Section 194M | TDS from payments to contractors or professionals by individuals and HUFs

Overview

The Income Tax Act of India mandates the deduction of Tax Deducted at Source (TDS) on various types of payments. Section 194M is a relatively recent addition to the TDS provisions, introduced in the Finance Act of 2019, to streamline TDS compliance for certain individuals and Hindu Undivided Families (HUFs). This section requires TDS to be deducted by individuals or HUFs who make payments for professional or technical services or commission / brokerage or contractor payments not covered under section 194C, 194H or 194J. In this article, we will explore the details of TDS under Section 194M, including who is required to deduct the tax, the applicable rates, and key exceptions.

Who is liable to deduct TDS u/s 194M?

TDS under Section 194M is required to be deducted by “individuals and HUFs” (not liable for tax deduction (TDS) under Section 194C, 194H, or 194J) from payments made to contractors or to a commission agent or broker or to professionals for professional and technical services. However, the key condition is that these individuals or HUFs should not be required to get their accounts audited under Section 44AB of the Income Tax Act (which pertains to taxpayers with turnover or gross receipts exceeding prescribed limits). This means that small and medium-sized businesses, as well as individuals who do not meet the audit criteria, are obligated to deduct TDS when making certain payments.

Threshold limit for deduction

The threshold limit for deduction under Section 194M is ₹50 Lakhs in a financial year. If an individual or HUF makes payments exceeding this threshold, they are required to deduct TDS at the specified rate.

TDS Rate u/s 194M

The TDS rate under Section 194M is 5% of the amount paid. “With effect from 1st October 2024, TDS rate has been reduced to 2% under this section”.

In any case TDS rate will be 20%, if the payee fails to furnish PAN details to the payer (as per section 206AA of the Act).

This TDS rate applies to payments for:

• Payment to a contractor (not covered u/s 194C).
• Payment is made to a commission agent or broker (not covered u/s 194H).
• Fees paid for professional or technical services (not covered u/s 194J).

When is TDS deducted u/s 194M?

Under section 194M, TDS is required to be deducted at the earlier of the following:-

• At the time of credit of such income to the account of service provider; or,
• At the time of payment of such sum in cash or by cheque or by any other mode.

Note: No “Tax Deduction or Collection Account Number (TAN)” is needed for deducting tax under this section. Therefore, the deductor can use their PAN instead of obtaining a TAN.

Time to Deposit TDS u/s 194M

The tax deducted at source (TDS) u/s 194M must be deposited to the Central Government within 30 days from the end of the month in which the tax was deducted.

Exemptions from TDS under Section 194M

While Section 194M mandates TDS on certain payments, there are several exemptions:

• Payments made to government etc: As per Section 196, no tax shall be deducted under this provision from any sum payable to the Government, RBI, Mutual Fund, or any Corporation established under the Act that is exempt from tax.
• Payments below the threshold: If the total payments made to a particular payee in a financial year do not exceed ₹50 lakh, no TDS needs to be deducted.

Consequences on Non-compliance u/s 194M

Following are the consequences and penalties for non-compliance with section 194M:

• Penalty u/s 271C:
  “Penalty on failure to deduct and deposit TDS”, if person fails to deduct the tax as required u/s 194M shall be subjected to a penalty u/s 271C. The penalty amount cannot exceed the amount of TDS required to be deducted.
• TDS is not deducted:
  If a deductor has not deducted the TDS as required under Section 194M, it charges interest of @1% per month till the date TDS is deducted.
• TDS is deducted but not deposited:
  If a deductor has deducted the TDS as required under Section 194M but has not deposited the collected tax to the government, then it charges interest @1.5% from the date when tax is deducted to the date of deposition.

Why Choose Bizfoc for TDS?

At Bizfoc, we specialize in providing you the best accounting services in filing your TDS. Here are the reasons why we are known for our services to our clients on filing TDS:

• Assist in suggesting the right documents for TDS filing.
• Providing valuable insights on sections of TDS computations.
• Prescribe forms as per the necessity.
• Helps in accurate computations for TDS computations and returns.
• Tailored advice and guidelines for TDS filing.

In general, we assist the client to solve their queries and doubts regarding the documentation, procedures, and fees for filling out the form. Other than making your filing successful, we help you make a better decision by covering every aspect of what you actually need to get your TDS.

Conclusion

Section 194M provides clarity on TDS deductions for payments made by individuals and Hindu Undivided Families (HUFs) for professional and technical services. The introduction of this section has simplified the compliance process for non-corporate taxpayers while ensuring the government receives tax on these transactions. If you fall under the purview of this provision, it is essential to stay updated on the latest thresholds, rates, and filing procedures to avoid penalties and ensure seamless tax compliance.

Frequently Asked Questions? (FAQs)