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Section 194J: TDS on Fees for Professional & Technical Service

Section 194J mandates TDS on payments for professional or technical services, royalty, non-compete fees, and directors' fees to ensure advance tax collection.

  • 7,438 Views | Updated on: Aug 02, 2024

Ensuring timely collection of taxes is crucial for a healthy economy. Section 194J of the Income

It serves as a pivotal mechanism for the deduction of tax at source (TDS) on a variety of payments. It helps collect taxes upfront, preventing delays and ensuring a steady flow of revenue for the government.

What is Section 194J under the Income Tax Act?

Section 194J of the Income Tax Act mandates Tax Deducted at Source (TDS) on payments made for professional or technical services, royalties, non-compete fees, and fees for services rendered by directors. This ensures taxes are collected in advance from payments made for such specified services.

Who is Required to Deduct TDS Under Section 194J?

Any person under Section 194J (excluding individuals and Hindu Undivided Families (HUFs) not subject to tax audit under Section 44AB) who makes payments for technical services, royalty, non-compete fees, and professional or directors’ fees is required to deduct TDS. This generally encompasses businesses, companies, and firms.

Which Services are Covered under Section 194J?

Section 194J covers the following services for TDS deduction:

  • Professional Services: Services rendered by professionals such as doctors, lawyers, accountants, engineers, architects, consultants, etc.
  • Technical Services: Services related to technical or consultancy work.
  • Royalty: Payments for the use of intellectual property, patents, trademarks, etc.
  • Non-compete Fees: Payments for not engaging in a particular business or profession.
  • Directors’ Fees: Any remuneration or fees paid to a company director.

Types of Payments Covered Under Section 194J

Under Section 194J, four main types of payments are covered. These can also be called the services covered under Section 194J. Let us take a quick look:

Professional Fees

Professional fees under Section 194J include payments made to professionals such as doctors, lawyers, engineers, accountants, architects, consultants, and interior decorators for their services.

Technical Service Fees

Technical service fees refer to payments for managerial, technical, or consultancy services, including services related to software development, engineering, and technical support.

Royalty

Royalty payments covered under Section 194J include payments for the transfer of rights or use of intellectual property such as patents, trademarks, copyrights, designs, and similar assets.

Payments such as Non-Compete Clauses

Payments made under non-compete clauses are covered, which involve compensation paid to individuals or entities to refrain from engaging in a similar business or profession for a specified period.

Tax Deduction Rates

An individual must deduct TDS at the rate of 10% when the following payments to a resident exceed ₹30,000 in a fiscal year:

  • Fees charged for professional services
  • Fees charged for technical services
  • Non-compete fees as per Section 28(VA) of the Income Tax Act
  • Royalty payments
  • Remuneration paid to directors, excluding salary

Consequences of Non-Deduction or Late Deduction of TDS

The consequences of non-deduction or late deduction of TDS under Section 194J can include the following:

Interest Payment

Interest is charged at 1% per month or part thereof from the date on which TDS was supposed to be deducted until the date of actual deduction.

Penalty

A penalty can be levied under Section 271C of the Income Tax Act, which is equal to the amount of TDS that was not deducted or deducted but not paid.

Disallowance of Expenses

If TDS is not deducted or paid late, the expenditure on which TDS was required may be disallowed when computing the deductor’s income.

Legal Consequences

Non-compliance can lead to legal proceedings and other consequences as per the provisions of the Income Tax Act.

What is the Time Limit to Deposit TDS u/s 194J?

The time limit to deposit TDS under Section 194J of the Income Tax Act is as follows:

Payment Type

Non-Government Deductors

Government Deductors

Payment made before 1st March

Deposit by the 7th day from the end of the month

Deposit by the 7th day from the end of the month

Payment done in March

Deposit by April 30th

Tax payment is made on the date of professional or technical fees to the payee. However, the corresponding challan is deposited by the 7th day from the end of March.

What is the Time Limit to File TDS Return u/s 194J?

The time limit to file a TDS return under Section 194J of the Income Tax Act is as follows:

Type of Deductor

Time Limit for Filing TDS Return

Government Deductor

Quarterly on or before the 15th day of the month following the quarter-end.

Non-Government Deductor

Quarterly on or before the 31st day of July for Q1, 31st day of October for Q2, 31st day of January for Q3, and 31st day of May for Q4.

Government deductors must file their TDS returns quarterly by the 15th day of the month following the quarter-end. Non-government deductors are required to file quarterly TDS returns by specific due dates depending on the quarter.

Example of TDS on Professional Fees and Technical Services

A 10% TDS applies to payments made to residents for professional or technical services if the total payment in a financial year exceeds ₹30,000.

Here are some examples of professional fees attracting TDS (if exceeding ₹30,000):

  • Doctor’s consultation fees
  • Lawyer’s fees
  • Chartered accountant’s fees
  • Architect’s fees
  • Consultant’s fees

Examples of technical services attracting TDS (if exceeding ₹30,000):

  • Engineering services
  • Designing services
  • Maintenance services (technical in nature)
  • Repair services (technical in nature)

Tax Act plays a vital role in this process in India. This section mandates tax deduction at source (TDS) on payments made for various professional and technical services.

Key Takeaways

  • Any entity making payments for specified services under Section 194J must deduct TDS, excluding individuals and HUFs not liable for tax audit under Section 44AB.
  • It covers professional services (e.g., doctors, lawyers), technical services (e.g., software development), royalty, and non-compete fees.
  • Section 194J TDS rate is 10% on payments exceeding ₹30,000 in a fiscal year for the services covered under this section.
  • Interest at 1% per month, penalty under Section 271C, disallowance of expenses, and potential legal actions for non-compliance can be faced in case of non-deduction.

Summing Up

Understanding Section 194J is essential for businesses making payments and professionals receiving them. Both parties contribute to a robust tax system by adhering to the TDS guidelines. Following these regulations avoids penalties and legal consequences and fosters a transparent and accountable financial environment.

FAQs on Section 194J

1

What is Section 194J of the Income Tax Act?

Section 194J of the Income Tax Act mandates the deduction of tax at source (TDS) on fees for professional or technical services, royalties, and non-compete fees.

2

What is the rate of TDS under Section 194J?

The rate of TDS under Section 194J is generally 10%, but for payments to call centers, it is reduced to 2%.

3

Who is liable to deduct TDS under Section 194J?

Any person (other than individuals and HUFs not covered under tax audit) making payments for professional or technical services, royalties, or non-compete fees is liable to deduct TDS under Section 194J.

4

Are there any exemptions or thresholds under Section 194J?

Yes, TDS under Section 194J is not required if the total amount paid or credited does not exceed ₹30,000 in a financial year.

5

What are the compliance requirements for deductors under Section 194J?

Deductors must obtain a TAN, deduct TDS at the specified rates, deposit the deducted TDS with the government within the due dates, and file quarterly TDS returns.

6

Where can I find more information or assistance regarding Section 194J?

More information can be found on the official Income Tax Department website or by consulting a tax professional or advisor.

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.