"Demystifying Section 194J: A Comprehensive Guide to TDS on Professional and Technical Services with Real-Life Examples"

Section 194J – Professional or Technical Services: A Reader-Friendly Guide with Real-Life Examples Meghana Dayananda

1. Who Needs to Deduct TDS under Section 194J?

- Q: Do individuals or Hindu Undivided Families (HUFs) without audit requirements need to worry about TDS under Section 194J?

- A: No, individuals or HUFs without audit requirements in the previous financial year are exempt from TDS obligations when making payments for professional or technical services.

Example: Sarah, a freelance graphic designer, does not undergo audits. She does not need to worry about TDS under Section 194J for the payments she receives for her design services.

1.2 Individuals and HUFs with Audit Requirements (Section 44AB a/b):

- Q: What if individuals or HUFs are subject to audit under Section 44AB a/b?

- A: If audit requirements are applicable, TDS must be deducted when making payments for professional or technical services.

Example: Raj, a consultant with a successful practice, undergoes audit as per Section 44AB. He is required to deduct TDS when making payments for the technical consultancy services he avails.

1.3 Entities Like Government, Corporation, Trust, Company etc.:

- Q: Are there entities obligated to deduct TDS regardless of audit requirements?

- A: Yes, entities such as Central or State Government, Local Authority, Corporation, Company, Cooperative Society, Trust, University, Registered Society, and Firm must deduct TDS under Section 194J for professional or technical services to residents, irrespective of audit requirements.

Example: XYZ Corporation, a tech company, must deduct TDS when paying fees for technical services to external consultants, even if the company is not subject to audit.

2. Which Services Fall Under Section 194J?

- Q: What types of services are covered by Section 194J?

- A: Services covered include fees for professional services, fees for technical services, remuneration or fee or commission to a director (not liable to TDS u/s 192), royalty, and non-compete fees.

Example: ABC Productions, a film production company, must deduct TDS when making royalty payments to a music composer for the use of their compositions in the company's films.

3. What is the Threshold for Tax Deduction?

- Q: When is tax deduction required for professional and technical services?

- A: Tax must be deducted if the payment for such services exceeds Rs 30,000 during the year. This limit applies independently to each item or payment. No threshold limit exists for payments made to a director by the company; tax must be deducted regardless of the amount.

Example: XYZ Company pays a legal consultant Rs 25,000 for drafting contracts and an additional Rs 35,000 for legal opinions during the year. TDS is applicable in this case.

4. What are the Rates and Times of Tax Deduction under Section 194J?

4.1 Rates of Tax Deduction:

- Q: What are the TDS rates under Section 194J?

- A:

- 2% for fees for technical services (excluding professional services) or royalty related to the sale, distribution, or exhibition of cinematographic films.

- 10% for other cases involving professional services.

- 2% if the payee is exclusively involved in operating a call center.

- 20% if the payee does not furnish their PAN.

Example: XYZ Call Center, exclusively involved in operating call center services, deducts TDS at a reduced rate of 2% when making payments for technical services.

4.2 Time of Deduction:

- Q: When should TDS be deducted under Section 194J?

- A: The deduction should occur at the earlier of:

- The credit of income to the payee's account (entry in books of accounts).

- Actual payment (in cash, cheque, draft, or other modes).

Example: ABC Consultancy credits the fee for a completed project to the consultant's account. TDS should be deducted at this point, irrespective of the actual payment date.

5. Payment to Director:

- Q: How does Section 194J apply to payments made to directors?

- A: Remuneration or fee or commission to a director (which is not liable to TDS u/s 192) falls under Section 194J.

Example: XYZ Company pays an annual remuneration of Rs 10000 to its director for strategic advisory services. TDS is applicable at the specified rate under Section 194J on this payment to the director irrespective of thresh hold limit.