services
• Director remuneration (excluding salary)
• Royalty payments
• Non-compete fees

Definition of Professional and Technical Services

The scope of services covered under Section 194J is wide-ranging and includes both professional and technical services.

Professional Services

The term “professional services” refers to services rendered by individuals who have specialized knowledge or skills in their respective fields. The services covered include:

• Legal services
• Medical services
• Accountancy services
• Engineering services
• Architectural services
• Interior decoration
• Technical consultancy
• Advertising services
• Services are offered by sportspersons, coaches, event managers, commentators, umpires, and more.

This category includes all services that demand specialized knowledge and professional understanding.

Technical Services

Technical services include management, technical, or consulting services. These services often demand special technical knowledge, expertise, or skills. Technical services are defined as not including the following:

• Managerial services
• Consultancy services
• Any technical personnel services

In both situations, the payer is responsible for deducting TDS and submitting it to the government within a specific time range.

Other Payments Covered:

Royalty: Payments for the use or transfer of intellectual property, patents, trademarks, or any similar rights fall under royalty. This includes payment for the use of formulas, inventions, and scientific discoveries, but excludes payments for motion pictures.

Non-Compete Fees: Any payment provided to an individual to refrain from practicing a particular profession or conducting a specific company is considered non-compete. These are subject to TDS under Section 194J.

Persons Liable to Deduct TDS

Anyone making payments for professional or technical services must deduct TDS. Individuals and Hindu Undivided Families (HUFs) are excluded unless they had a tax audit under Section 44AB in the previous year. Businesses, LLPs, and firms must deduct TDS on all payments, regardless of the amount.

TDS on Professional Services Rate

The applicable rates under Section 194J are as follows:

Threshold Limits for TDS Deduction

TDS must be deducted if payments for professional or technical services exceed Rs. 30,000 annually. However, each type of payment, such as royalties or professional fees, has a unique Rs. 30,000 limit.

For example, if a company pays Rs. 20,000 in technical fees and Rs. 25,000 in royalties, TDS does not apply because neither payment exceeds the threshold. However, director payments are liable to TDS without a threshold limit.

TDS Deduction and Deposit Timeline

TDS must be deducted at the moment of payment or credit, whichever occurs first. The deadline to submit TDS is as follows:

• Payments paid before March 1 are due by the seventh of the following month.
• Payments made in March are due by April 30 for non-government deductors.

Penalties for Non-Compliance

Noncompliance with TDS on services may result in many fines, including:

1. Disallowance of expenses: If TDS is not deducted, payment-related expenses may be rejected for determining taxable income.
2. Interest is imposed at 1% per month for late deductions and 1.5% per month for late payments.
3. Penalties: Failure to deduct or deposit TDS may result in a penalty equivalent to the TDS amount.
4. Prosecution: Persistent noncompliance could result in imprisonment ranging from 3 months to 7 years.

Examples

Example 1: Professional Services

Mr. A, who is subject to a tax audit, hires Mr. B for professional services in the financial year 2023–2024. He pays Rs 50,000 in April and Rs 20,000 in December. Since the total payment exceeds Rs 30,000, TDS should be deducted at the rate of 10% on both payments.

Example 2: Non-Compete Fee

A company pays a non-compete fee of Rs 5 lakh to a professional to prevent him from operating in a particular business. Since it falls under professional services, the company has to deduct TDS at the rate of 10% before making the payment.

Exceptions and Special Considerations

• If payments are made for personal use by individuals or HUFs not subject to a tax audit, TDS on professional services does not apply.
• Payments to non-residents are governed by Section 195.
• TDS is not applicable if total payments in a financial year do not exceed Rs. 30,000.

The Central Board of Direct Taxes (CBDT) has clarified that routine maintenance contracts are subject to TDS under Section 194C rather than Section 194J unless technical information is transferred.

Conclusion

Understanding TDS on professional services is extremely important for both businesses and professionals. By following this, financial operations run smoothly and penalties are avoided. It is important to know the correct rates, limits, and dates of deposit of TDS when paying for legal advice, consultancy, or technical services to ensure tax compliance.