Section 194J of Income Tax Act: TDS on Professional & Technical Fees

Section 194J of Income Tax Act: TDS on Professional & Technical Fees. Section 194J of the Income Tax Act governs the provisions related to the deduction of tax at source (TDS) on professional and technical fees, royalty, non-compete fees, and director remuneration (excluding salary). This section ensures timely tax collection from high-value professional and technical service payments by shifting the responsibility of tax deduction to the person making such payments. The provisions apply when a certain threshold of payment is crossed, and the tax deducted must be deposited with the government.
Types of Payments Covered Under Section 194J
Under Section 194J of Income Tax Act, various types of payments are covered when made to a resident. These include fees for professional services, technical services, royalty, non-compete fees, and director's fees or commission. These payments are subject to TDS only when the amount exceeds the prescribed threshold. The provision ensures that income earned from such specialized services is reported and taxed appropriately by deducting tax at the source of payment.
Professional Services
Professional services include services rendered by individuals in the fields of medicine, law, accountancy, engineering, architecture, interior decoration, advertising, and other notified professions. CBDT also includes film artists, company secretaries, information technology professionals, and sports professionals like coaches, umpires, and commentators under this category. These services are covered due to the nature of expertise and skill involved, and any income earned through such services becomes liable for TDS once the payment exceeds the threshold limit.
Technical Services
Technical services refer to services involving technical, managerial, or consultancy support provided by a person. These services typically include expert knowledge or know-how related to a technical field. Examples include IT consultancy, software development, system integration services, engineering consulting, or even business management services. As per court rulings, the services should involve human intervention and technical expertise. Payments for services delivered solely through automated means or software do not qualify as technical services under this section.
Royalty
Royalty is defined as payment made for the use or transfer of rights related to intellectual property, such as patents, copyrights, trademarks, formulas, models, or designs. It also includes payments for providing any information concerning the use of such intellectual property. For instance, if a business pays for using a patented software or accessing scientific data, the payment is considered royalty and subject to TDS under Section 194J of Income Tax Act.
Non-Compete Fees
Non-compete fees refer to payments made in exchange for an agreement where the recipient agrees not to compete with the payer or not to share specific technical or business knowledge. These payments can be in cash or kind and are made to prevent individuals or businesses from disclosing information, licensing rights, or engaging in similar professional activity. Such arrangements are generally used in takeovers, mergers, or employment contracts where confidential knowledge transfer is restricted.
Fees to Directors
Any remuneration, fees, or commission paid to a director (excluding salary) is also covered under this section. These payments include sitting fees for attending board meetings or commissions paid for professional services. Regardless of the amount, TDS must be deducted on such payments without applying any threshold limit. The flat TDS rate for director fees is 10%.
Who is Liable to Deduct TDS under Section 194J?
All persons making specified payments to a resident are required to deduct tax under Section 194J, except individual or HUF taxpayers who are not liable for tax audit under Section 44AB in the previous financial year. If an individual or HUF is covered under tax audit, they are required to deduct TDS while making payment for professional or technical services. Thus, all companies, firms, cooperative societies, trusts, and associations are liable to deduct TDS under this section, and so are individuals and HUFs if their turnover exceeds audit limits.
Threshold Limit for Deducting TDS under Section 194J
TDS under Section 194J of Income Tax Act is applicable only when the amount paid or credited to a resident exceeds Rs. 50,000 in a financial year. This limit applies separately for each category of payment such as professional fees, technical fees, royalty, and non-compete fees. For example, if Rs. 30,000 is paid as royalty and Rs. 30,000 as technical fees, no TDS is applicable. However, if Rs. 55,000 is paid as professional fees alone, TDS needs to be deducted on the entire amount. The limit used to be Rs. 30,000 earlier but has been revised to Rs. 50,000 effective from April 1, 2025.
Rate of TDS Deduction under Section 194J
The TDS rates under Section 194J are determined based on the nature of the payment:

For technical services: 2% (excluding professional consultancy)

Call center payments: 2%

Royalty for distribution or exhibition of films: 2%

Other royalty payments: 10%

Professional fees and all other cases: 10%

If PAN is not provided: 20%

Payments to directors: 10% without threshold limit

These rates are prescribed by the government and are liable to change through Finance Acts or circulars.
Time of Deduction and Deposit of TDS
TDS should be deducted either at the time of crediting the amount to the payee’s account or making the actual payment, whichever occurs earlier. Once TDS is deducted, it must be deposited with the government within the prescribed timelines:

If payment is made before 1st March: Deposit by 7th of the next month.

