Like other services, imparting professional services or technical services also makes lone liable to pay taxes on income earned from it. So, we will be talking about TDS on professional fees in this article, and what else one needs to know.
First of all, let’s be clear about TDS here. It’s Tax deduction at Source. Everyone who has been employed has to pay taxes on the income earned. In most cases, taxes are deducted at source, that means the employer deduct taxes from your income and pay it to the government on your behalf.
TDS on Professional Fees: –
• A person, not being an individual or Hindu Undivided Family, avail the services of professional or technical experts or pay a royalty to any entity, has to deduct TDS at the time of making payment to them, according to section 194J of the Income Tax Act, 1961.
• Here, professional services also include technical services as mentioned in the above points and Non-compete fee as per the section 28VA of Income Tax Act.
• Under the section 194J of Income Tax Act, from the date of 1st July 2012, any fees, commission or remuneration paid to the director of any company also comes under it’s jurisdiction and will be liable for the deduction of TDS. Earlier they were counted as their head salary.
Professional services under section 194J: –
Professional services that comes under the purview of this section are below –
• All the professional that has been notified under section 44AA of Income Tax Act.
• Sports Persons
• Doctors or physiotherapists
• Legal Professionals
• Film artists
• Event managers
Technical experts are –
Services rendered by individual experts regarding –
• Technical consultancy
• Managerial consultancy
Sector-specific consultants from areas such as mining, assembly or construction do not come under this purview. Income from these services are considered as salary of the taxpayer and taxes are deducted on their annual income accordingly.
• Royalty is a payment in exchange of using or monetising or commercial production of someone else’s ideas, invention or secret formulae.
• It also includes transfer of rights for the purpose of it’s scientific, commercial or industrial production.
• It includes sharing of trademarks, patent, intellectual property or copyrights.
Non-Compete Fee: –
• When a person is paid either in cash or in kind, in exchange that he will not share any information related to any patent, license, trademark, intellectual property information, other techniques, business rights or any other know-how related information with anyone else for the purpose of further manufacturing or assembly or innovation. That fee or payment is known as Non-compete fee.
• It includes the fee paid in exchange that no business concerned will be carried out by the person receiving it.
Rate of TDS on professional fees according to section 194J: –
• According to section 194J, any person, on availing services from professional or technical experts or on paying royalty or Non-compete fee, must deduct TDS at the rate of 10% from the payable fee, at the time of making payment to them.
• For the purpose of BPOs(Business Processing Organisation), the same rate is fixed at 2%.
Note: – In case the professional or technical experts have failed to provide his PAN number to the deductor, then the rate at which TDS will be deducted is fixed at 20%.
Are surcharges or other cess applicable?
No, on the top of TDS, no surcharges or educational cess or any other cess or SHEC are applicable.
Who can deduct TDS under sec 194J?
• Anyone other than individual or Hindu Undivided Family can deduct taxes from the fee of professionals.
• Individuals and Hindu Undivided Family, who comes under the purview of section 44AA of Income Tax Act (Tax Auditing), also responsible for deducting taxes from professionals.
Who is exempted from TDS on professional Fees?
• Those professionals or technical experts whose fee do not exceed the taxable amount of Rs 30,000 annually, from one source, are exempted from paying taxes.
• Whose annual income does not exceed the taxable income of Rs 2,50,000?
• Those individuals or Hindu Undivided Family, who charges fee for their professional services, and use the fee for his personal uses.
• In case of person running business, if the total annual turnover of the business is less than Rs 1 crore.
• In case of profession, the limit for exemption is Rs 25 lakhs on annual basis.
• Those who want a reduction in the rate of TDS on professional fees on valid reasons, can seek so by submitting an application with other details such as PAN number to the assessing officer.
• An assessing officer on verification of claims can issue a certificate to the taxpayer which would need to be submitted to the deductor to claim a reduction of rates of TDS.
Deposition of taxes deducted: –
• If the TDS deduction is done by a government agency then it should be deposited on the same day and no challan is issued in this case.
• When non-government entity deducts TDS, then they must deposit the same with the government within 7 days from the end of the month, in which tax has been deducted.
• In case, the taxes have been deducted in the month of March, i.e. the end of the financial year, then a relaxation is available that tax collected should be deposited either within 7 days from the end of the month or on or before 30th of April.
Issuance of TDS certificate: –
It is must for the deductor to issue TDS certificate to the taxpayer on time, failing which may incur a penalty. Mainly there are 2 categories of deductions and due date of issuing certificate is also different for both of them. That are –
• Government Deductor –
1. For a First quarter (1st April to 30th June) – 15th August
2. For Second quarter (1st July to 30th September) – 15th November
3. For a Third quarter (1st October to 31st December) – 15th February
4. For a Fourth quarter (1st January to 31st March) – 30th May
• Non-government Deductor –
1. For a First quarter (1st April to 30th June) – 30th July
2. For a Second quarter (1st July to 30th September) – 30th October
3. For a Third quarter (1st October to 31st December) – 30th January
4. For a Fourth quarter (1st January to 31st March) – 30th May
Some important points to take note of: –
• The deductor in order to deduct TDS on professional fees and deposit the same with the government must have TAN registration. Then only he will be able to deposit it and issue TDS certificate.
• Due to the vagueness of the law under the Income Tax Act, there have been several judgements by different courts of the country. In these judgements, several clarifications regarding this section 194J have been made.
• As per these judgements, several services have been removed under the purview of sec 194J.
• Such as fee paid to the Bombay Stock Exchange doesn’t come under the jurisdiction of section 194J.
• Whereas, payment made for availing services of TV broadcasting, it was held to be applicable for the purpose of TDS on professional fees.
• There can be cases where professional, as well as technical services, can be availed at the same time, in that case, the fee will be paid separately and for the purpose of TDS applicability, the limit of Rs 30,000 will be calculated separately for both the services.
We have discussed section 194J of the Income Tax Act, 1961 here. TDS on professional fees must be deducted with utmost accuracy. It will save the precious time of Income Tax officials. However, in case of any discrepancy, both the deductor and the payee or taxpayer can approach the assessing officer for rectification of the same.
For accurate calculation of TDS on Professional Fees or other related services, please avail the services of Company Vakil.
I am currently pursuing my LLB from Delhi University. My area of focus is Intellectual Property, Patents & Trademark Registration, etc. I have special interest in Commercial Arbitration. Contact me @govsraj on Twitter.