Section 194M of Income Tax Act

Generally, individuals and HUFs are required to comply with TDS provisions only if their gross receipts in a year are more than ₹1 crore or ₹50,00,000 lakhs, respectively.  However, with the introduction of section 194 M, individuals and HUFs whose gross receipts are not more than the aforesaid amount are also required to comply with TDS.

Section 194 M TDS was coined to introduce TDS on the payment made to resident individuals for carrying out services under a contract consisting of labour supply or professional services. 

This section is applicable when an amount is paid to resident individuals for TDS on construction services or contractual work or when a commission or brokerage is paid to them exceeding ₹50,00,000.

However, the provisions of this section are not applicable to those individuals and HUFs who are deducting TDS under other sections, such as 194 C, 194H, or 194J, where their gross receipts are more than ₹1 crore or ₹50,00,000.

•  Payments Included Under TDS On Contractor Section

In light of section 194 M, it is crucial to know the payments that attract the provisions of TDS for an individual and HUF. The payment made by an individual or HUF must be in connection with:

1. Contract
2. Work
3. Commission or Brokerage
4. Professional Services

As per the provisions of section 194 M TDS, payment must be made to a resident individual for carrying out work which is agreed under a contract or by way of fees for offering professional services or by way of commission.

Let us understand the meaning of each term for TDS under section 194 M.

• Work- For TDS, the term includes:
• Catering services
• Providing advertising services 
• Carriage/transport services for passengers and goods by any means other than railways.
• Broadcasting services, telecasting services and program production for telecasting or broadcasting.

Manufacturing a product as per the customer’s specifications, using the materials provided by the customers. However, it does not include the production or manufacture of a product using materials purchased from a person other than the customer.Professional Services: The meaning of professional services provided by an individual or HUF and carrying out work for personal purposes includes the following:

• Fees paid for technical services
• Fees paid for professional services
• Royalty payment
• A fee, commission, or remuneration paid to the director of a company (not liable to TDS u/s 192).

Any fee paid for not carrying out the business or profession, also known as non-compete fees.Commission: All payments made to individuals and HUFs as commission. However, it does not include insurance commissions.

• Contracts: TDS on contractor limit will have the same meaning as section 194C clause (iii).

The liability of deducting TDS for the purpose of section 194 M is on the individual or HUF who makes the payment to a resident for carrying the work under contract, as professional services, commission brokerage, etc.

The responsibility of deducting tax at source for the purpose of section 194 M of the Income Tax Act lies with the individual or HUF who makes the payment to a resident for supplying professional services or labour under a contract. The payment made by an individual or HUF must exceed ₹50,00,000 in a financial year.

Even if the contract came into effect before 1^st September 2019, the payment will be subject to TDS if the payment is made after the said date and the total amount exceeds ₹50,00,000. It is essential to mention that those persons who are liable to deduct TDS under sections 194C, 194H, or 194J are exempt from TDS under 194M. Besides, such persons can deposit the TDS using their PAN and are not required to obtain a TAN.  

As per the 2019 budget, individuals and HUFs are required to deduct tax at source from the payments made to resident contractors when they render services, as mentioned above. An important aspect of TDS is the time when the taxes must be deducted. 

TDS for section 194 M must be deducted earlier of the following:

1. The time of crediting the amount
2. The time of payment (when a cheque or draft is issued)

The provisions of section 194 M of the Income Tax Act state that the TDS on payments made to resident individuals must be deducted at 5%. However, if the service provider/individual does not furnish his PAN card, TDS must be deducted at 20%.

Let us understand these provisions with the help of an example.

Example: Mr A contracts with Mr B on 1.03.2024 for broadcasting services for ₹60,00,000. The payment for the services is made by crediting the amount on 30.06.2024 to Mr B’s account. In this case, TDS under section 194 M at 5% will be deducted when the payment is credited to the account, which is on 30.06.2024. It is essential to note that the TDS will be accounted for AY 2024-25 and not 2023-24, as it is credited after March 2024.

The provisions of deducting TDS under section 194 M are applicable only when the payment made to contractors or service providers exceeds ₹50,00,000 in a financial year. To make the process simpler, individuals or HUFs can deposit the TDS using the PAN and they do not need to obtain a TAN.

Here is an example that demonstrates the application of the provisions of section 194 M of the Income Tax Act in real life.