If payment is made in March: Deposit by April 30th for non-government deductors. For government deductors, the timelines differ slightly depending on whether a challan is used or not.

Consequences of Non-Deduction or Late Deduction of TDS
Failure to deduct or deposit TDS on time leads to multiple consequences:
1. Disallowance of Expenses: As per Section 40(a)(ia), if the TDS is not deducted or not deposited before the due date of filing the income tax return, 30% of the expenditure will be disallowed. This means the payer cannot claim that portion as a business expense. However, the disallowed amount will be allowed as a deduction in the year in which the TDS is deposited.
2. Interest for Delay: Interest is levied for delay in deduction or delay in payment:

For non-deduction: 1% per month or part of the month from the date tax was deductible to the date of deduction.

For non-payment: 1.5% per month or part of the month from the date of deduction to the date of deposit.

3. Penalty and Prosecution: Under Section 271C, a penalty equal to the amount of TDS not deducted or deposited may be levied. Also, if the tax is deducted but not paid, the deductor may face imprisonment ranging from 3 months to 7 years under Section 276B.
Issuance of TDS Certificate - Form 16A
The person deducting TDS under Section 194J must issue Form 16A to the deductee. This TDS certificate provides details of the amount deducted and deposited. The due dates for issuing Form 16A are:

April to June: 15th August

July to September: 15th November

October to December: 15th February

January to March: 15th June This form helps the deductee claim TDS credit while filing their income tax return.

TDS Statement Filing
The deductor is also required to file TDS returns on a quarterly basis in Form 26Q. These statements must include all details of the deductees, amount paid, TDS deducted, and deposited. Non-filing or delayed filing of TDS returns may attract penalties under Section 234E and late fees under Section 271H.
CBDT Clarifications and Circulars
The Central Board of Direct Taxes (CBDT) has clarified the scope of Section 194J in various scenarios:

Payments for software usage generally do not attract TDS under Section 194J if they are not for professional or technical services.

Recruitment agency fees are treated as professional services and liable for TDS.

GST should not be included in the TDS base amount if separately mentioned in the invoice.

Maintenance contracts involving only supply of parts and basic servicing may fall under Section 194C unless technical services are involved.

