A complete guide on Section 194J of Income Tax Act: TDS on Professional Fees, TDS on Technical Services and Penalty for not deducting TDS (Tax Deducted at Source)

Introduction

The requirements for Tax Deducted at Source (TDS) on payments made toward fees for various professional and technical services are outlined in Section 194J of the Income Tax Act of 1961. TDS is a part of advance tax deduction, therefore tax under section 194J of Income Tax Act is deducted at the applicable rate before payment for any professional or technical service is completed. In this article information such as TDS on professional fees, TDS on technical services, Due Date for TDS Deposit and Penalty for not deducting TDS is explained.

Section 194J of Income Tax Act

Section 194J of the Income Tax Act of 1961, in particular, lays out the criteria for tax deducted at source (TDS) on a variety of technical and professional services prices. TDS is deducted at the applicable rate as part of the advance tax deduction before payment for any professional or technical service is finished.

Changes made to Section 194J under Income Tax Act:

As part of the Finance Bill 2020, Section 194J of the TDS was changed. These are some of them:

• Fees for technical services (which are not considered professional services) will be subject to a 2 percent tax deduction. In all other circumstances, the rate might be as high as 10%.
• TDS must be deducted by an individual or HUF (Hindu Undivided Family) whose revenue, gross receipts, or turnover from his business or profession exceeds one crore rupees in the case of a business or fifty lakh rupees in the case of a profession during the fiscal year immediately preceding the one in which interest is credited or paid.

Due Date for TDS Deposit

Services that are covered under Section 194J

• TDS on Professional fees
• TDS on Technical Services
• A director’s remuneration, fee, or commission (which is not subject to TDS under section 192)
• Royalty

Payment received (in cash or in any other form) under an agreement for not engaging in any business activity; or not sharing any know-how, copyright, franchise, Trademark,  patent, license, or other business/commercial right of similar nature/ information/ method.

Rate for TDS on Professional fees and TDS on Technical Service

 Penalty for not deducting TDS as per Section 194J

If a person or corporation receiving services forgets to deduct TDS or makes late TDS payments to the government, Section 194J of the Income Tax Act of 1961 details many penalties that can be applied. The following are some of the possible punishments:

• Interest Charged Until Payment

The company or individual must pay the following penalty interest on the due TDS amount if payment is late:

1. If TDS is not deducted, interest at the rate of 1% per month or fraction of a month is imposed from the day TDS was supposed to be deducted until the date TDS was actually deducted.
2. TDS Deducted but Not Deposited to the Government: Interest is charged at 1.5 percent per month or part of a month from the day TDS was deducted until payment to the government.

• Disallowance of a portion of the expenditure

If an individual or organization fails to deduct TDS, 30 percent of their spending for the services obtained for the relevant financial year would be disallowed. In actuality, after deducting and paying TDS to the government on time, a tax assessor can only claim the full tax benefits of expenses.

Situation in which Section 194J is not Applicable

There are a few exceptions to TDS Section 194J, which are stated below:

• If the payment is paid by a single person or by a HUF. However, if the individual or HUF comes under section 44AB(a)/ 44AB(b), the amount is subject to TDS deduction under Section 194J.
• Furthermore, if a contribution is made or credited only for personal purposes, an individual/HUF is not required to pay TDS under section 194J.

Important Note: Section 44AB(a) applied to businesses with a total turnover or gross receipts of more than INR 1 crore in a fiscal year, whereas Section 44AB(b) applied to professionals with a total gross receipts of more than INR 50 lakhs in a fiscal year.

FAQs for Section 194J of Income Tax Act 

1. Are there any Section 194J tax exemptions for TDS?

Yes, TDS is excluded up to Rs. 30,000 per year under Section 194J. However, regardless of the amount paid to the director, the payment must be taxed at the current TDS rate.

2. What is the maximum amount of TDS that can be deducted under Section 194J?

If the payment for professional or technical services covered by this section exceeds Rs 30,000 per year, TDS is needed to be deducted under Section 194J.

3. How can I confirm the amount of tax I have deducted under Section 194J?

TDS facts can be verified by acquiring Form 16 from deductors or using Form 26AS from the TRACES utility or income tax e-filing website.

4. If my income falls under both Sections 192 and 194J, which ITR form should I use?

The income earned under these sections is distributed across a variety of time periods. If the 194J receipt is less than Rs. 50 lakhs, ITR Form 4 can be filed; otherwise, ITR (Income Tax Return) 3.

5. For a paid employee, which ITR should I file for 194J? In the ITR result, where should it be shown?

If any professional services are supplied that are not the assessee’s business and are done on a casual basis, an ITR-1 form.