Section 194J under TDS - Professional or Technical Services Fees

Introduction

Section 194J of the Income Tax Act deals with the Tax Deducted at Source (TDS) on payments made for professional or technical services. If you are an individual or business paying for services like legal, technical, or professional services, you are required to deduct TDS before making the payment. This ensures that tax is collected at the source from income paid for these services. In this article, we will explain Section 194J in simple terms, including TDS rates, limits, exemptions, and the recent updates for FY 2025-26.

What is Section 194J of the Income Tax Act?

Section 194J is a provision under the Income Tax Act that mandates TDS deduction on payments made to professionals and technical service providers. It applies to individuals, firms, and companies that make payments to entities or individuals providing services in the following areas:

1. Professional Services: Legal, accounting, technical, medical, and other professional services.
2. Technical Services: Services involving the application of technical knowledge and skill.

The payer is responsible for deducting the tax at the rate specified in Section 194J and remitting it to the Income Tax Department. This ensures that the government collects tax directly from the income earned by professionals or service providers.

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Types of Payments in 194J

Section 194J covers payments made for the following services:

1. Professional Services:

   • Services provided by lawyers, doctors, accountants, etc.
   • Payments made for consulting, management services, etc.

2. Technical Services:

   • Services provided for scientific research, technical support, computer programming, and software development.

3. Royalty Payments:

   • Payments are made for the use of intellectual property like patents, copyrights, and trademarks.

4. Remuneration:

   • Remuneration paid to directors of a company.

Section 194J applies to these payments if they meet the prescribed thresholds for deduction.

Amendments in TDS Section 194J for FY-25-26. Budget 2025 Update

The Budget 2025 introduced the following amendments in Section 194J for FY 2025-26:

1. Rate Reduction for Certain Payments: The TDS rate for payments made to professionals in some sectors, such as legal and technical services, has been reduced to 5% for specified income slabs.
2. Expanded Scope of Technical Services: The scope of technical services has been broadened to include new types of services related to digital platforms and internet services.
3. New Compliance Rules: The threshold for deduction has been modified, requiring deduction at a lower limit for certain services, including online training and digital consulting.

These changes make the TDS process more streamlined and encourage digital services by ensuring a simpler tax deduction procedure.

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

TDS under Section 194J must be deducted by the following individuals or entities:

1. Businesses and Firms: If they make payments for professional or technical services.
2. Corporate Entities: All companies, irrespective of their size, must deduct TDS on payments made for professional and technical services.
3. Individuals: If the individual is paying for professional services and their total taxable income exceeds the prescribed limit.

Who is not required to deduct TDS:

1. Small businesses or individuals with income below the threshold limit for tax deduction.
2. Government bodies that are exempt from certain TDS deductions for specific services.

The payer needs to verify whether they fall under the TDS-deducting category.

What is the 194J TDS Rate and Limit for FY 2025-26?

Nature of Payment

TDS Rate for FY 2025-26

Applicable Limit

Professional Services (Non-Resident)

10%

If payment exceeds ₹30,000

Professional Services (Resident)

10%

If payment exceeds ₹30,000

Technical Services (Non-Resident)

2%

If payment exceeds ₹30,000

Technical Services (Resident)

2%

If payment exceeds ₹30,000

Royalty or Remuneration to Directors

10%

No limit (except for salary-related)

The TDS rates have been simplified under Budget 2025, reducing the compliance burden for taxpayers.

Payments that are Protected by Section 194J

Section 194J protects certain payments from TDS deduction:

1. Interest Payments:
   Payments made for interest on loans or bonds do not fall under the scope of 194J.
2. Salary Payments:
   Regular salary or wages paid to employees are subject to TDS under Section 192 and not Section 194J.
3. Payments for Goods:
   If payments are for goods, they are not taxable under Section 194J, as it applies only to services.

Understanding these exceptions helps businesses avoid unnecessary deductions and keep tax calculations accurate.

TDS Exemption Limit Under Section 194J

Income Type

TDS Exemption Limit

Example

Professional or Technical Services

₹30,000

A legal firm pays ₹25,000 for a consultation; no TDS required.

Remuneration to Directors

No limit

TDS is applicable on all payments to directors, no threshold.

In this table, payments below ₹30,000 for professional or technical services does not require TDS deduction, making tax compliance simpler for smaller transactions.

Time Limit for Deposit of TDS

TDS deducted under Section 194J must be deposited by the following timelines:

1. For Payment Made in March:
   TDS should be deposited by 7th April of the same year.
2. For Other Months:
   TDS must be deposited by the 7th of the next month from the date of deduction.

Late payment of TDS leads to penalties and interest. Ensuring timely deposits is crucial to avoid any additional costs.

Consequences of Non-deduction or Late Deduction

If TDS is not deducted or deducted late, there can be severe consequences:

1. Interest on Late Payment:
   The payer will have to pay interest of 1.5% per month on the amount of TDS not deposited.
2. Penalties:
   If TDS is not deducted, the assessed penalty can be as high as 100% of the tax due.
3. Disallowance of Payments:
   The recipient’s expense claims might be disallowed if TDS is not deducted, leading to increased tax liability.
4. Legal Consequences:
   Non-compliance can result in tax notices and penalties under section 271C of the Income Tax Act.

Some Special Considerations by CBDT (Government) Circular on 194J Applicability

The Central Board of Direct Taxes (CBDT) issued circulars clarifying the applicability of Section 194J:

1. Payment to Doctors:
   In some cases, payments made to doctors may not be subject to 194J if their professional services are for non-taxable reasons.
2. TDS on Payments to Non-Residents:
   Special provisions apply when payments for professional and technical services are made to non-residents under Double Taxation Avoidance Agreements (DTAA).

These clarifications ensure that businesses remain compliant and avoid excessive TDS deductions where not applicable.

Examples of TDS on Professional Fees and Technical Services

1. Legal Services (Professional Services):
   A company pays ₹50,000 for legal consultation.

   • TDS Deducted: 10%
   • Amount Deducted: ₹5,000
   • Amount Paid: ₹45,000

2. Technical Services:
   A software company pays ₹80,000 for programming services.

   • TDS Deducted: 2%
   • Amount Deducted: ₹1,600
   • Amount Paid: ₹78,400

These examples show how TDS is calculated for different professional and technical services.

Conclusion

Section 194J plays a crucial role in regulating TDS deductions on professional and technical services in India. It ensures that businesses pay their fair share of taxes while also simplifying the process for both the taxpayer and the government. By following the rules related to TDS rates, exemptions, and compliance, businesses can avoid penalties and ensure proper tax filing. It is important to stay updated on the latest amendments and seek professional advice for accurate deductions.