Examples of TDS under Section 194J
Example 1: A hospital pays Rs. 5,00,000 to a senior surgeon for surgical services. As the service falls under the category of professional services and exceeds the threshold, TDS at 10% must be deducted.
Example 2: A company hires a software consultant for IT integration and pays Rs. 70,000. Since the service involves technical expertise, TDS must be deducted at 2% under technical services.
Example 3: Mr. X, who is under tax audit, hires a chartered accountant for GST consultation and pays Rs. 1,00,000. He must deduct TDS at 10% and deposit it as per the timelines.
Example 4: A publishing house pays Rs. 80,000 to a writer for use of their script. The payment is considered royalty and attracts TDS at 10%.
Conclusion
Section 194J of Income Tax Act is a vital compliance requirement that covers payments made to professionals and technical service providers. It ensures that tax is collected in advance and that all high-value payments are reported to the tax authorities. Understanding its provisions, including applicable rates, thresholds, consequences, and exceptions, is essential for all businesses, consultants, and service providers. Failure to comply with these rules can result in financial penalties, disallowance of expenses, and even prosecution. Therefore, timely deduction and deposit of TDS under Section 194J is necessary for smooth tax compliance.
FAQs
Q1. What is Section 194J of the Income Tax Act?
Ans. Section 194J deals with the deduction of TDS on payments made towards professional services, technical services, royalty, non-compete fees, and director's fees. It requires certain entities to deduct tax at source when making these payments to residents.
Q2. Who is required to deduct TDS under Section 194J?
Ans. Every person other than an individual or HUF (not liable for tax audit under Section 44AB) who makes payment for services mentioned under Section 194J must deduct TDS. Individuals and HUFs must deduct TDS if they are liable to audit.
Q3. What is the threshold limit for TDS deduction under Section 194J?
Ans. TDS must be deducted only when the payment to a resident for professional or technical services exceeds Rs. 50,000 in a financial year. This limit is separate for each category such as royalty or technical fees.
Q4. What is the TDS rate applicable under Section 194J?
Ans. The TDS rate is 10% for professional services and royalty, and 2% for technical services and call center payments. If PAN is not provided, TDS is deducted at 20%.
Q5. When should TDS be deducted under Section 194J?
Ans. TDS should be deducted at the time of credit of the amount to the payee’s account or at the time of payment, whichever is earlier.
Q6. Is TDS applicable on director's fees under Section 194J?
Ans. Yes, any remuneration or sitting fees paid to directors (excluding salary) are subject to TDS at 10% without any threshold limit.
Q7. Are payments made for personal purposes also covered under Section 194J?
Ans. No, if an individual or HUF makes payments for personal purposes, TDS under Section 194J is not applicable, even if the payment exceeds the threshold.
Q8. What are the consequences of non-deduction or late deduction of TDS under Section 194J?
Ans. Non-deduction or late deduction may lead to disallowance of 30% of the expense, interest at 1% or 1.5% per month, penalties under Section 271C, and possible prosecution under Section 276B.
Q9. Is GST included while calculating TDS under Section 194J?
Ans. If GST is shown separately in the invoice, TDS should be deducted only on the base amount, excluding the GST component.
Q10. How is the TDS certificate issued for deduction under Section 194J?
Ans. The deductor must issue Form 16A as a TDS certificate to the payee, which shows the amount deducted and deposited. It must be issued quarterly on or before the prescribed due dates.

Section 194J of the Income Tax Act governs the provisions related to the deduction of tax at source (TDS) on professional and technical fees, royalty, non-compete fees, and director remuneration (excluding salary). This section ensures timely tax collection from high-value professional and technical service payments by shifting the responsibility of tax deduction to the person making such payments. The provisions apply when a certain threshold of payment is crossed, and the tax deducted must be deposited with the government.

Types of Payments Covered Under Section 194J

Under Section 194J of Income Tax Act, various types of payments are covered when made to a resident. These include fees for professional services, technical services, royalty, non-compete fees, and director's fees or commission. These payments are subject to TDS only when the amount exceeds the prescribed threshold. The provision ensures that income earned from such specialized services is reported and taxed appropriately by deducting tax at the source of payment.

Professional Services

Professional services include services rendered by individuals in the fields of medicine, law, accountancy, engineering, architecture, interior decoration, advertising, and other notified professions. CBDT also includes film artists, company secretaries, information technology professionals, and sports professionals like coaches, umpires, and commentators under this category. These services are covered due to the nature of expertise and skill involved, and any income earned through such services becomes liable for TDS once the payment exceeds the threshold limit.

Technical Services

Technical services refer to services involving technical, managerial, or consultancy support provided by a person. These services typically include expert knowledge or know-how related to a technical field. Examples include IT consultancy, software development, system integration services, engineering consulting, or even business management services. As per court rulings, the services should involve human intervention and technical expertise. Payments for services delivered solely through automated means or software do not qualify as technical services under this section.

Royalty

Royalty is defined as payment made for the use or transfer of rights related to intellectual property, such as patents, copyrights, trademarks, formulas, models, or designs. It also includes payments for providing any information concerning the use of such intellectual property. For instance, if a business pays for using a patented software or accessing scientific data, the payment is considered royalty and subject to TDS under Section 194J of Income Tax Act.

