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Section 194M – TDS On Payment To Resident Contractors And Professionals

By Mohammed S Chokhawala

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Updated on: Aug 6th, 2024

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3 min read

The Budget 2019 proposed various changes to the existing sections of the income tax laws and introduced some new Sections for TDS, such as 194M and 194N.

194M – TDS on payment to resident contractors and professionals. Continue reading to know more.

194N – TDS on cash withdrawal in excess of Rs 1 crore. Click here to read more about section 194N.

Budget 2024 Update

The TDS rate has been proposed to decrease to 2% from 5% with effect from 1st October 2024.

What Is Section 194M?

In general, TDS/TCS provisions are to be complied with by individuals or HUFs only if they are doing business or profession and gross receipts exceed Rs.1 crore or Rs.50 lakhs, respectively. However, a few sections require compliance with their provisions even if the above conditions are not satisfied, and section 194M is also one among them.

It applies when the total amount paid to a resident individual for carrying out any contractual work or commission/brokerage paid (not being insurance commission) or providing any professional service in a financial year exceeds Rs 50,00,000.

If such individuals or HUFs have gross receipts from business or profession in excess of Rs. 1 crore or Rs. 50 lakhs respectively, TDS deduction is applicable as per Sections 194C, 194H and 194J. The individual and/or HUF who have to deduct TDS under Section 194C (TDS on payment to a contractor), 194H (Commission or brokerage) and 194J (TDS on payment on professional fees) do not have to deduct tax at source under Section 194M.

Individuals or HUFs who have to deduct tax can pay the tax to the government by quoting their PAN only. They are not required to get a tax deduction account number (TAN) for TDS deduction.

Payments to non-residents are not covered under this section.

Reason For Introduction Of Section 194M

The finance bill of 2019 introduced Section 194M, which provides for tax deduction at source from any money paid by an individual or HUF to a resident contractor when the services are provided for personal use. Therefore, this section applies to personal as well as business related payments.

Before the introduction of this section, there was no liability on an individual or HUF to deduct tax at source in the situation mentioned above.

Also, individuals or HUFs carrying business or profession (not breaching the turnover threshold) were also not deducting any tax at source, even when the payment was made for the purpose of business or profession.

A major amount of payment made for contractual works, commission/brokerage (other than insurance commission_ and professional fees was escaping the levy of TDS because of this exemption, creating a scope for tax evasion.

Key points to note:

  • This section is not applicable to non-residents.
  • Lower TDS certificates can be submitted under this section.
  • Quote PAN in place of TAN: The government has given relaxation under this section, individual or HUF can deposit TDS to the government using PAN in place of TAN and TAN is not required to be obtained.
  • This section is applicable from 01 September 2019.

What Is Meaning Of ‘Work’, ‘Contract’, And ‘Professional Services’ In Section 194M?

Work: The expression “work” in this section would include:

  • Advertising
  • Broadcasting and telecasting, including the production of programs for such broadcasting or telecasting.
  • Carriage of goods and passengers by any mode of transportation other than railways.
  • Catering.
  • Manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer. But does not include manufacturing or supplying a product according to the requirements or specifications of a customer by using material purchased from a person, other than such a customer.

Professional Services: The phrase, professional services in this section would include:

  • Legal
  • Medical
  • Engineering
  • Architectural
  • Accountancy
  • Technical consultancy
  • Interior decoration
  • Any other professional service as notified by the government

Contract: This expression includes a sub-contract.

Who Has To Deduct TDS Section 194M?

An individual or HUF who pays a resident for contract work completed, commission/brokerage paid(other than insurance commission), or any professional service provided will have to deduct tax at source under 194M.

As per the Union Budget 2019, any individual/HUF paying any sum to a resident for carrying out any work (including the supply of labour) under any contract or by way of fees for professional services rendered during the financial year exceeding Rs 50,00,000 in a year will have to deduct TDS at 5%. (With effect from 1st October 2024 this rate is proposed to be reduced to 2%)

This section will be effective from 1 September 2019 onwards. The TDS amount will be deducted on any payment made after this date, even if the contract existed before, provided the payment exceeds Rs 50,00,000.

Time Of Deduction Section 194M 

TDS amount will be deducted on the earlier of the following dates:

  • At the time of credit of the amount.
  • At the time of payment by cash or by the issue of a cheque or draft.

Rate Of TDS Section 194M

TDS at 5% will be deducted under 194M if the total amount paid to a resident exceeds Rs 50,00,000 in a particular financial year. 

In case the PAN of the deductee is not available, then TDS will be deducted at 20%.

Due Date For Depositing TDS Under Section 194M

The person responsible for deducting tax under section 194M shall file Form 26QD. The due date to file Form 26QD is within 30 days from the end of the month in which you made the payment. For example, if you paid on 1st December 2023, the due date for TDS payment is on or before 30th January 2024.  

Certificate Of Tax Deducted Under Section 194M

The person who deducts tax under section 194M shall furnish a certificate under Form No.16D to the payee within 15 days of the due date of furnishing the challan cum statement in Form 26QD.

No Requirement To Obtain TAN

 The provisions of section 203A, which require obtaining a Tax Deduction Account Number (TAN), shall not apply to the person required to deduct tax in accordance with the provisions of section 194M.

For a better understanding, read more related articles:

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Frequently Asked Questions

Who is responsible to deduct tax under Section 194M?

An individual or HUF, other than those required to deduct tax under section 194C or 194H or 194J is responsible to deduct tax under section 194M.

What is the rate at which tax should be deducted under Section 194M?

As per Section 194M, TDS shall be deducted at the rate of 5%(This rate is proposed to be reduced to 2% with effect from 1st October 2024). If the payee fails to furnish PAN, tax should be deducted at the rate of 20%.

What is the maximum limit upto which no tax needs to be deducted under section 194M?

No tax needs to be deducted when such payment or aggregate amount of payments made to a resident does not exceed Rs.50 lakhs in a financial year.

Should the persons responsible to deduct tax under section 194M obtain a TAN number?

Persons responsible to deduct tax under this section are not required to possess or obtain a TAN (Tax Deduction account number) for the purpose of deducting tax under this section.

Which form is to be filed by the person who has deducted tax under Section 194M?

The person has to file Form 26QD who has deducted tax under Section 194M within 30 days from the end of the month in which payment is made.

A entered into a contract of catering on 25 July, 2019 and payment made of Rs. 55 Lakh on 30 August, 2019. Whether TDS will be deducted in this case ?

In this case, contract was entered before 01Sep, 2019 but payment was made before 01 September, 2019 hence TDS will not be deducted.

A made a payment of professional fees of Rs. 55L , and A is liable to get his accounts audited under section 44 AB. Whether TDS is required to be deducted under section 194M?

As per this section, individuals who are required to get their accounts audited are not covered hence TDS will not be deducted under section 194M, but to be made under section 194J(b).

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About the Author

I'm a chartered accountant, well-versed in the ins and outs of income tax, GST, and keeping the books balanced. Numbers are my thing, I can sift through financial statements and tax codes with the best of them. But there's another side to me – a side that thrives on words, not figures. Read more

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Quick Summary

Budget 2019 introduced TDS Sections 194M and 194N. Section 194M applies to payments exceeding Rs 50,00,000 to residents for contractual work or professional services. The TDS rate under Section 194M will be lowered to 2% from 5% starting October 2024. The section does not apply to non-residents. Payments should be made after September 2019.

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