Section 194M of Income Tax Act: A Guide on TDS on Payments to Resident Contractors and Professionals
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25 May 2022The budget of 2019 introduced various modifications to the already existing income tax rules. During this budget, the government also proposed the addition of Section 194M of Income Tax Act. This section mentions TDS for the services that HUFs or individuals avail from professionals or resident contactors.
Read on to know the various provisions under this section.
Table of contents
- What Is Section 194M of Income Tax Act?
- What is the Reason Behind the Introduction of Section 194M of Income Tax Act?
- What are the Deductions under Section 194M of Income Tax Act?
- What is the Definition of “Contract”, “Professional Services”& “Work” Under Section 194M Of Income Tax?
- Who can deduct TDS under Section 194M?
- What Is the Mode of Depositing TDS?
- When Is the Due Date for Filing TDS Returns?
- Final Word
- FAQs on Section 194M of Income Tax Act
What Is Section 194M of Income Tax Act?
Section 194M of Income Tax Act mentions that any HUF or individual who obtains contractual or professional services should deduct TDS at 5% if the overall payable amount is more than Rs. 50 lakh during a particular FY. The primary aim behind the introduction of this section was to maximise tax regularity and accountability of financial liability among HUFs and individuals.
Further, this section holds relevance when the payment category falls under Section 194H, 194C or 194J of Income Tax Act. Individuals and HUFs who deduct TDS under Section 194J and Section 194C can avail exemption from tax deduction under Section 194M.
Moreover, such entities can complete this process with just their PAN. They don’t need to obtain TAN for the purpose of TDS.
However, note that this clause does not apply to any payment made to NRIs (Non-resident Indians).
Also read: NRI Income Tax Slabs: Details On Taxable Income and Deductions https://navi.com/blog/nri-income-tax-slabs/
What is the Reason Behind the Introduction of Section 194M of Income Tax Act?
India witnessed the introduction of TDS under Section 194M of Income Tax Act in the Finance Bill of 2019. This section applies to both business and personal payments. Before the proposal of this section, an individual or HUF had no obligation to deduct TDS while availing professional or contractual services.
Furthermore, they used to refrain from deducting tax at source even when the payment was made in relation to their profession or business. As a result, a significant percentage of contractual work payments and professional fees were debarred from TDS. This increased the emergence of tax fraud in the country.
What are the Deductions under Section 194M of Income Tax Act?
Evidently, Section 194M of Income Tax Act was introduced to maintain a depth in the structure of the income tax regulations. As per the provisions of this section, TDS shall be applicable in the following payment modes:
- Payment to professionals or resident contractors exceeding Rs. 50 lakh
If a HUF or individual avails services from professionals or contractors, where the total payable amount is more than Rs. 50 lakh, then the payer is liable to deduct TDS at 5%. Here, the various types of payments include:
- House construction
- Land development
- Expenses of event management
- Expenses of marriage
- Gardening
- Advocate fee
- Asset maintenance services
- Property maintenance services
- Crop harvesting
- Payment with regard to hospitals or healthcare
- Payments related to parking charges or maintenance charges during a house purchase
Section 194M of Income Tax Act mentions that TDS shall be applicable on the payment made towards a house purchase.
Individuals or HUFs must also deduct TDS if the payment exceeds the said amount towards car parking fees, house purchase, advance fees, water fees, club membership fees and maintenance fees.
- Rent payment of more than Rs. 50,000 per month
According to this section, TDS shall be deducted if a tenant pays a monthly rent of more than Rs. 50,000. In this situation, he/she shall deduct TDS at 5% for the current financial year.
Furthermore, failing to abide by this rule might attract a penalty of 1% interest a month, which can go up to 1.5%.
Also read: How To Use HRA Exemption Calculator Online? https://navi.com/blog/hra-exemption-calculator/
What is the Definition of “Contract”, “Professional Services”& “Work” Under Section 194M Of Income Tax?
Section 194M of Income Tax Act also mentions the meaning of a few relevant terms. Find details about them below:
- Work
As per this section, work could include the following:
- Telecasting and broadcasting, including programme development of such broadcasting or telecasting
- Advertising
- Catering
- Use of passenger transportation and goods (other than Indian Railways)
- Manufacturing or supplying products in accordance with the request of a customer. However, in this case, the material must have been purchased from the said customer.
- Professional services
As per this section, professional services refer to:
- Technical services charges
- Professional fees
- Remuneration to directors, excluding salary
- Non-compete fees
- Royalty
- Contract
This includes sub-contract and is subjected to clause (iii) of this section.
Who can deduct TDS under Section 194M?
According to the provisions under Section 194M of Income Tax Act, an individual or HUF is responsible for deducting TDS on payment made towards any contractual or professional service.
The rate of TDS is typically set at 5%. However, the government lowered this rate to 3.75% from May 14 2020 to March 31 2021.
What Is the Mode of Depositing TDS?
One can deduct TDS while making the payment in cash, cheque or draft or after the amount is credited into the other person’s bank account.
Mentioned below are the modes of depositing TDS:
For Tenants
- Form 26QC
Any tenant paying a rent of more than Rs. 50,000 must deduct TDS via Form 26QC. He/she must complete this process within 15 days of filing the form at SBI, RBI or any other authorised bank.
Upon TDS deduction, a tenant must deposit the TDS within 15 days of filing Form 26QC. He/she must furnish the deposit along with Form 16C, authorised by the concerned bank. The tenant can then submit this form to his/her landlord, which would work as proof of deposit.
For Immovable Property Purchase
This is a challan cum statement form, which can be utilised for deducting TDS when a resident or NRI purchases a property exceeding the value of Rs. 50 lakh.
Such individuals or HUFs must fill this form within 7 days of the end of a month.
Also read: How To File TDS on Sale of Property: Registration, Payment Process And Penalty https://navi.com/blog/tds-on-sale-of-property/
Such individuals or HUFs must submit the tax deduction in Form 16B to the seller within 15 days of furnishing Form 26QB.
When Is the Due Date for Filing TDS Returns?
Section 194M of Income Tax Act obligates HUFs and individuals to deduct tax at source concerning specific payments. In this regard, the deadline to file TDS for the relevant quarters is mentioned in the table below:
| Quarter | Date |
| April to June | July 31 |
| July to September | October 31 |
| September to December | January 31 |
| January to March | May 31 |
Final Word
The above sections discuss the various provisions under Section 194M of Income Tax Act. That said, individuals or HUFs must keep these in mind and abide by the same to stay on the safe side of the law.
FAQs on Section 194M of Income Tax Act
As per Section 194M of Income Tax Act, the person who deducts TDS must provide the payee with a certificate along with Form 16D. Note that one should do this within 15 days of furnishing the challan cum statement through Form 26QD.
An individual or HUF must deduct TDS on a payment amount of more than Rs.50 lakh at the time of credit of the amount or while making the payment through any other mode, such as cash, cheque or draft.
Section 197 of Income Tax Act provides the benefit of a zero tax deduction or a reduced tax rate. However, to avail this benefit, the property owner or landlord must make an application along with a fee to the assessing officer under Section 194M of Income Tax Act.
The due date for TDS payment is before or on the 7th date of the upcoming month. This means that if a deductor deducts tax in July, he/she will have to pay the tax deducted at source on or before August 7.
Tax Deduction and Collection Account Number or TAN is a 10-digit alphanumeric number, which the Income Tax Department of India allots. Every person who is liable to deduct TDS has to obtain this document.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
