Tax compliance plays a crucial role in ensuring financial transparency and accountability. For individuals and Hindu Undivided Families (HUFs) making significant payments to contractors or professionals for personal use, Section 194M of the Income Tax Act is a provision worth understanding. Introduced in the Finance Bill of 2019, this section mandates Tax Deducted at Source (TDS) on certain payments, simplifying the process for taxpayers while ensuring compliance.
Whether you are hiring a contractor for home renovation or engaging a professional for personal services, understanding Section 194M can help you avoid penalties and streamline your tax obligations. Let us explore this provision in detail, including its applicability, rates, and compliance requirements.
Budget 2025 update
As of the latest updates in Budget 2025, there have been no changes to Section 194M. The provisions remain the same as outlined in the Finance Bill of 2019. Individuals and HUFs should continue to follow the existing guidelines for TDS deduction under this section.
What is Section 194M?
Section 194M was introduced to bring tax compliance to individuals and HUFs who are not required to deduct TDS under other sections of the Income Tax Act. It applies when payments exceeding Rs. 50 lakh in a financial year are made to resident contractors, professionals, or service providers for personal use.
Unlike businesses, individuals and HUFs often engage contractors or professionals for non-commercial purposes, such as home construction or wedding planning. Section 194M ensures that such high-value transactions are also subject to TDS, promoting accountability in the taxation system.
Reason for introduction of Section 194M
The primary objective of Section 194M is to ensure tax compliance and reduce tax evasion in high-value personal transactions. Before its introduction, individuals and HUFs making significant payments for personal services were not required to deduct TDS, creating a gap in accountability.
By mandating TDS on payments exceeding Rs. 50 lakh, Section 194M:
- Addresses the issue of non-reporting of income by contractors and professionals.
- Encourages individuals and HUFs to contribute to tax compliance.
- Simplifies tax collection for the government.
Nature of payments under Section 194M
Section 194M applies to payments made to resident contractors, professionals, or individuals providing services under a contract. These payments must be for personal use, not business or commercial purposes.
Examples of payments covered:
- Paying Rs. 60 lakh to a contractor for home renovation.
- Engaging a wedding planner for Rs. 55 lakh.
- Paying Rs. 52 lakh to an architect for designing a personal property.
Such transactions fall under the purview of Section 194M if they exceed Rs. 50 lakh in a financial year.
What is the meaning of ‘work’, ‘contract’, and ‘professional services’ in Section 194M?
To understand Section 194M better, let us break down its key terms:
- Work: Refers to activities such as construction, repair, or manufacturing. For instance, hiring a contractor for building a house.
- Contract: Any agreement to perform a specific task or service. For example, signing a contract with a wedding planner.
- Professional services: Services provided by professionals such as architects, lawyers, or consultants. For instance, paying an architect to design your home.
These definitions ensure that all relevant personal transactions are covered under Section 194M.
Who has to deduct TDS under Section 194M?
Section 194M is applicable to:
- Individuals or HUFs making payments exceeding Rs. 50 lakh in a financial year.
- Those who are not required to deduct TDS under any other section of the Income Tax Act.
This means that if you are an individual or HUF not engaged in business or profession requiring tax audit, but you make high-value payments for personal use, you must deduct TDS under Section 194M.
Time of deduction under Section 194M
TDS under Section 194M must be deducted:
- At the time of credit of the payment to the contractor or professional.
- Or at the time of payment, whichever is earlier.
This ensures that the tax is deducted promptly, reducing the risk of non-compliance.
Rate of TDS under Section 194M
The rate of TDS under Section 194M is 5% on payments exceeding Rs. 50 lakh in a financial year.
Key points to note:
- Threshold: No TDS is deducted if the payment is Rs. 50 lakh or less.
- Applicability: The 5% rate applies only to the amount exceeding Rs. 50 lakh.
For example:
- If you pay Rs. 55 lakh to a contractor, TDS is deducted on Rs. 5 lakh (the amount exceeding Rs. 50 lakh).
Due date for depositing TDS under Section 194M
After deducting TDS, you must deposit it with the government by the following deadlines:
- For payments made in March: Deposit by 30th April.
- For other months: Deposit within 30 days from the end of the month in which TDS is deducted.
It is crucial to adhere to these timelines to avoid penalties or interest for late deposits.
Certificate of tax deducted under Section 194M
Once TDS is deducted, you must issue a TDS certificate (Form 16D) to the recipient of the payment.
Steps to obtain the certificate:
- File Form 26QD within 30 days from the end of the month in which TDS was deducted.
- Download Form 16D from the TRACES portal after filing Form 26QD.
This certificate serves as proof of TDS deduction, ensuring transparency for both parties.
Some important points
Here are a few key considerations under Section 194M:
- No TAN required: Individuals or HUFs deducting TDS under Section 194M are not required to obtain a TAN (Tax Deduction and Collection Account Number).
- Applicability: Section 194M does not apply to individuals or HUFs whose accounts are subject to tax audit under Section 44AB.
- Threshold clarity: The Rs. 50 lakh limit applies to aggregate payments made during the financial year.
Conclusion
Section 194M simplifies tax compliance for individuals and HUFs making high-value payments to contractors and professionals for personal use. By understanding its provisions, such as the 5% TDS rate, Rs. 50 lakh threshold, and timely filing requirements, you can ensure compliance and avoid penalties.
