TDS Section 194J has garnered renewed focus following the enactment of the Finance Bill 2020, which introduced modifications to Section 194J effective from April 1, 2020. This section of the Income Tax Act of 1961 outlines the provisions for TDS deductions on payments made for professional and technical services.
This article serves to keep you updated on these changes and offers an in-depth overview of Section 194J under TDS. Here, you will find information on applicability, TDS rates under Section 194J, and much more.
Categories of Payments Under 194J
- TDS on professional charges
- Charges for technical services
- Director's remuneration
- Royalty payments
- Non-compete fees
Revisions in TDS Section 194J
A TDS deduction rate of 2% applies to payments for specified services (excluding professional services), whereas a rate of 10% is applicable in all other cases under Section 194J.
Individuals or HUFs must deduct TDS if their business turnover exceeds Rs 1 crore or their professional earnings exceed Rs 50 lacs in the financial year preceding the one in which interest is credited or paid. If Section 44AB is applicable, the prescribed monetary thresholds will apply instead.
Who Must Deduct TDS?
Entities responsible for making the following payments to any resident, except employees or HUFs, are required to deduct TDS under Section 194J:
- Compensation for specialized and engineering services, where applicable.
- Director's remuneration, fees, commissions, or any similar payment not covered under Section 192 or classified as royalty.
- Non-compete fees under Section 28(VA).
TDS Rate Under Section 194J of the Income Tax Act
The following tax rates are applicable to services covered under Section 194J of the Income Tax Act:
| Category | Applicable TDS Rate |
| Royalty as consideration for sales, distribution, or exhibition of cinematographic films | 10% |
| Technical service fees (excluding professional royalty for film sales, distribution, or exhibition) (Effective from April 1, 2020) | 2% |
| For entities engaged in call center operations (Effective from June 1, 2017) | 2% |
| Where the payee fails to provide a PAN | 20% |
| Professional service charges | 10% |
Payments Covered Under Section 194J
If an individual makes any of the following payments to a resident in a financial year exceeding Rs.30,000, they are required to deduct TDS at a rate of 10%:
- Compensation for professional services rendered.
- Remuneration paid for technical consultancy services.
- Non-compete fees under Section 28(VA) of the Income Tax Act.
- Royalty payments.
Professional Services
This includes services offered by professionals in fields such as medical, architecture, engineering, and civil services. Other recognized professions under Section 44AA include accountancy, interior design, advertising, and consultancy.
It also covers film scriptwriters, company secretaries, and authorized representatives.
Additionally, this category extends to athletes, event organizers, journalists, commentators, referees, judges, coaches, physiotherapists, team doctors, and sports columnists.
Technical Services
This refers to advisory, technical, or managerial services provided by professionals.
However, manufacturing, mining, and assembly services are not included as they fall under the recipient’s salary head.
Non-Compete Fees
Under Section 194J, non-compete fees are payments made in cash or kind to restrict an individual from sharing trade secrets, patents, licenses, trademarks, contracts, techniques, or business-related know-how used in manufacturing, production, or any similar operations.
Royalty
In this context, royalty is compensation paid for:
- Transfer of ownership of patents, inventions, proprietary formulas, blueprints, or trademarks.
- Usage rights for patents, blueprints, inventions, and similar assets.
- Access to proprietary information such as copyrights, formulas, or algorithms.
- Utilization of equipment for research, agriculture, or business operations.
- Transfer of rights to distribute or broadcast published works, research findings, documentaries, or video content.
Special Cases
TDS deduction under Section 194J also applies in the following cases, as per departmental circulars and rulings:
- Medical services provided in hospitals.
- Payments made to publicity firms by film artists.
- Fees paid to management and HR consultancy firms.
- Registrar fees for corporate data management.
Penalties for Non-Deduction or Late Deduction
Failing to deduct or remit TDS to the tax authorities on time can lead to the following consequences:
Disallowance of Expenses
- 30% of the expense will be disallowed when computing profit or loss in the year of the claimed expense.
- The disallowed amount will be reinstated in the year when TDS is deducted and paid to the income tax department.
Interest on Late Deduction or Payment
- Failure to Deduct TDS: Interest of 1% per month or part thereof, from the due date of deduction until the actual deduction.
- Failure to Pay or Deposit TDS: If TDS is deducted but not deposited with the tax authorities, an interest of 1.5% per month or part thereof applies from the deduction date until the payment date.