Section 194J of the Income Tax Act

  • Author :
  • TATA AIG Team
  • Published on :
  • 03/01/2024

The Indian Taxation System is intricate and provides rules and regulations for taxpayers to comply with. Section 194J of the Income Tax Act in India addresses the process of tax deductions at source concerning payments for professional or technical services.

This provision mandates that the individual or entity making such a payment deducts a specified tax percentage before transferring the amount to the sender.

The onus of deducting TDS and remitting it to the government within the stipulated time frame lies with the person or the entity making the payment. The deducted TDS amount is then attributed to the recipient's income tax account, allowing them to claim credit while filing income tax returns.

The purpose of this blog is to ensure that you stay updated regarding the latest developments and provide you with a detailed overview of section 194J within the TDS framework.

What Does Section 194J of the Income Tax Act Provide?

Section 194J in the Income Tax Act, 1961 states that any entity, excluding individuals or Hindu Undivided families, making payments to a resident for professional or technical services must deduct TDS at either 10% or 2% of the payment credited.

It must depend on the nature of the services rendered. Failure by the payee to furnish their PAN information to the deductor results in TDS being deducted at a higher rate of 20%.

Payment Covered Under Section 194J

There are three types of payment on which TDS is deducted under section 194J of the Income Tax Act, as explained below:

Professional Services

Professional services usually encompass offerings from professionals such as lawyers, doctors, accountants, or architects.

It includes services like:

Medical services

Accountancy or Technical consultancy services

Interior Decoration Services

Legal Services

Engineering Services

Advertising services, etc.

The list of services also includes film artists, event managers, commentators, anchors, sportspersons, umpires, and professionals like company secretaries, authorised representatives, referees, physiotherapists, coaches and trainers, and team physicians under Section 194J and Section 44AA.

Technical Services

As defined in Section 194J, technical services include payment, whether a lump sum or other, made to provide managerial or consultancy services. However, this definition excludes payments for construction, assembly, mining, or similar projects undertaken by the recipient.

TDS on technical services does not include payments that would be considered the person’s income falling under the “salary” category.

Royalty

Royalty fees also fall within the scope of TDS under section 194J. In this context, royalty payments include various types of transactions, including:

Conveying legal ownership of patents, models, copyrights, and similar assets.

Utilising these related intellectual properties.

Revealing information about patents, discoveries, and formulas.

Granting authorisation for the use of this intellectual property for educational and commercial purposes.

Transferring rights related to literature, scientific findings, and others.

Tax Deduction Rate Under Section 194J of Income Tax Act

Under section 194J, the tax deduction rates stand as follows:

2% TDS on service charges or royalties linked to the sale, distribution, or showcasing of intellectual properties would be deducted. It excludes professional fees.

TDS on the Professional fee limit is ₹50,000, and above that, a TDS of 10% is deducted.

For a payee solely involved in operating a call centre business, the source deduction is a 2% 194J TDS rate.

Time and Due Date of TDS Payment Under Section 194J

Particulars Rate of TDS (with PAN) Rate of TDS (without PAN)
Payment to a resident  0.1 0.2
Payment to a business running a call centre 0.02 0.2
TDS on Professional Fees 0.1 0.2
Type Payment Before 1st March Payment Made in March
From non-government office Settled by the 7th day of the month's end 30th April
From government office Settled by the 7th day of the month's end Tax payments for technical fees or income tax on professional fees are processed on the pay date to the recipient. However, the challan is deposited by the 7th day from the end of March.

TDS Mechanism Under Section 194J

The person who makes the payment is responsible for deducting TDS beforehand and has to deposit it to the government within the provided time limit. The amount of TDS deducted is then credited to the assessee's tax payable account, which he can use to pay the tax liability. Simply put, the service provider or payment receiver can claim TDS credit while filing their Income Tax Return.

Under Section 194J, the following steps are necessary:

Receive a Tax Deduction and a Tax Collection Account Number (TAN).

Deduct Tax Deducted at Source (TDS) at the rate set by law.

Pay the deducted TDS to the government by the 7th of the following month.

