TDS on payment to contractors & professionals- Section 194M of Income Tax

Introduction:

Section 194M has been introduced by the Finance Bill, 2019 with an intention to widen the scope of tax deduction and improving the tax compliances. Before the introduction of this section, there was no liability on an individual or HUF to deduct TDS on any payment made to a resident contractor or professional when the services are provided for personal use. Further, if the individual or HUF is carrying on a business which is not subjected to audit, there was no obligation to deduct tax at source on such payments to a resident contractor or professional. This resulted in a loophole in tax system resulting in tax evasion.
To plug this loophole, Section 194M has been inserted providing for levy of TDS @ 5% on the amount paid or credited on account of contractual or professional work. This amendment has been effective from 1^st September 2019. In this article, we will answer all the questions relating to Section 194M in details as below:

What is Section 194M?

According to Section 194M, an individual or HUF is required to deduct TDS on payment made towards any contractual work or commission or fees for professional work. Such payment may be towards business purposes or personal use.

Following points are to be noted in respect of section 194M:

• TDS under section 194M is to be deducted in the following two conditions:

(a) Payments made for personal purposes by an individual or HUF
(b) Payments made for business purposes by an individual or HUF whose accounts are not audited.

• If an individual or HUF is required to get its accounts audited, he shall not deduct TDS under section 194M. In such cases, the individual or HUF shall deduct u/s 194C or 194H or 194J.
• Under section 194M, TDS is required to be deducted only when payment is made to a resident towards any of the following:
  (a) Contractual work
  (b) Commission or Brokerage (other than insurance commission)
  (c) Fees for professional services
• If payments are made to a non-resident, TDS shall be deducted under section 195 of the Income Tax Act.

Who is required to deduct TDS under section 194M?

Following two categories of persons are responsible for deducting tax at source u/s 194M:

• Individual
• Hindu Undivided Family (HUF)

For any payment made towards contractual work or commission or fees for professional services for personal or business purposes.

When an individual or HUF are not required to deduct TDS under section 194M?

 An individual or HUF shall not be responsible for deduction of TDS under section 194M if:
(a) His accounts are audited and therefore liable to deduct TDS u/s 194C, 194H or 194J or
(b) Payments made towards such services does not exceed Rs. 50 Lakhs during a financial year

What is the threshold limit for tax deduction under section 194M?

Tax at source shall be deducted under section 194M only if the amount or aggregate of amount towards above services paid to a resident during a financial year exceeds Rs. 50 lakhs. 
For example: Mr. X availed services of an architect for construction of his residential house during F.Y. 2020-21 and paid Rs. 48 Lakhs. Since, the amount paid is below Rs. 50 Lakhs, Mr. X is not required to deduct TDS u/s 194M. But if the amount paid is Rs. 52 Lakhs, TDS shall be deducted @ 5% of Rs. 52 Lakhs.

 Which are the specified payments covered under section 194M?

Following specified payments are liable for TDS under section 194M:

• Payment towards any work (including labour supply) carried out in pursuance of any contract
• Payment by way of commission or brokerage (other than insurance commission)
• Payment by way of fees for professional services

What is the rate of TDS under section 194M?

TDS under section 194M has to be deducted at the rate of 5% of the amount or aggregate of amount paid or credited to a resident contractor or professional if such amount or aggregate of amount exceeds Rs. 50 Lakhs during a financial year.

When is TDS required to be deducted under section 194M?

TDS u/s 194M is required to be deducted at the earlier of the following:

• At the time of credit to the account of payee or
• At the time of payment

What is the time limit for depositing TDS deducted under section 194M?

TDS deducted under section 194M has to be deposited to the Department as follows:

• Tax deducted in months of April to February: within 7 days from the end of month in which tax is deducted. For example, tax deducted on 21^st October is to be deposited by 7^th November.
• Tax deducted in month of March: on or before 30^th April of next financial year. For example: tax deducted on 11^th March, 2021 is to be deposited by 30^th April, 2021.

How to make payment of TDS under section 194M to the Income Tax Department?

TDS deducted u/s 194M can be deposited to the Income Tax Department using the Challan in Form No. 26QD. Challan is available at the following link: https://onlineservices.tin.egov-nsdl.com/etaxnew/tdsnontds.jsp

Important Info.: For deduction of TDS under section 194M, TAN is not required as per section 203A. The person deducting TDS u/s 194M can deposit TDS amount through PAN only.

For any query, you may whatsapp or contact on: 09660930417