TDS on payment to resident contractors or professionals under Section 194M

Introduction

In the Finance Bill, 2019, a new Section 194M was introduced to allow individuals or HUFs to deduct taxes on the services they acquire from resident contractors or professionals. Section 194M came into effect on September 1st, 2019. In this blog, we will discuss all TDS on payment to resident contractors or professionals i.e., Section 194M of the Income Tax Act, 1961.

What is Tax Deduction at Source (TDS)?

The TDS stands for tax deducted at source. As per the Income Tax Act, any company or person making a payment is required to deduct tax at source if the payment exceeds certain threshold limits. TDS has to be deducted at the rates prescribed by the tax department.

What is Section 194M?

According to Section 194M, if a person or HUFs uses contractual services or professional services and the total amount paid is more than Rs. 50 lakhs during the particular financial year, the payer has to deduct TDS at 5%. The purpose of adding this section was to make members of HUFs more accountable for their tax compliance and financial accounting.

What are the modes of payment for TDS under section 194M of Income Tax Act, 1961?

The following are the modes of payment for TDS under Section 194M:

A. Payments to resident contractors or professionals of over Rs.50 lakhs

When a person or HUFs makes a payment to resident contractors or professionals for their service and the payable amount is more than Rs. 50 lakhs for the particular financial year, the payer shall deduct TDS at the rate of 5%. The types of payments include:

• Land development
• Construction of Houses
• Marriage expenses such as catering, flower decoration, contracts for transportation
• Event Management expenses
• Advocate fee
• Gardening
• Property maintenance services
• Asset maintenance services
• Harvesting corps
• Payments related to healthcare and hospitals

B. Payments made for parking, and maintenance during the purchase of the house

TDS will be deducted by the concerned payer if the total payable amount is more than Rs. 50 lakhs. The payments include buying a house, car parking fees, advance fees, maintenance fees, club membership fees, and electricity and water fees. Section 194M shows that TDS should be deducted from the payment made to purchase the house.

C. Paying rent of more than Rs. 50 lakhs per month

Tax Deducted at Source can be deducted if the rent paid exceeds Rs. 50 lakhs per month. The TDS shall be deducted at the rate of 5% for the particular financial year. The tenant shall be subjected to a penalty of 1% interest per month if the TDS is not deducted.

Who is not eligible for TDS under Section 194M of Income Tax Act, 1961?

The TDS is not applied to the payments made to:

• The Government
• NRIs
• Non-contract basis services
• Any banking company or a cooperative society engaged in carrying on the business.

When can you deduct tax at source under Section 194M in Income Tax Act, 1961?

The person or HUFs can TDS on payment to resident contractors or professionals, either:

• At the time of credit of the amount or;
• At the time of payment by cash or by the issue of a cheque or draft.

Conclusion

The new insertion of Section 194M in the Income Tax Act, 1961 has made Hindu Undivided Family deduct tax on the payment to resident contractors or professionals. TDS on such payments is 5% with the condition that the payment should be more than Rs. 50 lakhs.