Non-Compete Fees

Non-compete fees refer to payments made in exchange for an agreement where the recipient agrees not to compete with the payer or not to share specific technical or business knowledge. These payments can be in cash or kind and are made to prevent individuals or businesses from disclosing information, licensing rights, or engaging in similar professional activity. Such arrangements are generally used in takeovers, mergers, or employment contracts where confidential knowledge transfer is restricted.

Fees to Directors

Any remuneration, fees, or commission paid to a director (excluding salary) is also covered under this section. These payments include sitting fees for attending board meetings or commissions paid for professional services. Regardless of the amount, TDS must be deducted on such payments without applying any threshold limit. The flat TDS rate for director fees is 10%.

Who is Liable to Deduct TDS under Section 194J?

All persons making specified payments to a resident are required to deduct tax under Section 194J, except individual or HUF taxpayers who are not liable for tax audit under Section 44AB in the previous financial year. If an individual or HUF is covered under tax audit, they are required to deduct TDS while making payment for professional or technical services. Thus, all companies, firms, cooperative societies, trusts, and associations are liable to deduct TDS under this section, and so are individuals and HUFs if their turnover exceeds audit limits.

Threshold Limit for Deducting TDS under Section 194J

TDS under Section 194J of Income Tax Act is applicable only when the amount paid or credited to a resident exceeds Rs. 50,000 in a financial year. This limit applies separately for each category of payment such as professional fees, technical fees, royalty, and non-compete fees. For example, if Rs. 30,000 is paid as royalty and Rs. 30,000 as technical fees, no TDS is applicable. However, if Rs. 55,000 is paid as professional fees alone, TDS needs to be deducted on the entire amount. The limit used to be Rs. 30,000 earlier but has been revised to Rs. 50,000 effective from April 1, 2025.

Rate of TDS Deduction under Section 194J

The TDS rates under Section 194J are determined based on the nature of the payment:

For technical services: 2% (excluding professional consultancy)
Call center payments: 2%
Royalty for distribution or exhibition of films: 2%
Other royalty payments: 10%
Professional fees and all other cases: 10%
If PAN is not provided: 20%
Payments to directors: 10% without threshold limit

These rates are prescribed by the government and are liable to change through Finance Acts or circulars.

Time of Deduction and Deposit of TDS

TDS should be deducted either at the time of crediting the amount to the payee’s account or making the actual payment, whichever occurs earlier. Once TDS is deducted, it must be deposited with the government within the prescribed timelines:

If payment is made before 1st March: Deposit by 7th of the next month.
If payment is made in March: Deposit by April 30th for non-government deductors. For government deductors, the timelines differ slightly depending on whether a challan is used or not.

Consequences of Non-Deduction or Late Deduction of TDS

Failure to deduct or deposit TDS on time leads to multiple consequences:

1. Disallowance of Expenses: As per Section 40(a)(ia), if the TDS is not deducted or not deposited before the due date of filing the income tax return, 30% of the expenditure will be disallowed. This means the payer cannot claim that portion as a business expense. However, the disallowed amount will be allowed as a deduction in the year in which the TDS is deposited.

2. Interest for Delay: Interest is levied for delay in deduction or delay in payment:

For non-deduction: 1% per month or part of the month from the date tax was deductible to the date of deduction.
For non-payment: 1.5% per month or part of the month from the date of deduction to the date of deposit.

3. Penalty and Prosecution: Under Section 271C, a penalty equal to the amount of TDS not deducted or deposited may be levied. Also, if the tax is deducted but not paid, the deductor may face imprisonment ranging from 3 months to 7 years under Section 276B.

Issuance of TDS Certificate - Form 16A

The person deducting TDS under Section 194J must issue Form 16A to the deductee. This TDS certificate provides details of the amount deducted and deposited. The due dates for issuing Form 16A are:

April to June: 15th August
July to September: 15th November
October to December: 15th February
January to March: 15th June This form helps the deductee claim TDS credit while filing their income tax return.

