Section 194J of the Income Tax Act ensures timely tax collection by requiring the deduction of Tax Deducted at Source (TDS) on payments made for professional and technical services, royalties, non-compete fees, and director’s remuneration. The section applies to businesses, corporations, or individuals liable for an audit under the Income Tax Act.
Key Payments Covered Under Section 194J
Section 194J mandates TDS deduction on payments for the following services:
- Professional Services (FPS)
- Technical Services (FTS)
- Director’s Remuneration (excluding salary)
- Royalty
- Non-compete fees (NCF)
What Are Professional Services?
Professional services include services from professionals such as:
- Legal, medical, engineering, or architectural experts
- Accountants, technical consultants, interior decorators, or advertisers
- Film artists, including actors, directors, editors, and singers
The CBDT (Central Board of Direct Taxes) has clarified that payments to sportspersons, commentators, referees, anchors, event managers, and related professions are also classified as professional services for TDS purposes under Section 194J.
What Are Technical Services?
Technical services refer to managerial, technical, or consultancy services. Payments made for such services fall under Section 194J unless the services are related to the sale, assembly, or usage of machinery.
Who Needs to Deduct TDS Under Section 194J?
Any person, except individuals or Hindu Undivided Families (HUF), must deduct TDS under Section 194J if:
- The business turnover exceeds ₹1 crore, or
- Gross receipts from a profession exceed ₹50 lakh.
Individual or HUF entities not liable for a tax audit are generally exempt from TDS deduction unless their turnover or gross receipts exceed the above limits.
Threshold Limit for TDS Deduction
TDS under Section 194J is not required if the total payment for professional or technical services is less than ₹30,000 in a financial year. This limit applies separately to each type of payment. For certain cases, Section 194M might apply instead of Section 194J for individuals and HUFs.
TDS Rates Under Section 194J
The applicable TDS rates under Section 194J are:
- 2% for:
- Call center payments
- Fees for technical services (not professional services)
- Royalty payments for the sale, distribution, or exhibition of cinematographic films
- 10% for all other services
When to Deduct TDS?
The TDS deduction should be made at the time of payment or crediting the payee’s account, whichever is earlier.
Penalties for Non-compliance
Failing to deduct TDS or delay in depositing TDS under Section 194J can lead to:
- Interest penalties:
- 1% per month for delayed deduction
- 1.5% for delayed deposit
- Disallowance of expenses: Under Section 40(a)(ia), the Income Tax Act may disallow expenses for non-compliance.
TDS Certificate and Filing of Returns
After deducting TDS, the payer must:
- Issue a TDS certificate (Form 16A) to the payee, detailing the deduction and deposit
- File quarterly TDS returns (Form 26Q) specifying all deductions under Section 194J
Conclusion
Section 194J ensures the efficient collection of taxes on professional and technical services. By adhering to TDS deduction guidelines, timely deposits, and filing returns, businesses can avoid penalties and promote transparency in financial transactions.
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