The deduction of tax at source or TDS has been very helpful in the collection of taxes in the country by targeting the source of income itself. It also eases the taxpayer’s burden of paying tax when it is time to file their income tax returns. That is because, they get credit for the taxes deducted at source.
One of the most important and common type of payments that a business entity makes is towards professional fees or fees for technical services. Some illustrative examples of professional fees are fees paid to a lawyer, doctor, engineer, architect, chartered accountant, interior decorators, advertisers, etc. Technical services would include the rendering of managerial, technical or consultancy services. Such payments made to residents are covered under section 194J.
The type of payments to residents covered under this section are as follows:
Tax has to be deducted in case the payment is greater than Rs. 30,000 during the year. However, there is no such limit for payments made to a director. The tax will have to be deducted no matter how small the amount.
Every person, who is making a payment in the nature of fees for professional or technical services is liable to deduct tax at source with the following exceptions:
To put it simply, all entities (other than individuals/HUF who are not required to do tax audit in the preceding year) need to deduct tax.
The tax should be deducted at the time of-
Examples on TDS on Professional and Technical Services
Mr. Jay has availed professional service from Mr. Veer in F.Y. 2021-22. First payment in April month was Rs. 55000 and second payment in december month was Rs. 22000. Let us check the TDS liability for both the payments
for the F.Y. 2021-22 in three scenarios:
Since Mr. Jay is not liable for Tax Audit u/s 44AB he is not liable to deduct tax while making payment to Mr. Veer.
Though Mr. Jay has taken professional service but that was for personal purpose. Hence, no TDS is required to be deducted while making payments for such services.
If Tax Audit is applicable to Mr. Jay and he avails the professional services for business purpose, then TDS @10% must be deducted at Rs. 55,000 while making payment or credit in the accounts, whichever is earlier. . This is because the transaction has exceeded the threshold limit of Rs. 30,000.
Similarly, since the transaction amount has exceeded the threshold limit in the financial year, TDS should be deducted for all the payments made to Mr. Veer. Hence, tax shall be deducted at source on second payment of Rs. 22,000 also.
Not deducting the tax or late deduction of the tax has a two-fold consequence:
|Non – Government deductor||Government deductor|
|Payment made before 1st March||7th day from the end of the month||7th day from the end of the month|
|Payment made in the month of March||April 30th||Payment of tax is made on the date of payment to the payee but the corresponding challan is deposited by the 7th day from the end of the month|
You can verify your TDS details by collecting Form 16 from the deductor or from Form 26AS through TRACES or income tax efiling website.
The company’s director provide managerial services. Hence, any sum payable or paid to the director as sitting fees, remuneration or any other sum (other than in the nature of salary) will attract the provisions of section 194J. Managerial services are technical in nature, hence 2% TDS on fees for technical services.
Since the limit did not exceed for the first time, No TDS should be deducted at Rs. 10,000. However, the transaction amount exceeds the threshold limit of Rs. 30,000 (for professional services) while making payment for the second time. Hence, TDS shall be deducted at total Rs. 60,000 at the rate of 10%.