TDS Statement Filing

The deductor is also required to file TDS returns on a quarterly basis in Form 26Q. These statements must include all details of the deductees, amount paid, TDS deducted, and deposited. Non-filing or delayed filing of TDS returns may attract penalties under Section 234E and late fees under Section 271H.

CBDT Clarifications and Circulars

The Central Board of Direct Taxes (CBDT) has clarified the scope of Section 194J in various scenarios:

Payments for software usage generally do not attract TDS under Section 194J if they are not for professional or technical services.
Recruitment agency fees are treated as professional services and liable for TDS.
GST should not be included in the TDS base amount if separately mentioned in the invoice.
Maintenance contracts involving only supply of parts and basic servicing may fall under Section 194C unless technical services are involved.

Examples of TDS under Section 194J

Example 1: A hospital pays Rs. 5,00,000 to a senior surgeon for surgical services. As the service falls under the category of professional services and exceeds the threshold, TDS at 10% must be deducted.

Example 2: A company hires a software consultant for IT integration and pays Rs. 70,000. Since the service involves technical expertise, TDS must be deducted at 2% under technical services.

Example 3: Mr. X, who is under tax audit, hires a chartered accountant for GST consultation and pays Rs. 1,00,000. He must deduct TDS at 10% and deposit it as per the timelines.

Example 4: A publishing house pays Rs. 80,000 to a writer for use of their script. The payment is considered royalty and attracts TDS at 10%.

Conclusion

Section 194J of Income Tax Act is a vital compliance requirement that covers payments made to professionals and technical service providers. It ensures that tax is collected in advance and that all high-value payments are reported to the tax authorities. Understanding its provisions, including applicable rates, thresholds, consequences, and exceptions, is essential for all businesses, consultants, and service providers. Failure to comply with these rules can result in financial penalties, disallowance of expenses, and even prosecution. Therefore, timely deduction and deposit of TDS under Section 194J is necessary for smooth tax compliance.

FAQs

Q1. What is Section 194J of the Income Tax Act?

Ans. Section 194J deals with the deduction of TDS on payments made towards professional services, technical services, royalty, non-compete fees, and director's fees. It requires certain entities to deduct tax at source when making these payments to residents.

Q2. Who is required to deduct TDS under Section 194J?

Ans. Every person other than an individual or HUF (not liable for tax audit under Section 44AB) who makes payment for services mentioned under Section 194J must deduct TDS. Individuals and HUFs must deduct TDS if they are liable to audit.

Q3. What is the threshold limit for TDS deduction under Section 194J?

Ans. TDS must be deducted only when the payment to a resident for professional or technical services exceeds Rs. 50,000 in a financial year. This limit is separate for each category such as royalty or technical fees.

Q4. What is the TDS rate applicable under Section 194J?

Ans. The TDS rate is 10% for professional services and royalty, and 2% for technical services and call center payments. If PAN is not provided, TDS is deducted at 20%.

Q5. When should TDS be deducted under Section 194J?

Ans. TDS should be deducted at the time of credit of the amount to the payee’s account or at the time of payment, whichever is earlier.

Q6. Is TDS applicable on director's fees under Section 194J?

Ans. Yes, any remuneration or sitting fees paid to directors (excluding salary) are subject to TDS at 10% without any threshold limit.

Q7. Are payments made for personal purposes also covered under Section 194J?

Ans. No, if an individual or HUF makes payments for personal purposes, TDS under Section 194J is not applicable, even if the payment exceeds the threshold.

Q8. What are the consequences of non-deduction or late deduction of TDS under Section 194J?

Ans. Non-deduction or late deduction may lead to disallowance of 30% of the expense, interest at 1% or 1.5% per month, penalties under Section 271C, and possible prosecution under Section 276B.

Q9. Is GST included while calculating TDS under Section 194J?

Ans. If GST is shown separately in the invoice, TDS should be deducted only on the base amount, excluding the GST component.

Q10. How is the TDS certificate issued for deduction under Section 194J?

Ans. The deductor must issue Form 16A as a TDS certificate to the payee, which shows the amount deducted and deposited. It must be issued quarterly on or before the prescribed due dates.