What is Section 194JB?
Section 194JB mandates that any person, except individuals and Hindu Undivided Families (HUF) not under tax audit, must deduct Tax Deducted at Source (TDS) when paying fees for professional services. This provision applies to payments made to professionals like consultants, architects, lawyers, medical writers, and other service providers. The TDS is deducted at a specified rate, ensuring compliance and transparency in transactions involving professional fees.
Additionally, Section 194JB applies to mutual funds and Associations of Persons (AOPs) established for investing in securities. The deducted tax must be deposited with the government within seven days of the month’s end in which it was deducted. The tax rates under section 194JB vary between 2% to 10%.
Why is Section 194JB Important?
Section 194JB plays a crucial role in ensuring transparency and preventing tax evasion. Given below is the importance of section 194JB -
- Reduces Tax Evasion: This section minimizes the risk of tax evasion by ensuring tax is collected at the time of payment, promoting financial accountability.
- Ensures Accurate Tax Reporting: Proper TDS deduction and reporting under this section ensure accurate tax records, reducing discrepancies during assessments.
- Prevents Non-compliance Penalties: Adhering to TDS requirements helps businesses avoid penalties and interest charges, mitigating financial risks.
- Facilitates Timely Revenue Collection: By requiring timely tax deduction, this section supports a consistent government revenue stream.
- Improves Transaction Transparency: Mandating documentation and reporting for professional payments enhances transparency in business dealings.
- Strengthens Professional Relationships: Timely TDS deductions and deposits foster trust and goodwill with professionals and service providers.
- Applies Broadly Across Sectors: These provisions cover a wide range of sectors, ensuring businesses and individuals comply when paying for professional services.
Section 194JB TDS Rates for Taxpayers
Section 194JB specifies the applicable Tax Deducted at Source (TDS) rates for professional payments:
- 2% TDS for PAN Holders: If the aggregate payment to a professional exceeds Rs.30,000 in a financial year, a 2% TDS rate applies, provided the professional has a valid PAN. This deduction ensures that a portion of the payment is withheld for tax purposes.
- 10% TDS for Non-PAN Holders: When a professional fails to furnish their PAN, the TDS rate increases to 10%. This higher rate encourages tax compliance and ensures professionals are registered under the tax system.
What is the Applicability of Section 194JB?
Section 194JB applies to payments made to professionals for different services. This ensures that the tax is deducted at the source at a specified rate. Section 194JB applies to the following set of people -
- Resident Individuals
- Hindu Undivided Family (HUFs)
- Association of Persons (AOP)
- Body of Individuals (BOI)
- Any professional service providers (legal, consultancy, marketing, etc.)
What are the Exceptions and Exemptions Under Section 194JB?
While Section 194JB ensures tax collection on payments for professional and technical services, it provides specific exemptions to simplify compliance:
- Threshold Limit: No TDS is required if total payments to a professional do not exceed ₹30,000 in a financial year. This exemption prevents small payments from being subject to TDS compliance.
- Exemption for Individuals and HUFs: Individuals and Hindu Undivided Families (HUFs) not undergoing a tax audit are exempt from deducting TDS under this section. This simplifies compliance for smaller taxpayers and reduces administrative burdens.
- Payments to Government Entities: Payments made to government bodies or specified entities are exempt from TDS. This recognizes the distinct nature of these transactions and ensures smoother financial processes.
What are the Components of TDS Filing for Taxpayers?
Under section 194JB of the Income Tax Act, the taxpayers are required to fulfill these requirements -
- TDS Deduction: Deduct TDS at 2% of the total payment when paying professionals. If the professional does not provide their Permanent Account Number (PAN), the TDS rate increases to 10%.
- TDS Deposit: Deposit the deducted TDS amount with the government by the 7th of the month following the deduction. Timely deposits ensure compliance and help avoid penalties for late payments.
- TDS Return Filing: File quarterly TDS returns using Form 26Q. Accurate and timely filing is essential to meet regulatory obligations and maintain compliance.
How to Calculate TDS Under Section 194JB?
Follow these steps to systematically calculate TDS under Section 194JB:
- Determine the Total Payment: Identify the total amount paid to the professional during the financial year.
- Check the Threshold Limit: If the total payment does not exceed ₹30,000, TDS is not applicable.
-
Identify the Applicable TDS Rate:
- A TDS rate of 2% is applicable if the payment exceeds ₹30,000 and the professional has provided their PAN.
- A 10% TDS rate is applicable if the professional has not provided their PAN.
- Calculate the TDS Amount: Multiply the total payment by the TDS rate applicable, to determine the TDS amount to be deducted.
Examples
-
Case 1: A company pays ₹60,000 to a freelance accountant who has provided their PAN.
- Total Payment: ₹60,000
- TDS Rate: 2%
- TDS Amount: ₹60,000 × 2% = ₹1,200
-
Case 2: A company pays ₹35,000 to a freelance writer who has not provided their PAN.
- Total Payment: ₹35,000
- TDS Rate: 10%
- TDS Amount: ₹35,000 × 10% = ₹3,500
These examples highlight how TDS rates differ based on whether the professional has furnished their PAN.
What is the Taxpayer’s Responsibility Under Section 194JB?
Under section 194JB, both the payer and the payee have a specific responsibility.
- Payer: The payer (business or organization) must deduct TDS at the specified rate and deposit it with the Central Government within the prescribed timeline. Timely compliance helps avoid penalties and interest charges for non-compliance with Section 194JB of the Income Tax Act.
- Payee: The payee (professional) can claim the TDS deducted under Section 194JB while filing their income tax return. To avoid higher TDS rates, it is crucial for the payee to provide their PAN to the payer.
Professionals who are liable to deduct TDS under section 194JB are required to file an ITR-3 income tax return form to claim the TDS (if applicable). This form is designed for individuals and HUFs who have income from business and profession.
You can download ITR-3 form from the website of the Income Tax Department.
Section 194JB plays a crucial role in preventing tax evasion, ensuring accurate tax reporting. It is important for individuals dealing with professional services to be compliant with section 194JB to avoid penalties and fees. If you still have tax-related queries or need help with filing your ITR, get in touch with our experts. Book an online CA now!
