Section 194J – TDS for Professional or Technical Services

Tax deduction at source, or TDS, is one of the many ways through which the Government of India gets tax revenue. Naturally, the Income Tax Act of 1961 contains many provisions that lay the groundwork for TDS collection and remittance. 

One of these provisions is section 194J, which deals with tax deduction at source for professional or technical services. If you regularly avail or provide professional or technical services, you need to be aware of this particular section of the Income Tax Act. Continue reading to get to know all about this unique provision. 

What is Section 194J?

Section 194J of the Income Tax Act, 1961 states that every person or entity, except individuals and Hindu Undivided Families (HUFs), making payments for professional or technical services must deduct TDS at the specified rates and deposit it with the government of India. The provision also states that individuals and HUFs can deduct TDS under this section only if they’re subject to tax audit under section 44AB of the Income Tax Act, 1961. 

However, TDS under section 194J must only be deducted if the payment for technical or professional services exceeds ₹30,000 in a financial year. Furthermore, the 194J limit of ₹30,000 applies separately to technical services and professional services. 

For instance, let’s say that the same individual provides technical services worth ₹25,000 and professional services worth ₹20,000. Although the total value of the combined services exceeds ₹30,000, individually, they’re well within the 194J limit. This effectively means that you don’t need to deduct any tax on either of these services. 

As long as the payments are within the 194J limit of ₹30,000 in a financial year, there’s no need to deduct any tax. 

Types of Payments Covered Under Section 194J

Section 194J of the Income Tax Act, 1961 outlines the nature of payments for which you need to deduct tax at the specified rates at the time of credit. Here’s a quick overview of the list of payments eligible for TDS deduction under section 194J and their respective rate of deduction. 

• Payments for professional services like legal, medical, engineering, architectural and accountancy services
• Payments for technical services and technical consultancy, including website design and software development, among others
• Payments for interior decoration services 
• Payments for advertising services 
• Payments made to call centre operators
• Payments for the distribution or exhibition of cinematographic films
• Royalty payments, including payments for the use of trademarks, patents and copyrights
• All other professional services
• Payments in the nature of non-compete fees
• Remuneration other than salaries paid to the directors of a company

Who Can Deduct TDS under Section 194J?

As per section 194J of the Income Tax Act of 1961, the person or entity availing the technical or professional service is required to deduct TDS at the time of credit or making payment to the service provider. 

The deducted TDS must be deposited with the government of India online or offline through Challan No. 281. Furthermore, the deductor must also provide the deductee a TDS certificate containing the details of the tax deducted at source.

Amendments in TDS Deduction Under Section 194J

Earlier, the rate of TDS deduction for professional and technical services was 10% of the value of the service. However, the Finance Act of 2020 brought in certain amendments regarding the rate of TDS deduction under section 194J. 

According to the latest amendment, the rate of TDS under section 194J for payments made for technical services has been reduced to 2% of the value of the service. However, the rate of TDS for professional services has been retained at 10% of the value of the service. 

Rate of TDS Deduction Under Section 194J of the Income Tax Act, 1961

As a taxpayer, you need to know the rate of TDS deduction under section 194J for various services. Here are the rates currently in existence after the amendments brought in by the Finance Act of 2020. 

Note: The TDS rates mentioned above are applicable only if the PAN of the deductee is furnished. If the deductee hasn’t furnished their PAN details, the rate of TDS deduction under section 194J will be 20%. 

Definition of Professional Services Under Section 194J 

Here’s a list of services that are considered to be professional services under section 194J of the Income Tax Act, 1961. 

• Accountancy services
• Advertising services
• Architectural services
• Authorised representative services
• Company secretary services
• Engineering services
• Interior decoration services
• Legal services
• Medical services
• Notified professions under section 44AA of the Income Tax Act, 1961
• Services provided by film artists, commentators, sportspersons, anchors, event managers, referees, umpires, coaches, physiotherapists, trainers, sports columnists and team physicians 
• Technical consultancy services

Definition of Technical Services Under Section 194J 

Section 194J also defines the phrase ‘technical services’. According to the section, it includes the following:

• Managerial services
• Technical services
• Consultancy services 

However, it doesn’t include payments that are considered salary by the recipient, mining services, construction services, and assembly services. 

Definition of Royalty Payments Under Section 194J 

Royalty payments under section 194J of the Income Tax Act, 1961 include payments for the following:

• Use of patents, designs and inventions
• Usage of a design, patent, invention, trademark or model
• Providing rights to a model, design, invention, trademark or patent
• Providing information related to a patent, formula or invention
• Providing rights to films or videotapes for radio broadcasting, literary work and scientific findings 
• Providing information related to industrial, technical, scientific or commercial knowledge, skill or experience 

Definition of Payments to Contractors and Subcontractors Under Section 194J 

Payments for works contracts made to contractors and subcontractors are covered under section 194J and are taxed at 2% of the value of the service. Works contracts involve the provision of services and transfer of tangible goods for construction, renovation and repairs. 

Consequences of Non-Deduction or Late Payment of TDS Under Section 194J 

Non-deduction or late payment of TDS on eligible professional or technical services carries significant penal provisions under section 194J. Let’s quickly take a look at what the consequences are likely to be: 

• Penalty for Non-Deduction of TDS Under Section 194J 

If TDS under the section has not been deducted, interest at the rate of 1% per month will be levied on the amount that should have been deducted. The interest will be levied until the actual date of deduction of the TDS amount.

• Penalty for Non-Payment of TDS Under Section 194J

If TDS under the section has been deducted but not paid within the stipulated due date, interest at the rate of 1.5% per month will be levied starting from the due date of payment till the actual date of payment. 

• Disallowance of Expenditure for Non-Payment of TDS Under Section 194J 

In the case of deduction but non-payment of TDS under this section, 30% of the value of the service will be disallowed from being claimed as an expenditure. However, the disallowed portion will be re-allowed in the financial year in which you pay the TDS to the government. 

Deduction of TDS at a Lower Rate

Deductees and service providers can submit an application under Form 13 to their assessing officer and obtain a certificate for exemption from TDS or deduction of TDS at a lower rate. If such a certificate is produced, you don’t have to deduct any TDS or must deduct TDS at a lower rate, as the case may be. 

Time Limit to Deposit TDS under Section 194J

The TDS under section 19J you collect each month must be deposited with the government on or before the 7th day of the subsequent month. For instance, if you deduct TDS on the 10th of July, you need to deposit the amount by the 7th of August. 

That said, this time limit applies to all the months except March. So, if you’re deducting TDS in March, the same must be deposited on or before the 30th of March. 

Also Read More About How to File TDS Return?

Conclusion

Section 194J of the Income Tax Act, 1961 was framed with the intention of deducting tax at the source for professional and technical service payments. However, the TDS deduction must be made only by entities other than individuals and HUFs. If you’re a deductor of TDS under section 194J, remember to deposit the collected tax amount with the government on or before the stipulated due date to avoid penalty. 

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