Tax deducted at source (TDS) targets the source of income itself and has been extremely helpful in collecting tax in our country. It ensures a steady source of revenue for the government throughout the year. It prevents taxpayers from evading taxes. It also reduces the burden of paying taxes at the end of a fiscal year for taxpayers. It is beneficial to the government as well as the taxpayers.

Section 194J of the Income-tax Act, 1961 states that a person must deduct TDS at a rate of 10% if the payment is over Rs. 30,000 in a year. The section applies to,

  • Professional services
  • Technical services
  • Royalty
  • Non-compete fees or fees paid to not disclose technical knowledge
  • Remuneration paid to directors excluding salary(other than section 192)

Note – Such ₹30, 000 is the maximum limit which is applicable to each item or payment independent

A business entity requires professional and technical services quite often. Professional services include fees paid to the lawyer, architect, doctor, chartered accountant, engineer, interior decorator, advertising agencies, etc. Technical services imply services rendered by an individual for managerial, technical, or consultancy services. All these payments are covered under section 194J.

Professional Services

  • Along with services rendered by an individual for legal, medical, architectural, or engineering professions.
  • It also includes event managers, anchors, umpires, sportspersons, coaches, trainers, physiotherapists, physicians, and advertising agents.
  • All professions accepted by the Board under Section 44AA are included in professional services.
  • Film artists, secretaries, and authorized representatives also come under it. 

Technical Services

  • It involves all managerial, technical, and consultancy services.
  • Services such as mining, assembly, and construction are not considered technical services.

Royalty

  • Royalty would involve sharing information and the use of an investigation, patent, model, etc.
  • It means consideration for the right to use the equipment for scientific or industrial purposes.
  • Transfer of rights concerning secret formula, invention, model, design, trademark, or patent.
  • It also includes the rights related to scientific findings, literary work, films, or videotapes with no consideration for the sales, distribution, or exhibition of the same.

Non-Compete Fees

Non-Compete fees imply payments received as cash or an agreement that binds a person from sharing information, license, trademark, patent, or business rights. It includes any technique or information likely to be used elsewhere for provisional services.

Rate of Tax deduction

  • Any payment covered under Section 194J (as mentioned above) shall be subjected to TDS at 10%
  • With effect from 1st June 2017, the rate of TDS will be 2% for payees engaged in the business of call centers.
  • With effect from 1st April 2020, the rate of TDS will be 2% for technical services.
  • The rate of deduction will be 20% in case the payee is unable to furnish his/her PAN card.

The consequence of late or no deduction

  • 30% of the expenditure is not allowed in the year. Once the TDS is successfully paid 30% of the expenditure is re-allowed.
  • If tax is not paid, interest shall be payable at 1.5% per month up to the date of payment.
  • If tax is not dedicated, interest shall be payable at 1% per month up to the date of payment.

Lastly, you can verify your TDS details by collecting Form 16 from the deductor or income tax websites.