File TDS returns every quarter using Form 26Q.

Who is Liable to Pay TDS Under Section 194J

Every individual engaging in professional or technical services must pay a deduction at the source. Nevertheless, the obligation to deduct TDS on the payments does not apply to the following:

Hindu Undivided Family (HUF) or individuals engaged in business if their turnover in the previous fiscal year did not exceed ₹1 Crore.

Hindu Undivided Family (HUF) or individuals engaged in a profession of their turnover in the previous fiscal year did not exceed ₹50 Lakhs.

Who is Required to Deduct TDS Under Section 194J

Anyone obligated to disburse the subsequent payments to a resident, excluding an employee or Hindu Undivided Family (HUF). They must undertake Tax deduction at source by Section 194J for the following cases:

Any compensations, fees, commissions, or other designations provided to a corporation director. It excludes payments under section 192 or those categorised as royalty.

Fees associated with non-competition as specified in section 28.

Charges for specialised and engineering assistance, whenever applicable.

Example of TDS Compliance as per 194J of Income Tax Act

Let us understand the TDS compliance as per 194J using a simple example:

Ram Enterprises, a company, hired a professional services firm and agreed to a fee of ₹1,00,000 for availing their services.

As per section 196J, Ram Enterprises must deduct the service charge TDS rate at 10% as it is a payment for professional services.

Ram Enterprises will pay ₹90,000 to the professional services firm after deducting ₹10,000 from their fees for ₹1,00,000.

Ram Enterprises is responsible for depositing ₹10,000 to the government’s account and filing the required TDS return.

Inapplicability of Sec 194J of Income Tax Act

There are situations where TDS Section 194J does not apply:

When an individual or a Hindu Undivided Family (HUF) makes the payment, unless they are covered under specific tax audit sections (44AB(a) or 44AB(b)), in which case they must deduct TDS as per Section 194J.

If an individual or HUF is making or crediting the payment only for personal reasons, they do not need to deduct TDS under Section 194J.

Consequences of Late Deduction/Non-Deduction of TDS

In case of failure in payment of TDS or deducting it late, it may lead to the following consequences:

You will have to pay Interest: If you deduct the TDS, you will have to pay an interest of 1% per month/part of the month will have to be paid. If you deducted TDS but were not paid to the government, an interest of 1.5% per month/part of the month will have to be paid.

Expenses will not be considered for deduction: In case you did not make the deduction of TDS within the stipulated time, you will not be allowed to claim certain deductions from this PGPB income.

Applying for TDS at a Lower rate

Section 197 has a provision that receiving payment can apply for the deduction of the TDS rate, but filling out a form called “Form 13.”

Then, this form needs to be submitted to the assessing officer. If the officer approves, they will issue a certificate that can be used to pay TDS at a reduced rate.

Conclusion

Dealing with tax laws is significant. For section 194J, remember if you are making payments for any professional services above the given limit, you would have to deduct the TDS before payment and deposit it using the 26Q form with the Income tax department.

Since we all can have the requirement of professional or technical services at one or the other time, it is essential to have an understanding of TDS section 194J of Income Tax purpose to make an informed decision and comply with the provisions of the law.

Tax Benefits with Tata AIG Under Section 80D

While considering the health insurance tax benefit, the Income Tax Act, Section 80D, mainly focuses on the deductions allowed on premiums paid by the assessee on health insurance policy.

₹50,000 per year for senior citizens and ₹25,000 for other individuals, or the amount spent, whichever is lower, can be deducted from gross total income before tax calculation.

With tax benefits on health insurance in India, one can safeguard one’s health while availing tax benefits.

At Tata AIG, we provide mediclaim insurance at a very affordable cost with add-on facilities per your requirements. Remember to keep the tax benefits documents when buying the medical insurance policy.

Disclaimer / TnC

Your policy is subjected to terms and conditions & inclusions and exclusions mentioned in your policy wording. Please go through the documents carefully.

Related Articles

Tata AIG Also Offers Insurance for the below products

Health Insurance

Two Wheeler Insurance

Car Insurance

Travel Insurance

scrollToTop