By focusing on the source of income itself, the deduction of tax at source (TDS) has been very beneficial in the nation’s tax collection. When it comes time for the taxpayer to file their income tax returns, TDS reduces the burden of tax payment. This is necessary so they can claim a credit for TDS deducted when filing their ITR. Fees for technical services or professional fees are one of the most important and frequent types of payments that a corporate entity makes. Fees paid to a lawyer, engineer, doctor, chartered accountant, interior decorator, architect, advertiser, etc. are some typical examples of professional fees. The rules of managerial, technical, or consulting services falls under the category of technical services under this section. Section 194J of Income Tax Act covers such payments given to residents.
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Types of payments covered under section 194J
The following types of payments are made to residents, which are covered by section 194J:
- Royalty
- Fee for professional service
- Fee for technical service
- Remuneration or commission of fee paid to directors excluding salary (For instance, sitting fees for board meetings)
- Payments in the nature of non-compete fees (fees paid to not doing any business or profession for a specified period of time and within specific geographical location)
- Fees paid for not sharing any know-how or technical knowledge.
Meaning of various terms
Royalty
Royalty is the sum of money paid for:
- Transfer of ownership or use of a patent, trademark, model, or other creation.
- Use of inventions, designs, patents, etc.
- Provide any information pertaining to utilizing an innovation, patent, formula, etc.
- Transfer of rights in connection with literary works, films, or videotapes for radio broadcasting, but not in exchange for money or other benefits related to the sale, display, or distribution of cinematographic films.
- Providing any details pertaining to technical, industrial, commercial, or scientific knowledge, experience, or skill
Professional services
It refers to the services supplied by a person in the practice of their chosen profession in the fields of medicine, law, architecture, or engineering. Accountancy, technical consulting, interior design, advertising and any other professions listed by CBDT Board under Section 44AA of Income Tax Act are also included.
In accordance with Section 44AA, the CBDT has as of this writing announced the professions of a film artist, a company secretary, and authorized representatives. CBDT has also notified athletes, commentators, anchors, team physicians, physiotherapists, umpires, event coordinators, referees, coaches and trainers, and sports columnists as per this section.
Technical services
According to income tax rules, “fees for technical services” refers to managerial, technical, and consulting services but excludes payments that the beneficiary of such income considers to be salary.
- Technical services are those that include the use of technical expertise or proficiency in technology.
- Running and managing the client’s business is covered in the definition of managerial services.
- Consultancy services can be viewed as advisory services where clients receive the essential counsel and consultation for their businesses.
Technical service would include services provided by a human, not by machines or robots according to the Supreme Court’s judgment.
Non-compete fees
Non-Compete Fees refer to payments made in cash or kind in exchange for an agreement that prohibits the parties from disclosing any licenses, patents, trademarks, franchises, know-how, commercial or business rights, or information that could be used elsewhere for processing, manufacturing, or any other temporary service.
Threshold limit for deducting Tax
If the total amount paid for professional and technical services during the year exceeds Rs 30,000, tax must be deducted under section 194J.
This maximum limit of Rs 30,000 is applicable to each item or payment separately. For payments (commissions, fees, or salaries) provided to a director by the firm, there is no such limit. No matter how little the tax is, it must be taken into account.
You can also read belated return u/s 139(4).
Rate of Deduction of Tax Under Section 194J
| Nature of payments | TDS Rates |
| Payments made to operators of call centers | 2% |
| Payment of royalty for sale, exhibition or distribution of cinematographic films. | 2% |
| Any payment of fees for technical service | 2% |
| All other payments covered u/s 94J (example Professional Services) | 10% |
| Payee does not furnish his/her PAN | 20% |
Persons liable to deduct tax
Time of TDS deduction under section 194J
The tax should be deducted when:
- booking the entry into the accounts or
- making actual payment for the expense,
Whichever occurs first.
Time limit for deposit of TDS
| Condition | Government deductors | Non-Government deductors |
| Payment made in month of March | Tax is paid at the time professional or technical fees are paid to the payee, but the corresponding challan must be deposited by 7th day following the end of the month of March. | April 30th |
| Payment made in other months | 7th day from the end of the month | 7th day from the end of the month |
Consequences of non-deduction or late deduction of TDS
Both failure to deduct taxes and failure to deduct them on time have negative effects.
- Disallowance of a portion of the expense: 30% of the expense will be disallowed in the year it is claimed (added to the profit and loss account), but it will be allowed again in the year the TDS is paid to the government.
- Interest payable till date of payment: In the event that the tax is not paid on time, interest must be paid to the government along with the TDS. The interest rate is calculated using the formula below:
- Where no tax deduction has been made, interest will be due at a rate of 1% each month or fraction of a month from the date the tax was supposed to be deducted until the date it was actually deducted.
- When tax is deducted but not paid to the government, interest is due at a rate of 1.5% each month or fraction of a month from the date the tax was deducted until the date it was paid to the government.
Conclusion
A key provision that regulates the TDS deduction on professional or technical services is Section 194J of the Income Tax Act. It is applicable to all taxpayers who pay consultants or professionals for their services.
Frequently Asked Questions (FAQ)
TDS provisions relating to specific services are governed under Section 194J. Under Section 194J, any person paying a resident person fees for any of these specific services (technical, professional, etc.) must deduct TDS.
In accordance with this section, 10% of TDS must be deducted. 20% of the income is subject to TDS if the income recipient fails to provide the deductor with his PAN. The previously mentioned rates shall not be increased by a surcharge, education cess, or SHEC. TDS must also be deducted from fees that do not include the GST component.
Currently, various payments are made using the 10% and 2% TDS Rate under section 194J. Two numbers, 194JA and 194JB, are used to identify the rates and type of payment when filing e-TDS returns. professional service fees, royalties, noncompete agreements, director compensation, etc.
Section 194J requires any person (other than an individual or a Hindu Undivided Family) paying a resident for professional or technical services to deduct TDS at the rate of 10% or 2%, depending on the amount paid or credited to the recipient.
Section 194J requires TDS to be deducted if the payment for professional or technical services covered by this section exceeds Rs 30,000 per year.
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