Example 1: Consider an example where an individual or HUF pays ₹70,00,000 to a works contractor for building construction. However, this payment is not subject to TDS under section 194 C as the gross turnover of the individuals or HUF is not more than 1 crore or 50 lakhs. Thus, this payment will come under the purview of section 194 M for the purpose of TDS.

Example 2: Mr Yadav, a salaried employee, acquires a piece of land. He pays ₹80,00,000 for construction, ₹35,00,000 for interior decoration and ₹ 15,00,000 for other works. What is Mr Yadav's TDS liability as per section 194 M? 

The following table illustrates Mr Yadav's TDS liability.

* Since the amount paid is less than ₹50,00,000, no TDS will be deducted.

• Due Date for Depositing TDS Deducted u/s 194 M

The TDS deducted by an individual or HUF from the payment made under section 194 M must be deposited into the account of the Central Government within the due date prescribed as per the income tax provisions.

According to Rule 30 (2C), any amount deducted as TDS under section 194 M must be deposited into the Central Government’s account within 30 days from the end of the month in which the TDS was deducted. The TDS must be accompanied by the challan-cum statement in form 26QD.

Let us consider an example to understand the due date for depositing TDS u/s 194M.

Example: Ms Asha deducted TDS u/s 194 M on 12 November 2024 from the payment made to a contractor for carrying out works as specified in the contract. The due date for depositing this TDS is 30 days from the end of November, which is 30 December 2024.

However, it is important to note that the deductor can deposit the TDS anytime before the due date. In the above example, Ms Asha may deposit the TDS anytime before 30 December 2024.

• Mode of TDS Deposit 

The Income Tax Act also provides the mode in which one must deposit the TDS u/s 194 M. As per the provisions, TDS under section 194 M must be deposited electronically into the Central Government’s account. 

It means the TDS amount should be transferred using online/internet banking or a debit/credit card. One can deposit the TDS using challan-cum-statement in form 26QD through the NSDL web portal.

•  Issuing TDS Certificate to the Deductee 

After deducting the TDS and depositing it with the Central Government, the deductor is required to provide the deductee with a TDS certificate in Form 16D. The certificate must be issued to the deductee within 15 days from the due date of TDS in form 26QD.

Continuing the example of Ms Asha above, the due date for the TDS statement in Form 26QD was 30 December 2024. Thus, the due date for issuing the TDS certificate to the deducted is 15 January 2025. However, the deductor may issue the certificate anytime before the due date.

To sum it up, the following is the procedure for TDS under section 194 M:

• Tax deduction
• Tax deposit by the deductor
• Filing of Form 26 QD.
• Downloading for 16D from the Traces website
• Issuing the TDS certificate to the deductee.

The deductor is responsible for depositing the TDS within the due dates prescribed by the income tax rules. However, if, for any reason, the deductor does not deposit the TDS within the timelines, he may face the following consequences:

1. Fee payment for delay in depositing TDS
2. Penalty for failure to answer the questions, furnish returns or statements, etc.

•  Fee For Delay in TDS Deposit 

As per the rules, if a deductor fails to deposit the TDS under section 194 M within the due date mentioned, he will be charged with a fee for the same. As per section 234 E, any delay in the TDS deposit will attract a fee payment of ₹200 per day, till the date of actual TDS deposit. The fee is payable from the due date up til the date on which the tax was actually paid. 

The following table will explain the interest on delay for TDS deposit u/s 194 M.

Thus, the total amount to be deposited will be ₹3,06,291 through the challan.

1. The provision of section 194 M is not applicable to non-resident individuals.
2. One can submit a lower TDS certificate under this section.
3. The government has provided flexibility in depositing the TDS by using the PAN instead of the TAN. Thus, individuals and HUFs can deposit the TDS with the government using PAN.
4. The applicability of this section came into force on 1^st September 2019.
5. If a contract is made before 1^st September 2019, but the payment is made after 1^st September 2019, the provisions of section 194 M TDS rate will apply to the transaction.

Section 194 M of the Income Tax Act clearly specifies the provisions of TDS on payments made by individuals and HUFs for services under contracts or professional services, etc,. TDS will be applicable only if the payment is more than ₹50,00,000 and the gross receipts of the individual or HUF are not more than ₹1 crore or ₹50 lakhs.

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