Section 194J of Income Tax Act: TDS on Professional & Technical Services

Section 194J of the Income Tax Act mandates the deduction of Tax at Source (TDS) on payments for professional or technical services to residents. If you pay for or receive payments for such services, understanding this section is crucial for compliance with Indian income tax laws. Continue reading to see how Section 194J works and how it helps in ensuring efficient tax collection.

What Payments Are Covered Under Section 194J?

Section 194J applies to payments made to residents for professional and technical services, which include:

• Professional Services: Includes payments for services made by professionals like Chartered Accountants, Lawyers (legal fees), Doctors (medical services), Engineers, Architects, and Company Secretaries.

• Technical Services: Includes payments for managerial services, technical consultancy, and other advisory services.

• Royalty: Payment received for the use of business rights, patents, copyrights and other intellectual property.

• Non-compete: Payment received for an agreement not to compete in a concerned business. It refers to the payment in pursuance of the specific agreement.

• Director’s Fees: Refers to any remuneration or sitting fees paid to the Director, not classified as the salary.

Also Read: Tax Exemption & Its Various Categories

Whose Duty is it to Deduct TDS?

According to this section of the Income Tax Act, people who need to deduct TDS on professional or technical services are:

• Any person other than an individual or a Hindu Undivided Family (HUF)

• An individual or HUF liable for a tax audit under Section 44AB, i.e., their gross receipts or turnover in the previous financial year exceed ₹1 crore in business or ₹50 lakh in profession

TDS Rates and Threshold Limit for FY 2025-26

Starting April 1, 2025, the tax deduction threshold limit for professional services, technical services, royalty, and non-compete fees will be ₹50,000 per financial year. There will be no TDS deduction if the aggregate amount for any of these heads does not exceed that limit.

A distinction is further created under the Act between the various categories of payments:

• Technical services (other than professional services) and payments for royalties in respect of cinematographic films: 2% TDS

• Professional services, other types of royalty, non-compete fees, and director’s fees: TDS at the rate of 10%

The table below outlines the applicable rates and threshold limits:

Unlike other types, there is no threshold limit for directors' fees; TDS applies even to a minor payment. If the payee does not provide their PAN, a TDS rate of 20% must be applied. 

Also Read: A Guide to Tax-Saving Options Under Section 80C

How to Deduct and Deposit TDS

The actual deduction of such tax must occur when the payee’s account is credited or at the time of actual payment, whichever is earlier. After you deduct TDS, you must deposit the amount with the government before the 7th of the following month (or April 30 for tax deducted in March). You're also required to file the quarterly TDS return in Form 26Q and provide the TDS certificate (Form 16A) to the payee, enabling them to take credit for TDS from their end.

Consequences of Non-Compliance

The Income Tax Department enforces strict penalties for non-compliance:

• Interest: Late deductions attract interest at 1% per month until the date of deduction, and late deposit after deduction attracts interest at 1.5% per month.

• Disallowance of Expenditure: You may have to face a disallowance of 30% of the expenditure from your business expenses for tax purposes, increasing your taxable income and tax burden.

Also Read: A Complete Guide on Income Tax Act India

To Conclude

By adhering to the rules and regulations under Section 194J, you can prevent costly penalties like interest and expenditure disallowance. If you’re a professional looking to finance growth and expansion, a Professional Loan from Poonawalla Fincorp can offer you the necessary capital to expand your practice. Apply today!

FAQs

What happens if I don't comply with Section 194J?

Non-compliance leads to penalties, including interest on late TDS deduction or payment. Furthermore, 30% of the expenditure on which TDS was not deducted will be disallowed from your business expenses, increasing your taxable income.

Can I apply for a TDS deduction at a lower rate?

Yes, a payee can apply to their Assessing Officer using Form 13 for a certificate authorising a lower TDS rate or no deduction at all. This is typically granted if their total estimated tax liability for the financial year is low.

Is Section 194J applicable for payments for personal purposes?

No, TDS under this section is not applicable if the payment is made by an individual or HUF strictly for personal purposes. For example, legal fees paid for a personal matter do not attract TDS.

Do I need to deduct TDS on the GST component in an invoice?

No, TDS should only be deducted on the basic service value, excluding the GST component. This is applicable if the GST amount is shown separately on the invoice.

Who is responsible for deducting TDS under Section 194J?

Any person, except an individual or HUF not liable for a tax audit, is required to deduct TDS. An individual or HUF becomes liable if their turnover or receipts in the previous financial year crossed the specified limits.

What is the TDS rate for professional services for FY 2025-26?

For the Financial Year 2025-26, the TDS rate for fees for professional services is 10%, applicable if the total payment exceeds the new threshold limit of ₹50,000.

How to show 194J income in ITR?

Income subject to TDS under Section 194J should be reported under “Profits and gains of business or profession” in your income tax return. You can claim credit for the TDS deducted against your tax liability using the details in your Form 26AS.

What is the TDS limit for 194J for FY 2025-26?

Effective from April 1, 2025, the threshold limit for TDS under Section 194J for the financial year 2025-26 is ₹50,000. This new limit applies separately to each category of professional or technical services.

What is the TDS rate for consultancy charges?

The TDS rate for consultancy services depends on their nature under Section 194J. Fees for technical services attract a 2% TDS rate, while fees for professional services are subject to a 10% TDS rate.

What is the difference between 194C and 194J?

Section 194J applies to payments for professional services (legal, medical) and technical services, which are skill-based. In contrast, Section 194C applies to payments for contractual 'work', such as advertising, catering, or transport of goods.