Section 194J of Income Tax Act

Section 194J of the Income Tax Act deals with tax deductions for payments made for professional and technical services. It requires a tax deduction of 2%, 10%, or 20% (varies based on the service type) if the payment exceeds Rs. 30,000 in a financial year. However, this rate becomes 20% if the recipient of payment fails to provide their PAN number.

In cases of non-compliance, that is, if TDS is not deducted, the expense is not allowed as a deduction while calculating taxable income. Additionally, interest is charged for not deducting or not depositing the deducted tax on time.

Let’s check out some key provisions of Section 194J, understand its applicability, and explore the various TDS rates. Also, we will study the latest amendments and comprehend what happens when you don’t deduct TDS as stated in this section.

What is section 194J under the Income Tax Act?

Section 194J of the Income Tax Act requires any assessee [except individuals and Hindu Undivided Families(HUFs)] to deduct a certain percentage of tax at source (TDS) from the payments made for:

• Professional services like legal, medical, engineering, architectural services, etc.

• Technical, managerial, or consultancy services.

• The use of patents, trademarks, etc.

• Non-compete fees, which ensure an individual or an entity does not compete in a particular business.

As an exception, individuals or Hindu Undivided Families (HUFs) with a business or professional income exceeding the limits specified under section 44AB in the previous financial year are also required to deduct TDS under this section.

The usual rate of TDS is 10% of the payment amount. However, for certain technical services, the rate is 2%. The applicable rate is 20% if the recipient fails to furnish their PAN number.

Also, when it comes to technical services provided by non-residents, the TDS rate is generally higher at 20%. It is worth mentioning that such payments are covered under Section 195 instead of Section 194J.

Moreover, the obligation to deduct TDS falls on the individual making the payment. They must:

• Deduct the appropriate amount of tax, and

• Deposit it with the government within the specified timeframe

This deducted TDS is then credited to the recipient's income tax account. After this, the recipient can claim this credited TDS when filing their income tax return.

Also read: 44AD of Income Tax Act

Payments covered under Section 194J

Section 194J covers several types of payments made to residents. These payments require tax deduction at the source (TDS). Let’s have a look at various types of payments:

• Professional fees: Payments made for services provided by professionals such as architects, lawyers, engineers, doctors, accountants, and others.

• Technical services: Payments for technical, managerial, or consultancy services. This includes services related to the transfer of, development, and use of technical knowledge or information.

• Director’s fees: Payments made to directors as fees, remuneration, or commission, excluding their salary. For example, the sitting fees paid to directors for participating in the scheduled board meetings.

• Royalty: Any sum of money paid for the use of or the right to use trademarks, patents, designs, or other intellectual property.

• Non-compete fees: Payments made to someone to not engage in a certain business or profession for a specified period and within certain geographical limits. It can also include fees paid to ensure someone does not share specific technical knowledge or know-how.

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Who is required to deduct TDS u/s 194J?

Section 194J of the Income Tax Act specifies that any person making payments for professional or technical services to a resident must deduct TDS. Generally, individuals and HUFs are not required to deduct TDS under this section. However, if they are liable to audit under Section 44AB of the Income Tax Act in the previous financial year, they must also deduct TDS.

Additionally, the following entities must deduct TDS under Section 194J:

• Central or state government bodies.

• Municipal corporations or other local governing bodies.

• Government or private corporations.

• Both public and private companies.

• Societies registered under cooperative laws.

• Public or private trusts.

• Universities and educational institutions.

• Societies registered under the Societies Registration Act.

• Partnerships or limited liability partnerships.

• Those individuals or HUFs whose accounts are required to be audited under Section 44AB due to their income levels

Also read: Section 140A of Income Tax Act

Amendments in TDS Section 194J

As per the latest amendments for payments related to specialised services (not considered skilled professional services), the TDS rate is 2%. For all other types of payments covered under Section 194J, the TDS rate is 10%.

Also, individuals and Hindu Undivided Families (HUFs) have to deduct TDS under Section 194J, if their turnover during the previous financial year:

• From business exceeded Rs. 1 crore, or

• From their profession exceeded Rs. 50 lakh

If Section 44AB is applicable, the monetary caps (limits for audit) as specified in the section will be used to determine if TDS needs to be deducted.

