Section 194M was introduced in the Finance Act, 2022 to make the process of TDS (Tax Deducted at Source) simpler for payments to resident contractors and professionals. This rule has been effective since September 1, 2019.
Section 194M applies to individuals or Hindu Undivided Families (HUFs) who make payments under a contract, as commission or brokerage, or as fees for professional services during a financial year.
Prior to Section 194M, many individuals and HUFs earning income from clients were not paying taxes on those earnings, leading to tax evasion. To address this, the government introduced Section 194M to ensure that taxes are deducted at the source.
Note: In Budget 2024, the TDS rate on certain payments made by specific individuals or Hindu Undivided Families (HUFs) under Section 194M is reduced from 5% to 2%, effective from October 1, 2024. This adjustment is intended to provide relief and make the tax process simpler for smaller payments.
What is Section 194M?
Section 194M is a tax provision designed to help individuals and Hindu Undivided Families (HUFs) comply with TDS (Tax Deducted at Source) requirements, even if their gross receipts do not meet the usual thresholds for business or professional income.
Normally, TDS provisions apply if an individual or HUF has business receipts exceeding ₹1 crore or professional receipts over ₹50 lakh. However, Section 194M is an exception. It applies when an individual or HUF makes payments of more than ₹50 lakh in a financial year to a resident individual for:
- Contractual work,
- Brokerage or commission (excluding insurance commission),
- Professional services.
This provision ensures that even those with smaller businesses, who may not meet the larger thresholds for other TDS provisions, are still required to comply with TDS on significant payments.
Key Points about Section 194M:
- TDS Deduction: If an individual or HUF has gross receipts exceeding ₹1 crore (for business) or ₹50 lakh (for profession), they must deduct TDS under Sections 194C (payments to contractors), 194H (commission), or 194J (professional fees).
- Exemption: If the individual or HUF is already required to deduct TDS under Sections 194C, 194H, or 194J, they are exempt from Section 194M.
- TDS Compliance: Individuals or HUFs need only quote their PAN to deduct and remit the TDS, and do not need to obtain a TAN (Tax Deduction Account Number).
- Non-Residents Excluded: Payments made to non-residents are not covered under Section 194M.
In summary, Section 194M ensures that smaller individuals and HUFs, who are making significant payments to resident contractors or professionals, fulfill their TDS obligations without the need to register for a TAN.
What is the Nature of Payments Covered Under Section 194M?
Under Section 194M, the nature of payments is classified as follows:
- Contract: The term “contract” is defined in Section 194C of the Income Tax Act. It refers to any agreement where one party agrees to carry out work for another, typically involving the exchange of money for services provided.
- Commission or Brokerage: Payments made for commission or brokerage are outlined in Section 194H of the Income Tax Act. This includes payments made for services such as sales commissions or finding clients. However, it does not include insurance commissions.
- Professional Services: The term professional services is defined under Section 194J of the Income Tax Act. It includes services offered by professionals like lawyers, accountants, doctors, and consultants.
- Work: The term “work” is explained in Section 194C of the Income Tax Act. It typically refers to the execution of tasks or services under a contract, covering both manual and intellectual work.
In summary, Section 194M covers payments for contractual work, commission or brokerage, and professional services, with specific clarifications provided in the relevant sections of the Income Tax Act.
Understanding the Definitions of ‘Work,’ ‘Contract,’ and ‘Professional Services’ Under Section 194M
Section 194M specifies certain types of payments made by an individual or Hindu Undivided Family (HUF) to a resident contractor or professional for personal purposes. Below is a detailed breakdown of the key definitions:
Work
When an individual or HUF makes a payment to a resident contractor for performing work related to a personal purpose, the term “work” includes the following activities:
- Advertising
- Broadcasting and Telecasting (including program production)
- Carriage of Goods and Passengers using any mode of transport (excluding railways)
- Catering
- Manufacturing or Supply of a Product according to the customer’s specifications using material purchased from the customer. This does not include manufacturing or supplying a product as per a customer’s specifications using materials purchased from a third party.
Professional Services
When an individual or HUF makes a payment to a resident professional for providing professional services for personal purposes, the term “professional services” includes the following:
- Fees for Professional Services
- Fees for Technical Services
- Remuneration, Fee, or Commission to a director of a company (if not subject to TDS under Section 192)
- Royalty
- Non-compete Fees (payments made for not engaging in any business or profession)
Other points to remember
- Commission: Payments made by an individual or HUF to a resident individual or HUF as commission are also covered under Section 194M.
- Contract: As per Clause (iii) of Section 194C, the term “contract” includes sub-contracts as well.
- The Insurance Commission is not covered under Section 194M.
What is the TDS Rate as per Section 194M and When is it Required to be Deducted?
