Introduction
When looking into your personal or business finances in India, familiarising yourself with specific Income Tax Act tax provisions (like Section 194M) is important to ensure compliance and prevent surprises. Section 194M was introduced by the 2019 Union Budget and was intended to deduct tax at source on certain high-value payments made by individuals and Hindu Undivided Families (HUFs) to prevent future tax leakages.
What is Section 194M?
You may be asking yourself, What is Section 194M? As an individual or HUF, it means that you deduct Tax Deducted at Source (TDS)on payments to resident contractors, professionals, or for commissions when the total exceeds a specific threshold in a financial year. In principle, there were no TDS requirements on receipts unless these were linked to businesses that had also been audited; this flaw in the legislation allowed room for evasion. Section 194M closes that gap by covering substantial transactions without requiring you to be under tax audit obligations.
Applicability of Section 194M
Section 194M applies to you if you make payments over ₹50 lakh in a year for contractual work, professional services, or brokerage fees to Indian residents. This only occurs if you're not already deducting TDS under provisions like those for contracts or fees. The ₹50 lakh threshold provides some breathing room by exempting lesser payments, relieving everyday taxpayers' costs, and targeting larger taxpayers.
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Who needs to do TDS under Section 194M
Suppose you are an individual or HUF with business or professional income above ₹50 lakh but not covered by other sections of TDS. In that case, you have TDS liability under 194M of the Income Tax Act to ensure you have deducted TDS on payments received for services that help your personal or professional purpose, and to support the better reporting of tax collection reasonably.
Types of Services Covered Under Section 194M
To apply Section 194M correctly, you need to know what qualifies. Contractual services include labour supply, building construction, maintenance jobs, or other agreements. Professional services span legal counsel, healthcare, financial auditing, design engineering, building architecture, advisory consulting, or decor planning. 'Work' under this section encompasses promotional campaigns, media production and airing, non-rail transport of items or people, and food services. Custom manufacturing applies if you source materials from the client.
TDS Rate and Threshold Limit Under Section 194M
The threshold for the 194M Income Tax Act is ₹50 lakh total payments per year; if crossed, you deduct TDS on the full amount. The current rate is 2%, effective since October 1, 2024, down from the earlier 5% to simplify compliance. Without the payee's PAN, it jumps to 20%. To provide context, a short-term dip to 3.75% occurred from May 2020 to March 2021 during the pandemic, but rates have since stabilised.
Let's put this in perspective. If you were to make a payment of ₹60 lakh for consulting services, you would deduct 2% TDS on the full ₹60 lakh (₹ 1.2 lakh). However, TDS would not apply to the ₹ 40 lakh you spent on repairs because it's below the limit.
How to Comply with Section 194M
Compliance is user-friendly—you don't need a TAN, your PAN works. Deduct TDS when paying by cash, check, or crediting the account. Then, submit Form 26QD within 30 days of the month's end post-payment. For a July 20 payment, file by August 31. Issue Form 16D certificate to the recipient within 15 days after filing. The process for paying and depositing TDS is seamless and allows the payee to offset the TDS when they file their taxes.
Exceptions and Penalties under Section 194M
You are exempt if the total payments are less than ₹50 lakh or have already been taxed under other TDS provisions. However, if you fail to deduct or deposit TDS, you would be liable to a penalty of 1% interest per month of the amount, in addition to fines up to ₹10,000. You will want to be careful to avoid unnecessary costs.
Conclusion
Section 194M of the Income Tax Act allows you to contribute to transparent taxation on large payments, while allowing for broader coverage without added burden on smaller amounts. If you keep up to speed on the procedures, you can keep things running smoothly and make the proper decisions.
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