It must be noted that Section 194C covers TDS on payments made for "work". This term includes various types of services and contracts. However, there has been some confusion because there is no clear rule stating that payments covered under Section 194J (professional or technical services) should not be considered "work" under Section 194C (payment to contractors).

As a result, some taxpayers used to incorrectly apply the TDS provisions of Section 194C when they should have used Section 194J.

To address this issue, a new change is proposed in the Budget 2024. This change explicitly states that payments under Section 194J are not considered "work" under Section 194C.

Therefore, from October 1, 2024, any sum covered under Section 194J must be taxed according to Section 194J, not Section 194C. This change aims to clarify the TDS provisions and prevent incorrect tax deductions.

Also read: 234B of Income Tax Act

Section 194J of the Income Tax Act TDS rate

Section 194J specifies different TDS rates applicable to various types of payments under Section 194J. Let’s check them out in the table below:

Type of service	TDS rate under Section 194J
Royalty for sales, distribution, or exhibition of cinematographic films	10%
Fees for technical services (not including professional services or royalties related to cinematographic films)	2%
Fees for professional services	10%
Payments to call centers	2%
When the payee does not provide a PAN	20%

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Payments that are protected by Section 194J

Section 194J cover payments exceeding Rs. 30,000 made for professional and technical services, non-compete fees, and royalties. It also includes specific cases like medical services in hospitals, professional fees to publicity companies, and payments to management and HR consulting firms.

For a comprehensive understanding, let’s check out the various payments protected by Section 194J in detail:

Professional services

Services provided by professionals in fields like architecture, advertising, medicine, professional consulting, accounting, civil engineering, interior design, and other occupations recognised by the Board under Section 44AA.

Technical services

Managerial services, consulting, or technological services provided by an individual.

However, it does not include services related to mining, assemblies, or manufacturing as those fall under different income categories.

Non-compete fees

Payments made in cash or kind to prevent someone from sharing or using patents, know-how, licenses, trademarks, or business rights. Also, it covers any amount paid for engaging in certain business activities.

Royalty

Payments for the transfer of ownership or use of algorithms, patents, copyrights, blueprints, inventions, concepts, formulas, trademarks, or any other kind of intellectual property.

Specific cases

The income tax department's various case laws and circulars specify that TDS under Section 194J also applies to:

• Payments for medical services provided in hospitals.

• Payments made to publicity companies by film artists.

• Fees paid to firms providing management or human resources consulting.

• Fees paid by companies to registrars for data exchange services.

Also read: 234C of Income Tax Act

Consequences of non-deduction or late deduction

If you don’t deduct TDS or deposit the deducted TDS within the stipulated time, you face several penalties, such as disallowance of the related expenditure and interest charges. Let’s understand the various consequences in detail:

Disallowance of expenditure

If TDS is not deducted as stated under Section 194J, 30% of the expenditure on which TDS should have been deducted will be disallowed as a business expense when calculating your taxable income for that year.

This disallowed expenditure (30%) will be allowed as a deduction only in the year when the TDS is finally deducted and paid to the income tax authorities.

Interest on deduction failure

Non-compliance with Section 194J also attracts an interest charge, which is calculated at the rate of 1% per month or part of a month. The calculation period begins from the date TDS was supposed to be deducted and runs until the actual date of deduction.

Also read: Income Tax Return Extended Date for FY 2024-25

Conclusion

Section 194J of the Income Tax Act mandates tax deductions at source (TDS) in respect of payments made for professional and technical services exceeding Rs. 30,000 in a financial year. Generally, the TDS rate is 10%, but it varies based on the type of service, with technical services requiring a 2% deduction. However, this rate is set at 20% if the recipient of payment does not supply their PAN number.

It is essential to note that compliance with Section 194J is important as non-deduction or late deduction results in the disallowance of expenses and interest charges. Furthermore, some recent amendments have expanded the scope of Section 194J by covering individuals and HUFs who are required to get their accounts audited under Section 44AB.

Some common examples of payments covered under Section 194J include professional fees, technical services, director’s fees, royalties, and non-compete fees.

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