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TDS on Professional fees – Section 194J

TDS-on-Professional-Fees

Introduction 

  • Section 194J of the Income Tax Act, 1961, governs TDS on professional fees or technical fees.
  • It applies to any person other than an individual or a Hindu Undivided Family (HUF) who makes payments to a resident for the professional or technical services.

     Let’s delve into the details:

 

Types of Payments Covered:

    • Professional Fees: These include payments made to professionals such as lawyers, doctors, engineers, architects, chartered accountants, interior decorators, and advertisers.
    • Fees for Technical Services: These encompass services involving technical expertise, technology, and consultancy.
    • Remuneration Paid to Directors (excluding salary): For instance, sitting fees for attending board meetings.
    • Royalty Payments: This includes non-compete fees or fees paid to restrict business activities within specific geographical boundaries.

Meaning of Various Terms:

    • Professional Services: These are services provided by individuals engaged in medical, legal, architectural, engineering, and other notified professions.
    • Technical Services: These involve managerial, technical, and consultancy services provided by humans (not machines or robots).
    • Royalty: Payment for the transfer of rights or usage of inventions, trademarks, patents, etc.

 

Timing of TDS Deduction

The deduction of TDS should occur at the earlier of the following:

  • Credit of the Amount: When the sum is credited to the account of the payee (whether called a suspense account or by any other name) in the books of accounts of the person liable to pay.
  • Actual Payment: When the payment is made in cash, by check, draft, or any other mode.

 

TDS Rates under Section 194J

The applicable rates for TDS are as follows:

  • Fees for Professional Services10%
  • Fees for Technical Services and Payment to Call Centers2% (Note: For fees for technical services, the rate was 10% until FY 19-20)
  • Remuneration or Fees to Directors (other than Section 192)10%
  • Royalty10%
  • Non-Compete Fees10%
  • Royalties Related to Cinematographic Films2% (consideration for sale, distribution, or exhibition of films)

* If the recipient fails to furnish their PAN (Permanent Account Number), TDS is deducted at a higher rate of 20%

Limits of TDS deduction

Under Section 194J of the Income Tax Act, the threshold limit for TDS (Tax Deducted at Source) is ₹30,000 per financial year for each type of payment covered by this section . Here’s what it means:

  1. Professional Fees and Technical Services:
    • If the total amount of payment made to a resident for professional fees or fees for technical services exceeds ₹30,000 in a financial year, TDS must be deducted.
    • This applies separately to each type of payment. For example, if you pay ₹25,000 as fees for technical services and ₹20,000 as professional charges, TDS is not required. But if either of these payments exceeds ₹30,000, TDS becomes mandatory.
  2. Other Covered Payments:
    • The threshold also applies to remuneration paid to directors (excluding salary)royalty payments, and non-compete fees.
    • Non-compete fees refer to payments made to restrict business activities within specific timeframes or geographical boundaries

 

Persons not liable to deduct TDS 

  • In case of an individual or HUF carrying on business: Where turnover does not exceed Rs 1 crore during the previous financial year..
  • In case of an individual or HUF carrying on profession: Where turnover does not exceed Rs 50 lakh during the previous financial year.

To put it simply, all entities (other than individuals/HUF who are not required to do tax audit in the preceding year) need to deduct tax (TDS) while paying fees for professional or technical services.

 

TDS Payment Due Dates:

  • Deposit Timeline: The deductor (the entity making payments) must deposit TDS by the 7th of the next month (from April to February) or by the 30th of April (for March).
  • For example, if TDS is deducted in January, it should be deposited by the 7th of February. However, if TDS is deducted in March, it can be deposited on or before the 30th of April

 

TDS Return Filing:

  • File the TDS return in Form 26Q every quarter.
  • The due dates for filing TDS returns are as follows:
    • July 31st: For the first quarter (April to June)
    • October 31st: For the second quarter (July to September)
    • January 31st: For the third quarter (October to December)
    • May 31st: For the fourth quarter (January to March)

The consequences of not deducting TDS

Let’s explore them:

  1. Interest Liability: In case there is a delay in the payment of tax, interest has to be paid along with the TDS to the Government. The rate of interest is determined in the following manner:
    • Where no deduction of tax has been made: Interest shall be payable at 1% per month/part of month from the date on which such tax was required to be deducted up to the date of actual deduction.
    • Where tax has been deducted but not paid to the government: Interest shall be payable at 1.5% per month/part of month from the date on which such tax was deducted up to the date of payment to the government.
  2. Disallowance of a part of the expenditure: 30% of the expenditure shall be disallowed in the year in which the expenditure is claimed (taken to the profit and loss account) – however, the 30% disallowed shall be re-allowed in the year in which the TDS is paid to the government.

Exclusions:

    • No surcharge, education cess, or SHEC (Secondary and Higher Education Cess) is added to the mentioned rates.
    • TDS is calculated on fees excluding the GST component.
    • Technical services include services provided by humans, not machines or robots.

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