Section 194M: TDS on Payments to Resident Contractors and Professionals

Section 194M: TDS on Payments to Resident Contractors and Professionals

Section 194M: TDS on Payments to Resident Contractors and Professionals

In the latest update, the Budget for 2019 has brought about significant changes in the income tax laws. This includes the introduction of new sections for TDS, namely 194M and 194N.

So, what is Section 194M? This particular section requires individuals and Hindu undivided families (HUF) to deduct tax at source. It applies specifically to those who are not required to have their books of accounts audited. In other words, if the total turnover or receipts of a business exceed Rs. 1 crore or the receipts of a profession exceed Rs. 50 lakh, then books of accounts need to be audited. Check out the details here.

This section comes into play when the total amount paid to a resident individual for any contractual work or professional service exceeds Rs. 50,00,000 in a financial year.

However, if individuals or HUFs are required to get their books of accounts audited, the TDS deduction will be applicable under Section 194C and 194J. In cases where individuals or HUFs need to deduct TDS under Section 194C (payment to a contractor) and 194J (payment of professional fees), they are not required to deduct tax at source under Section 194M.

For those who have to deduct tax, they can simply pay the tax to the government by using their PAN, without the need for a tax deduction account number (TAN) for TDS deduction.

It's important to note that this section does not cover payments to non-residents.

The introduction of Section 194M is justified by the need to ensure that tax is deducted at source from any money paid by an individual or HUF to a resident contractor, especially when the services are provided for personal use. Previously, there was no obligation for individuals or HUFs to deduct tax at source in such situations. Additionally, individuals or HUFs engaged in business or profession, not subjected to any audit, were also skipping TDS deductions even when making payments for business or professional purposes. This exemption resulted in a significant amount of payment for contractual works and professional fees evading TDS, leading to potential tax evasion.

To better understand the terms used in Section 194M, let's break them down. The term "work" refers to activities like advertising, broadcasting, telecasting, carriage of goods and passengers (excluding railways), catering, and manufacturing/supplying products based on customer requirements. It does not include manufacturing/supplying products using materials purchased from someone other than the customer. On the other hand, "professional services" include professional fees, fees for technical services, remuneration paid to directors (excluding salary), royalty, and non-compete fees or fees to restrict sharing of technical knowledge or know-how. Lastly, "contract" also encompasses sub-contracts.

Now, who is responsible for deducting TDS under Section 194M? It falls upon individuals or HUFs making payments to residents for completed contract work or professional services. If the total payment during a financial year exceeds Rs. 50,00,000, then TDS at 5% must be deducted. From 14th May 2020 to 31st March 2021, the TDS rate is 3.75%.

This section has been effective since 1st September 2019. Therefore, any payment exceeding Rs. 50,00,000 made after that date, even if the contract existed prior, is subject to TDS.

TDS should be deducted on either the date of credit or the date of payment by cash, cheque, or draft, whichever is earlier.

The TDS rate under Section 194M is 5% for total payments exceeding Rs. 50,00,000 in a financial year. However, from 14th May 2020 to 31st March 2021, the rate is reduced to 3.75%.

In cases where the PAN of the person receiving payment is not available, TDS will be deducted at a higher rate of 20%.

When it comes to depositing TDS, if the payment is made by or on behalf of the government, the TDS amount must be paid on the day of payment. For payments made by any other person, the TDS should be paid using challan cum statement Form 26QD. If the deduction is made in March, the TDS must be deposited by 30th April of the next financial year. For deductions made in any other month, the TDS must be deposited within seven days from the end of that month.

Those deducting tax under Section 194M need to furnish a certificate in Form No. 16D to the payee within 15 days from the due date of furnishing challan cum statement in Form 26QD.

Section 194M: TDS on Payments to Resident Contractors and Professionals

In the latest update, the Budget for 2019 has brought about significant changes in the income tax laws. This includes the introduction of new sections for TDS, namely 194M and 194N.

So, what is Section 194M? This particular section requires individuals and Hindu undivided families (HUF) to deduct tax at source. It applies specifically to those who are not required to have their books of accounts audited. In other words, if the total turnover or receipts of a business exceed Rs. 1 crore or the receipts of a profession exceed Rs. 50 lakh, then books of accounts need to be audited. Check out the details here.

This section comes into play when the total amount paid to a resident individual for any contractual work or professional service exceeds Rs. 50,00,000 in a financial year.

However, if individuals or HUFs are required to get their books of accounts audited, the TDS deduction will be applicable under Section 194C and 194J. In cases where individuals or HUFs need to deduct TDS under Section 194C (payment to a contractor) and 194J (payment of professional fees), they are not required to deduct tax at source under Section 194M.

For those who have to deduct tax, they can simply pay the tax to the government by using their PAN, without the need for a tax deduction account number (TAN) for TDS deduction.

It's important to note that this section does not cover payments to non-residents.

The introduction of Section 194M is justified by the need to ensure that tax is deducted at source from any money paid by an individual or HUF to a resident contractor, especially when the services are provided for personal use. Previously, there was no obligation for individuals or HUFs to deduct tax at source in such situations. Additionally, individuals or HUFs engaged in business or profession, not subjected to any audit, were also skipping TDS deductions even when making payments for business or professional purposes. This exemption resulted in a significant amount of payment for contractual works and professional fees evading TDS, leading to potential tax evasion.

To better understand the terms used in Section 194M, let's break them down. The term "work" refers to activities like advertising, broadcasting, telecasting, carriage of goods and passengers (excluding railways), catering, and manufacturing/supplying products based on customer requirements. It does not include manufacturing/supplying products using materials purchased from someone other than the customer. On the other hand, "professional services" include professional fees, fees for technical services, remuneration paid to directors (excluding salary), royalty, and non-compete fees or fees to restrict sharing of technical knowledge or know-how. Lastly, "contract" also encompasses sub-contracts.

Now, who is responsible for deducting TDS under Section 194M? It falls upon individuals or HUFs making payments to residents for completed contract work or professional services. If the total payment during a financial year exceeds Rs. 50,00,000, then TDS at 5% must be deducted. From 14th May 2020 to 31st March 2021, the TDS rate is 3.75%.

This section has been effective since 1st September 2019. Therefore, any payment exceeding Rs. 50,00,000 made after that date, even if the contract existed prior, is subject to TDS.

TDS should be deducted on either the date of credit or the date of payment by cash, cheque, or draft, whichever is earlier.

The TDS rate under Section 194M is 5% for total payments exceeding Rs. 50,00,000 in a financial year. However, from 14th May 2020 to 31st March 2021, the rate is reduced to 3.75%.

In cases where the PAN of the person receiving payment is not available, TDS will be deducted at a higher rate of 20%.

When it comes to depositing TDS, if the payment is made by or on behalf of the government, the TDS amount must be paid on the day of payment. For payments made by any other person, the TDS should be paid using challan cum statement Form 26QD. If the deduction is made in March, the TDS must be deposited by 30th April of the next financial year. For deductions made in any other month, the TDS must be deposited within seven days from the end of that month.

Those deducting tax under Section 194M need to furnish a certificate in Form No. 16D to the payee within 15 days from the due date of furnishing challan cum statement in Form 26QD.

Download App

Explore More

Managing assets totalling over 1 crore+