Under Section 194M of the Income Tax Act, TDS (Tax Deducted at Source) is applicable when certain payments are made. Here’s a simple breakdown:
TDS Rate:
The TDS rate is 5% (2% effective from October 1, 2024) if the total payment in a financial year exceeds Rs. 50 lakh. If the PAN (Permanent Account Number) is not available, the TDS will be deducted at a higher rate of 20%.
When is TDS Deducted?
TDS is required to be deducted at the earliest of the following two events:
- When the amount is credited to the payee’s account.
- When the payment is made in cash, or a cheque or draft is issued.
In simpler terms, TDS must be deducted when the amount is either recorded in the account or paid out—whichever happens first.
Who is Responsible for Deducting TDS?
Under Section 194M, the following persons are responsible for deducting TDS:
- Individual or HUF (Hindu Undivided Family): If an individual or HUF makes a payment, they are required to deduct TDS under this section.
- When Payment is Made for Personal Work or Services: If the payment is made to a resident contractor or resident professional for services related to personal work or purposes, the individual or HUF is responsible for deducting TDS.
- Commission or Brokerage Payments: If an individual or HUF pays commission or brokerage to a resident, and they are not required to have their books of accounts audited, they must also deduct TDS under section 194M.
In simple terms, any individual or HUF making certain payments, such as for professional services or commission, is responsible for deducting TDS under this section, as long as they meet the specified conditions.
Important Points About Section 194M
Here are some key points to understand about Section 194M:
- Not Applicable to Non-Resident Contractors: This section does not apply to non-resident contractors. It is only relevant for payments made to resident contractors or professionals.
- Lower TDS Certificate: A taxpayer can submit a lower TDS certificate under this section if they qualify for a lower rate of deduction based on their income.
- Quote PAN Instead of TAN: There is a relaxation provided under this section: individuals or HUF can use their PAN (Permanent Account Number) to deposit TDS instead of TAN (Tax Deduction and Collection Account Number). Therefore, they are not required to obtain a TAN.
- Effective from 1st September 2019: Section 194M has been in effect since 1st September 2019.
- TDS on Payments After 1st September 2019: If a contract was made before 1st September 2019, but the payment is made after this date, TDS will still be deducted, provided the payment exceeds Rs. 50 lakh. For example, If a contract was entered on 5th July 2019, but the payment of Rs. 52 lakh is made on 5th September 2019, then TDS will be deducted at 5% (2% effective from October 1, 2024) on the total payment of Rs. 52 lakh.
Frequently Asked Questions (FAQs) on Section 194M TDS
Here are some commonly asked questions regarding Section 194M:
Who needs to deduct TDS under Section 194M?
TDS under Section 194M is applicable to individuals and HUFs (Hindu Undivided Families) who make payments to resident contractors or professional services providers.
What is the rate of TDS under Section 194M?
The TDS rate is 5% (2% effective from October 1, 2024) if the total payment exceeds Rs. 50 lakh in a financial year. If the PAN is not provided, the rate increases to 20%.
When should TDS be deducted?
TDS should be deducted at the time of crediting the amount to the payee’s account or when payment is made (cash, cheque, or draft), whichever happens first.
Is TDS under Section 194M applicable to non-residents?
No, Section 194M does not apply to non-resident contractors. It only applies to resident contractors and professionals.
Can an individual or HUF use PAN instead of TAN?
Yes, under Section 194M, individuals or HUFs can deposit TDS using their PAN (Permanent Account Number) instead of needing to obtain a TAN (Tax Deduction Account Number).
What happens if a contract was signed before 1st September 2019?
If a contract was entered before 1st September 2019, but the payment is made after this date, TDS will be deducted if the payment exceeds Rs. 50 lakh.
Is there a lower TDS certificate available under Section 194M?
Yes, if you qualify, you can submit a lower TDS certificate to the government to have tax deducted at a reduced rate.
Did A need to deduct TDS on a Rs. 55 lakh payment for professional services made on September 5, 2019? If yes, on what amount?
If A made a payment of Rs. 55 lakh for professional services on September 5, 2019, TDS will be deducted because the amount exceeds Rs. 50 lakh.
Here’s the breakdown:
- Total Amount of Payment: Rs. 55 lakh
- Amount on which TDS will be deducted: Rs. 55 lakh
- TDS Rate: 5% (since the payment exceeds Rs. 50 lakh)
- TDS Deducted: TDS at 5%: Rs. 2.75 lakh
So, TDS of Rs. 2.75 lakh will be deducted on the total payment of Rs. 55 lakh.
TDS rate is 2% effective from October 1, 2024, here’s how the calculation will change for a payment of Rs. 55 lakh if the date is October 5, 2024:
- Total Amount of Payment: Rs. 55 lakh
- Amount on which TDS will be deducted: Rs. 55 lakh
- TDS Rate after October 1, 2024: 2%
- TDS Deducted: Rs. 55,00,000 x 2% = Rs. 1,10,000
