As per Section 194J of the Income Tax Act, any person (other than an individual or a Hindu Undivided Family) who makes a payment to a resident for professional or technical services is required to deduct TDS. The deduction rate is 10% or 2%, depending on the type of payment made.
This section ensures that tax is collected at the source on certain specified payments, including professional fees, technical services, royalties, and similar charges, provided these exceed the prescribed threshold.
In this article, we explain the scope, applicable rates, threshold limits, and implications of failing to deduct TDS under Section 194J.
What Does Section 194J Cover?
Section 194J applies to payments such as professional charges, technical service fees, royalty, non-compete fees, and remuneration paid to directors.
The TDS rates are:
- 10% for professional services, royalty, and directors’ remuneration
- 2% for technical services
- 20% if the recipient does not furnish a valid PAN
It is important to note that payments made for personal purposes are excluded from TDS obligations under this section.
Payments Included Under Section 194J
The following types of payments to residents fall within the scope of this provision:
- Fees for professional services
- Fees for technical services
- Director’s remuneration, commission, or fees other than salary (such as sitting fees for attending board meetings)
- Royalty payments
- Non-compete fees, i.e., amounts paid to restrict someone from engaging in a particular business or profession for a defined period or within a specific area, or fees paid to prevent sharing of technical expertise or know-how.
Professional Services
Professional services refer to work performed by individuals engaged in medical, legal, architectural, or engineering professions. It also covers any other profession specified by the CBDT under Section 44AA of the Income Tax Act.
Professions Notified by CBDT
The CBDT has specified several professions under Section 44AA, which include film artists, company secretaries, accountants, advertisers, interior decorators, technical consultants, authorized representatives, and information technology professionals.
Additionally, under Section 194J, the CBDT has also recognized sportspersons, commentators, event organizers, anchors, umpires, referees, physiotherapists, coaches, trainers, team doctors, and sports columnists as part of notified professions.
Technical Services
According to income tax provisions, fees for technical services refer to managerial, technical, or consultancy-related services. Payments classified as salary by the recipient are excluded from this category.
- Technical services involve the application of specialized knowledge or expertise in technology.
- Managerial services focus on operating, supervising, and managing the client’s business activities.
- Consultancy services include providing advice or guidance to clients for business decisions.
As per the Supreme Court’s ruling, technical services are those rendered by humans and do not cover services performed by machines or automated systems.
Royalty
Royalty refers to payments made for the following purposes:
- Granting rights or permission to use an invention, model, design, patent, or trademark
- Usage of patents, inventions, or designs
- Sharing information regarding the application of an invention, formula, or patent
- Transfer of rights concerning scientific research, literary works, films, or videotapes for broadcasting, excluding payments for the sale, exhibition, or distribution of cinematographic films
- Providing access to technical, industrial, commercial, or scientific knowledge, skills, or experience
Non-Compete Fees
Non-compete fees refer to payments made, either in cash or kind, under an agreement that prevents a person from transferring or sharing any license, patent, trademark, franchise, know-how, business rights, or commercial information which could otherwise be used for processing, manufacturing, or providing other services.
Persons Liable to Deduct Tax
Any person making payments towards professional or technical services must deduct tax at source. However, the following are exceptions:
- Individuals or HUFs carrying on business: No TDS is required if turnover in the previous year did not exceed ₹1 crore.
- Individuals or HUFs carrying on profession: No TDS is required if turnover in the previous year did not exceed ₹50 lakh.
In short, all entities other than individuals/HUFs not liable for tax audit in the preceding year must deduct TDS on such payments. Where Section 194J does not apply, Section 194M may be relevant.
Threshold Limit for Deduction of Tax
TDS must be deducted if the total payment for professional or technical services in a year exceeds ₹50,000.
This limit applies separately for each payment type. For instance, if ABC Company pays Mr. PK ₹45,000 as royalty and ₹20,000 as technical service fees, TDS is not applicable because the limit is checked individually for royalty and technical services.
For payments to directors (fees, commission, or remuneration), there is no threshold, and TDS must be deducted regardless of the amount.
(Note: Until FY 2024-25, the limit was ₹30,000.)
