Section 194J – TDS on Professional or Technical Fees

Introduction:

Section 194J of the Income Tax Act deals with the tax deduction at source (TDS) on certain professional or technical services. In this article, we will understand the detailed analysis of payments made to professionals such as lawyers, accountants, doctors, technical experts, and others. 

Legal provisions:

 (1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying a resident any sum by way of—

(a) fees for professional services, or

(b) fees for technical services, or

(ba) any remuneration or fees or commission by whatever name called, other than those on which tax is deductible under section 192, to a director of a company, or

(c) royalty, or

(d) any sum referred to in clause (a) of section 28,

shall, at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to two percent of such sum in case of fees for technical services (not being professional services), or royalty where such royalty is like consideration for sale, distribution or exhibition of cinematographic films and ten percent of such sum in other cases, as income-tax on income comprised therein :

Provided that no deduction shall be made under this section—

(A) from any sums as aforesaid credited or paid before the 1st day of July 1995; or

(B) where the amount of such sum or, as the case may be, the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year by the aforesaid person to the account of, or to, the payee, does not exceed—

(i) thirty thousand rupees, in the case of fees for professional services referred to in clause (a), or

(ii) thirty thousand rupees, in the case of fees for technical services referred to in clause (b), or

(iii) thirty thousand rupees, in the case of royalty referred to in clause (c), or

(iv) thirty thousand rupees, in the case of the sum referred to in clause (d) :

Provided further that an individual or a Hindu undivided family, whose total sales, gross receipts, or turnover from the business or profession carried on by him exceed one crore rupees in case of business or fifty lakh rupees in case of the profession during the financial year immediately preceding the financial year in which such sum by way of fees for professional services or technical services is credited or paid, shall be liable to deduct income-tax under this section :

Provided also that no individual or a Hindu undivided family referred to in the second proviso shall be liable to deduct income tax on the sum by way of fees for professional services in case such sum is credited or paid exclusively for personal purposes of such individual or any member of Hindu undivided family:

Provided also that the provisions of this section shall have the effect, as if for the words “ten percent”, the words “two percent” had been substituted in the case of a payee, engaged only in the business of operation of a call center.

Explanation.—For this section,—

(a) “professional services” means services rendered by a person in the course of carrying on legal, medical, engineering, or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board for section 44AA or of this section;

(b) “fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;

(ba) “royalty” shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;

(c) where any sum referred to in subsection (1) is credited to any account, whether called “suspense account” or by any other name, in the books of account of the person liable to pay such sum, such crediting shall be deemed to be the credit of such sum to the account of the payee and the provisions of this section shall apply accordingly.

Analysis:

Section 194J requires any person responsible for making a payment to a resident (individual, company, or firm) for the following services to deduct TDS:

1. Professional Services: Payments made to professionals like doctors, lawyers, architects, accountants, etc.
2. Technical Services: Payments made for services involving specialized knowledge in fields such as engineering, software, or IT consulting.
3. Royalty: Payments made for the use of intellectual property, such as patents, trademarks, copyrights, or know-how.
4. Fees for Technical Services (FTS): This includes services provided by a technician or expert in a specific technical field.
5. Call Centre Services: Payments to call centers or telemarketing service

Rate of TDS &Threshold for deduction of TDS

*In certain cases, if the payee does not provide their PAN, the TDS Rate can be increased to 20%.

Time for Deduction

TDS is deducted at the time of payment or credit, whichever is earlier. For example, if payment is made to a service provider, TDS is deducted at that point. If the payment is credited to the payee’s account, TDS is deducted when it is credited.

Non-applicability of TDS provisions under section 194J 

An individual or a Hindu undivided family is not liable to deduct tax at source. However, an individual or HUF, whose total sales, gross receipts, or turnover from business or profession carried by him exceeds ` 1 crore in case of business or` 50 lacs in case of profession in the financial year immediately preceding the financial year in which the fees for professional services or fees for technical services is credited or paid is required to deduct tax on such fee. 

Frequently Asked Questions for TDS under Section 194J

Question 1: While deducting the TDS whether GST or any other taxes will be included or excluded?

Clarification: TDS will be deducted on the basic amount exclusive of GST or any other taxes.

Question 2: TDS is applicable on the payment made for personal purposes by Individual/HUF?

Clarification: No, TDS would not be applicable on the payment made for personal purposes by Individual/HUF.  

Question 3:  Does the Stipend come under Professional Tax 194J?

Clarification: No, the stipend does not come under this section but It’ comes under sec 192. 

Question 4: What are the consequences for non-deduction/payment of TDS or non-filing of TDS return?

Clarification: 

• Disallowance of expenditure under section 40(a)(a) of the Act. 
• Interest u/s 201(1A) 1% per month for non-deduction and 1.5% for non-payment.
• Late fees u/s 234E for non-filing of TDS statement 200 per day during which default continues.
• Penalty for non-payment of TDS or non-filing of TDS return.
• Prosecution in some specified cases.