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    Section 194M – TDS on Payment to Resident Contractors and Professionals

    Updated on: 27 Nov, 2024 06:19 PM

    The Finance Act, 2022 introduced Section 194M to address TDS on payments made to resident contractors and professionals. This provision has been in effect since September 1, 2019. Section 194M specifies TDS requirements for payments made by individuals or HUFs under a contract, as commission or brokerage, or as fees for professional services during a financial year.

    Before Section 194M was introduced, many individuals or HUFs receiving income from clients were not paying taxes on such earnings, leading to tax evasion, and to stop this, the government implemented Section 194M.

    Budget 2024 Updates
    The TDS on certain payments by specific individuals or HUFs under Section 194M is proposed to be reduced from 5% to 2%, effective from October 1, 2024.

    What is section 194M?

    Usually, the TDS provisions need to be complied with if any individual or HUF is engaged in business or any profession and the gross receipts are more than one crore and 50 lakh, respectively. However, individuals or HUFs need to comply with these provisions even if their gross receipts do not exceed the threshold mentioned above. And that’s where Section 194M comes into the spotlight. Section 194M applies if an individual or HUF makes a payment of more than 50 lakh in a financial year toward a resident individual for carrying out contractual work, brokerage/commission paid (not insurance commission), or for rendering professional service.

    If individuals or HUFs have gross receipts from business or profession exceeding Rs. 1 crore or Rs. 50 lakhs, respectively, TDS deduction becomes applicable under Sections 194C, 194H, and 194J. However, individuals or HUFs required to deduct TDS under Section 194C (payment to contractors), Section 194H (commission or brokerage), or Section 194J (professional fees) are exempt from deducting tax at source under Section 194M.

    Such individuals or HUFs can remit the tax to the government by quoting their PAN. They are not required to obtain a tax deduction account number (TAN) for this purpose.

    Note: Payments made to non-residents are not covered under the provisions of Section 194M.


    Nature of payments under section 194M

    The nature of payment under Section 194M is divided into three key parts, as mentioned below:

    • Contract: The term "contract" is defined under Section 194C of the Income Tax Act.
    • Commission or Brokerage: This is specified in Section 194H of the Income Tax Act.
    • Professional Services: The meaning of professional services is provided in Section 194J of the Income Tax Act.
    • Work: The term "work" is also explained under Section 194C of the Income Tax Act.

    Understanding the Definitions of ‘Work,’ ‘Contract,’ and ‘Professional Services’ Under Section 194M :

    Payment to a resident contractor by an individual or HUF for carrying out work in the nature of personal purpose, and “work” here means:

    • Advertising
    • Broadcasting and telecasting (including the production of programs)
    • Carriage of goods and passengers using any mode of transport (but not railways)
    • Catering
    • Manufacturing or supply of a product as per the customer’s specifications by using material purchased from him/her. But does not include manufacturing or supplying a product according to the specification of a customer by using material purchased from other than such customer

    Payment to a resident professional for giving professional services by an individual or HUF for carrying out work in the nature of personal purpose and “professional services” here means :

    • Fees for professional service,
    • Fees for technical services,
    • Remuneration or fee or commission to a director of a company (which is not liable to TDS u/s 192).
    • Royalty
    • Non-compete fees, which means payment made for not carrying out any business or profession

    Payment to a resident individual or HUF by way of commission.

    As per clause (iii) of section 194 C, the Contract shall include sub-contracts.

    One point needs to be noted the insurance commission does not get covered under section 194M.


    What is the rate of TDS u/s 194M & when TDS is required to be deducted?

    As per the provisions of this new section, TDS will be deducted at the rate of five percent (5%) if the aggregate amount of payment exceeds Rs. 50 Lakh in a particular financial year.

    In case, PAN is not available, TDS will be deducted at the rate of twenty percent (20%).

    TDS is required to be deducted at the time of:

    • Credit of the amount.
    • Payment by cash or by the issue of a cheque or draft.

    whichever is earlier.


    Who is responsible for deducting TDS?

    The following persons are liable to deduct TDS under this section :

    1. Any individual or
    2. HUF

    If any payment is made to a resident contractor or a resident professional for carrying out any work in nature of personal purpose

    If any payment is made to a resident by way of commission or brokerage by an individual or HUF who is not required to get their books of accounts audited.


    Some important points

    • This section is not applicable to non-resident contractors.
    • A lower TDS certificate can be submitted under this section.
    • Quote PAN in place of TAN: The government has given relaxation under this section; individuals or HUF can deposit TDS to the government using PAN in place of TAN, and TAN is not required to be obtained.
    • This section is applicable from 01 September 2019.

    If the contract is entered before 01 September 2019 and payment is made after this date, TDS will be deducted subject to the amount of payments exceeding Rs. 50 lakh.

    Example :
    Lets say, a contract was entered on 05 July 2019, but payment was made on 05 September 2019 of Rs. 52 Lakh.
    In the above case, TDS will be deducted on Rs. 52 Lakh @ 5%.


    Frequently Asked Questions

    Q- A made a payment of Rs. 55 lakh for professional services on September 5, 2019. Will TDS be deducted in this case? If yes, on what amount?

    In the above case, TDS will be deducted as amount of payment exceeds Rs. 50 Lakh and TDS will be deducted on Rs. 55 lakh as explained in the below table:

    Particular Amount ( Rs.)
    Total Amount of payment 55 lakh
    Amount on which TDS to be deducted 55 lakh
    TDS @ 5% 2.75 lakh

    Q- A entered into a catering contract on July 25, 2019, and made a payment of Rs. 55 lakh on August 30, 2019. Will TDS be deducted in this case?

    In this case, contract was entered before 1Sep, 2019, but payment was made before 01 September 2019; hence, TDS will not be deducted.


    Q- How to pay TDS amount to the government under this section?

    Challan for payment of TDS under this section is yet to be notified by the government.


    Q- A made a payment of professional fees of Rs. 55L, and A is liable to get his accounts audited under section 44 AB. Whether is TDS required to be deducted under this section?

    As per this section, individuals who are required to get their accounts audited are not covered; hence, TDS will not be deducted under this section.


    Q- How will the deductee get credit/refund of the tax deducted?

    When tax is deposited to the government through challan, the tax will appear in 26AS of the deductee, and the deductee can claim credit of TDS.


    Q- An individual receives a bill of catering of Rs. 42 Lakh and a bill of consultancy of Rs. 10 Lakh from one single person. Whether TDS will be deducted?

    The threshold limit of Rs. 50 Lakh is the aggregate limit for both professional and contractual work; hence, TDS will be deducted.

    Particular Amount ( Rs.)
    Catering Bill 42 Lakh
    Consultancy Bill 10 Lakh
    Total Bill 52 Lakh
    TDS to be deducted on 52 Lakh
    TDS @ 5% 2.6 Lakh

    CA Abhishek Soni
    CA Abhishek Soni

    Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.

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