Rate of TDS Under Section 194J
| Nature of Payment | TDS Rate | Threshold Limit |
| Fees for technical services | 2% | ₹50,000 |
| Payments to call center operators | 2% | ₹50,000 |
| Royalty for cinematographic films (sale, distribution, or exhibition) | 2% | ₹50,000 |
| Other royalty payments | 10% | ₹50,000 |
| Professional services & other payments under this section | 10% | ₹50,000 |
| If PAN not furnished by payee | 20% | ₹50,000 |
| Payments to directors (fees, commission, remuneration) | 10% | No limit |
Time Limit for Deposit of TDS
TDS must be deducted either at the time of:
- Passing the accounting entry, or
- Making the actual payment, whichever occurs first.
Due dates for deposit:
- Non-Government Deductors
- Payments made before 1st March: Deposit by the 7th of the following month
- Payments made in March: Deposit by 30th April
- Payments made before 1st March: Deposit by the 7th of the following month
- Government Deductors
- Payment made through challan: 7th of the next month
- Payment without challan: Same day
- Payment made through challan: 7th of the next month
Consequences of Non-Deduction or Late Deduction of TDS
Failure to deduct tax or delay in deduction of TDS results in two major consequences:
- Disallowance of Part of Expenditure
- 30% of the expenditure will be disallowed in the year in which it is claimed in the profit and loss account.
- The disallowed 30% will, however, be allowed as a deduction in the year when the TDS is actually deposited with the government.
- 30% of the expenditure will be disallowed in the year in which it is claimed in the profit and loss account.
- Levy of Interest Until Date of Payment
- If there is a delay in depositing TDS, interest must be paid along with the tax.
- The applicable rates are:
- No deduction made: Interest at 1% per month or part thereof, calculated from the date the tax was required to be deducted up to the date of actual deduction.
- Deducted but not deposited: Interest at 1.5% per month or part thereof, calculated from the date of deduction until the date of payment to the government.
- No deduction made: Interest at 1% per month or part thereof, calculated from the date the tax was required to be deducted up to the date of actual deduction.
- If there is a delay in depositing TDS, interest must be paid along with the tax.
FAQs on Section 194J – TDS on Professional and Technical Services
Q1. Does payment of remuneration to a company’s director fall under Section 194J?
Yes. Any payment made to a director, other than salary, attracts Section 194J. Since directors provide managerial services, such payments are considered technical services, and TDS at 2% must be deducted.
Q2. What is Section 194J of the Income Tax Act?
Section 194J deals with TDS on payments made for specified services. These include professional services, technical services, royalty, non-compete fees, and remuneration paid to directors (other than salary). Any person making such payments to a resident is required to deduct TDS.
Q3. Who is required to deduct TDS under Section 194J?
- Any person making payments to a resident for professional or technical services must deduct TDS.
- Individuals and HUFs are exempt unless they are liable to a tax audit under Section 44AB.
Q4. Does payment made to a ‘Model’ attract TDS under Section 194J?
No. Since modelling is not a notified profession under Section 44AA, nor covered under Section 194J as professional services, payments made to models are not subject to TDS under this section, unless the work is connected to films or cinematographic services.
Q5. When is TDS not deducted under Section 194J?
TDS is not applicable in the following cases:
- When an individual or HUF making the payment is not liable to a tax audit (turnover below ₹1 crore for business or ₹50 lakh for profession).
- When professional or technical services are availed for personal purposes.
Q6. Is TDS applicable if consultancy services are used for personal purposes?
No. If consultancy or professional services are used purely for personal reasons, Section 194J does not require TDS deduction.
Q7. What services are covered under Section 194J?
The scope of Section 194J includes:
- Professional services (medical, legal, architectural, accountancy, etc.)
- Technical services (managerial, consultancy, advisory)
- Royalty payments
- Non-compete fees
- Remuneration or commission to directors (excluding salary)
Q8. What is the threshold limit for TDS under Section 194J?
TDS applies only if the payment to a resident exceeds ₹50,000 in a financial year for professional or technical services, royalties, or similar payments. However, for director remuneration (other than salary), there is no threshold, and TDS must be deducted regardless of the amount.
Q9. What is the rate of TDS under Section 194J?
- 10% for professional services, royalty, and director’s remuneration
- 2% for technical services and call center payments
- 20% if the recipient fails to provide a valid PAN
Q10. What happens if TDS under Section 194J is not deducted or paid late?
- Disallowance of expenditure: 30% of the expense is disallowed in the year of claim but allowed in the year TDS is deposited.
- Interest liability: 1% per month for non-deduction and 1.5% per month for non-payment after deduction, until the date of deposit.
