The tax deduction at source (aka TDS) has been rather beneficial in tax collections in the country by covering the source of income itself. It is helpful to both the taxpayers and the Government. From the government viewpoint, TDS helps in controlling tax evasion to a significant extent by placing the liability on most working entities to make tax deductions in respect of certain expenses as per the provision of the Act. Moreover, it maintains the seamless inflow of taxes for the government throughout the year. In this write-up, we will talk about Section 194J under IT Act- All You Needs to Know.
Significance of TDS from Taxpayer’s Viewpoint
For taxpayers, TDS is a way to unloading the burden of addressing tax liabilities during the filing of income tax returns. That is because they avail credit against taxes deducted at source. Professional fees or fees for technical services are a common type of expense for businesses operating in India.
Some examples of professional fees included fees paid to the doctor, CA, engineer, advertisers, architect, interior decorators, accountant, etc. Technical services usually include a rendering of technical, managerial, and consultancy services. The payments to residents fall under the regime of section 194J.
Read our article:What is TDS Payment Due Date through Challan?
Types of Payments Encompassed under Section 194J
The types of payment to Indian nationals encompassed under this section are as follows:-
- Professional fees
- Fees applicable to technical services
- Remuneration paid to officials (directors) excluding salary (For example, setting fees to make an appearance in the board meetings)
- Payments in the form of non-complete fees (i.e., fees paid against professional activities that are incomplete in nature for a specified time & within certain geographical boundaries) or fees paid against negligible sharing of technical knowledge.
Threshold Limit Applicable to the Tax Deduction
Tax must be deducted in case the payment is higher than Rs 30,000 during a certain financial year. But, there is no such limit applies to the payment made to a director. The tax deduction must be made regardless of the sum of the amount.
Every individual who is paying a certain amount as a fee for professional or technical services is obligated to make tax deduction at the source with the given exceptions:-
- In case of a person or HUF conducting a business: Where the turnover limit does not surpass Rs 1 crore during the preceding financial year.
- In case of a person or HUF pursuing a profession: Where the turnover does not surpass INR 50 Lakh during the preceding financial year.
In general, all entities (other than person/HUF who are not obligated to conduct a tax audit in the preceding year) need to make a tax deduction.
Rate of Tax Deduction under Section 194J
Fees for professional or technical services:-
Any payment that falls under this section is subject to TDS @ 10%. From April 1st, 2020, the tax authority decided to impose a TDS @ 2% on the payment fees related to technical services. However, w.e.f. 01.04.2017, Authority opted to impose a reduced rate of 2% as a TDS on payments made to operators of call centers. In case the payee fails to provide his/her PAN detail, the deduction rate would be 20%.
The tax deduction should be done at the time of making the actual payment of the expense or passing such entry in the accounts, whichever earlier.
Consequences of Late Deduction or Non-Deduction
Non-deduction of tax or late filing has a two-fold consequence:-
1: Disallowance of a Part Related to the Expenditure
- 30% of the expenditure shall be disallowed in the financial year in which the claim for the same is availed (taken to the P&L account).
- On the contrary, the 30% disallowed shall be re-allowed in the financial year in which the TDS is paid to the Central Government.
2. Imposition of Interest until the Payment Date
In case of delayed tax payment, interest has to be paid in addition to the TDS to the Government. The interest rate is estimated on the given way:-
- Where Tax has not be Deducted: – The interest @ 1%/month shall be applicable from the date on which such tax was supposed to be deducted up to the date of actual deduction.
- Where Deducted Tax has not been Remitted to the Government: – Interest shall be imposed @ 1.5%/month from the date on which the tax deduction was done up to the date of payment to the central Government.
Prescribed Timeline for Paying Taxes Under Section 194J
|Payment||Non – Govt. Deductor||Govt. Deductor|
|Payment is made before 1st March||7th day from the end of the month||7th day from the end of the month|
|Payment is made in March||April 30th||Tax payment is made on the payment date to the payee; but the corresponding challan should is furnished by the 7th day from the end of the month|
It is not easy for the individual to keep track of TDS as the deductions are collected on a continual basis. The deductor grants a TDS certificate to the payee as per section 203 of the IT Act. Banks also grant such certificates for deductions on pension payments, etc. The certificate is legitimate only if it is granted at the deductor’s letterhead. Everyone should seek a TDS certificate whenever it is applicable.
The amount deducted in the form of TDS depends on the amount you earn. TDS is applicable to the prevailing income source. Both the taxpayers and the Government avail several benefits from TDS. When you pay via cash, credit card, or cheque, a certain tax amount is deducted, which is submitted to the central agencies. If you have a string of queries related to section 194J, don’t hesitate to share the same with us. We would be glad to hear from you.
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