Section 194J TDS: A Comprehensive Guide on Professional and Technical Fees

Understanding the complexities of Tax Deducted at Source (TDS) is critical for both businesses and professionals. Section 194J of the Income Tax Act is one of the most important provisions you will encounter during audits and daily accounting.

Understanding the nuances of 194J is critical for Chartered Accountants, business owners, and SAP finance professionals who want to avoid interest penalties and disallowances.

Sepfust believes in simplifying compliance. This guide covers everything you need to know about Section 194J, including practical examples.

What is Section 194J?

Section 194J requires any person (with specific exceptions for individuals/HUFs) paying fees to a resident for professional or technical services to deduct TDS at the time of credit or payment, whichever occurs first.

The section covers payments for:

• Professional Services: Legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, advertising, etc.
• Technical Services: Managerial, technical, or consultancy services.
• Royalty: Payments for the use of patents, inventions, models, designs, trademarks, etc.
• Non-Compete Fees: Fees paid to ensure a person does not carry on a business or share technical know-how.
• Director’s Remuneration: Fees paid to directors (excluding salary), such as sitting fees.

Threshold Limit for Deducting Tax

A common question is: Do I need to deduct TDS on every small payment?

The answer is No.

The Exemption Limit:

TDS under Section 194J is required only if the aggregate sum credited or paid to a payee during the financial year exceeds ₹30,000 (Note: this limit has been increased to ₹50,000 in recent amendments, always check the latest Finance Act).

Important Rule: This limit applies separately to each category of payment.

• If you pay ₹45,000 for Technical Services and ₹20,000 for Royalty to the same vendor, NO TDS is required because neither individual category exceeded the ₹50,000 limit.

Exception for Directors:

There is no limit on Director Remuneration. If you pay a sitting fee of ₹5,000, you must deduct TDS.

TDS Rates under Section 194J (FY 2025-26)

The rate of TDS depends heavily on the nature of the service. Recent amendments have reduced the rate for "Technical Services" to provide relief to businesses.

> Note: If the payee fails to furnish a valid PAN, the TDS rate increases to a flat 20%.

Practical Examples: Understanding Applicability

To make this clearer, let’s look at some practical scenarios similar to those you might face during a tax audit.

Example 1: The Case of Mixed Payments

Scenario:

• ABC Ltd. pays Mr. Sharma (an Engineer) ₹25,000 in June 2025 for technical consultancy.
• In December 2025, ABC Ltd. pays Mr. Sharma another ₹30,000 for the same service.

Analysis:

• First Payment: No TDS is deducted because the amount (₹25,000) is below the ₹50,000 threshold.
• Second Payment: The total payment in the year is now ₹55,000 (25k + 30k). Since it crosses the threshold, ABC Ltd. must deduct TDS on the entire amount of ₹55,000, not just the excess.
• Result: ABC Ltd. must deduct 2% on ₹55,000.

Example 2: Personal vs. Business Use (Individual Payer)

Scenario:

Mr. Jay, an individual, hires an architect, Mr. Veer, for two different jobs in FY 2025-26.

1. Job A: Designing his personal home (Fee: ₹1,00,000).
2. Job B: Designing his office for his business (Fee: ₹60,000).

Analysis:

• Scenario A (Personal Purpose): Even though the amount exceeds ₹50,000, Mr. Jay is NOT required to deduct TDS because the service is for personal use.
• Scenario B (Business Purpose):
  • If Mr. Jay is liable for a Tax Audit (turnover > ₹1 Cr in business or ₹50 Lakh in profession), he MUST deduct TDS at 10% on the ₹60,000 payment.
  • If Mr. Jay is NOT liable for audit, he does not need to deduct TDS under Section 194J.

Consequences of Non-Compliance

Missing a TDS deduction isn't just a minor error; it has financial and reporting consequences:

1. Disallowance of Expenses: Under Section 40(a)(ia), 30% of the expenditure will be disallowed from your business expenses if TDS is not deducted or deposited. This increases your taxable profit and tax liability.
2. Interest Penalties:
   • 1% per month for failure to deduct.
   • 1.5% per month for failure to deposit after deduction.

Automating Compliance with Sepfust

Managing threshold limits, different rates for technical vs. professional services, and PAN validation can be difficult if done manually. This is especially true for companies that use SAP and have high volume.

• Streamline Your Process: Our SAP Cockpit Solutions are designed to integrate directly with your ERP, ensuring that every invoice is checked against 194J rules automatically.
• Audit-Ready Reporting: When it comes to tax audits, reporting these transactions under Clause 44 of the Tax Audit Report is mandatory. Eliminate manual errors and save days of work with our specialized Clause 44 Cockpit Solution.

By utilizing the appropriate tools, you can transform complex compliance into a simple, automated background process.

Warning: Tax laws are subject to change. Always consult with a tax professional or refer to the most recent government notifications for the most up-to-date regulations.