Section 194M: TDS Rules for High-Value Payments by Individuals & HUFs
When individuals or Hindu Undivided Families (HUFs) make large payments for professional services, contracts, or commissions, they may be required to deduct tax at source under Section 194M. This section was introduced to ensure that high-value transactions made by non-business individuals and HUFs also come under the TDS net, promoting better tax transparency.
What is Section 194M?
Section 194M of the Income Tax Act ensures that when individuals or HUFs pay substantial sums for work, contractual, or professional services, tax is deducted even if they are not conducting business or not otherwise liable to deduct TDS.
Purpose Behind Introducing Section 194M
Earlier, individuals and HUFs who were not subject to tax audit could make high-value payments without deducting TDS. To plug this gap and prevent revenue leakage, Section 194M was introduced.
Key Features of Section 194M
- Applies to individuals and HUFs who are not liable for a tax audit.
- Covers payments for contractual work, professional services, commission, or brokerage to resident payees.
TDS is deducted either when the amount is credited or paid, whichever is earlier.
Applicability of Section 194M
Section 194M applies when payments made by individuals or HUFs exceed certain limits for professional or contractual services.
Who Falls Under Section 194M?
- Individuals or HUFs not required to deduct TDS under sections 194C, 194H, or 194J.
- It becomes applicable when total payments for covered services exceed ₹50 lakh in a financial year to a resident.
Payment Types Covered
- Payments for contractual work.
- Commission or brokerage (excluding insurance commission).
- Professional fees such as consultancy, architecture, or legal services.
Threshold Limits for Applicability
TDS under Section 194M is required only if the total amount paid to a single resident exceeds ₹50 lakh in a financial year.
Who is Required to Deduct TDS?
Role of Individuals
If an individual pays more than ₹50 lakh to a resident for work, commission, or professional services in a financial year, they must deduct TDS even if they are not running a business.
Role of HUFs
Similar to individuals, HUFs are liable to deduct TDS once the payment exceeds the threshold.
Exempted Persons/Entities
Section 194M does not apply to those who are already deducting TDS under other sections such as 194C, 194H, or 194J.
Work, Contract, and Professional Services under Section 194M
Meaning of ‘Work’
The term “work” includes construction, manufacturing, labour supply, repair, maintenance, and related contractual activities.
Contractual Payments Covered
Payments made under agreements for executing work or providing services (including manpower supply) fall within the scope of Section 194M.
Professional Services Defined
Any services involving specialised skills, like those of accountants, doctors, engineers, consultants, or designers, are covered as professional services.
TDS Rate & Threshold under Section 194M
| Particulars | Details |
|---|---|
| Applicable Rate | 5% (2% effective from 1 October 2024 as per recent budget proposals) |
| Threshold Limit | ₹50 lakh in a financial year |
| Deduction Point | At the time of credit or payment, whichever is earlier |
| PAN Requirement | Deduction requires a valid PAN; TAN is not required |
Payment & Compliance Rules
Let’s understand the payment and compliance rules:
When to Deduct TDS
TDS must be deducted at the time of payment or credit, whichever happens first.
Due Dates for Depositing TDS
The deducted TDS should be deposited with the government within 30 days from the end of the month in which the deduction took place.
Filing Form 26QD and Certificate Issuance
- Deductors must file Form 26QD (a challan-cum-statement) within 30 days of deduction.
After depositing TDS, the Form 16D certificate must be issued to the payee within 15 days of filing 26QD.
Exceptions & Penalties under Section 194M
These are some of the exceptions and penalties under Section 194 M:
Situations Where Section 194M Does Not Apply
- Payments below ₹50 lakh in a financial year.
- Payers already liable under 194C, 194H, or 194J.
- Payments made to non-residents (covered separately under Section 195).
Consequences of Non-Compliance
- Interest is charged for failure to deduct or deposit TDS on time.
- Penalties may be levied for late filing of Form 26QD or delayed issuance of Form 16D.
- Expenses may be disallowed while computing taxable income.
Interest and Penalty Provisions
If TDS is not deposited within the due date, interest at 1% to 1.5% per month applies until payment is made. Penalty provisions may also be triggered under the Income Tax Act.
Conclusion
Section 194M ensures that high-value transactions by individuals and HUFs don’t escape the TDS framework. It plays a crucial role in widening the tax base and ensuring better compliance. With the proposed rate reduction to 2%, compliance becomes easier for payers, provided they follow the timelines for deduction, deposit, and filing.
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Frequently Asked Questions
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Who has to deduct TDS under Section 194M?
Individuals and HUFs making payments exceeding ₹50 lakh for professional, contractual, or commission-based services to residents must deduct TDS.
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What is the TDS rate under Section 194M?
Currently 5%, proposed to be 2% from 1 October 2024.
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Is TAN required for deduction under Section 194M?
No, the deductor can use their PAN for this purpose.
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What is the due date for filing Form 26QD?
Within 30 days from the end of the month in which the deduction took place.
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What happens if Section 194M compliance is missed?
The deductor may face interest, penalties, or disallowance of expenses for late or non-deduction of TDS.