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Section 194M of Income Tax Act

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August 23, 2022

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13 mins read

Section 194M of Income Tax Act – TDS from Payment to Contractors or Professionals by Certain Individuals or HUFs

Serial No. Contents
1. Introduction to Section 194M
2. Who can deduct TDS under Section 194M?
3. Who are liable for deduction under Section 194M ?
4. What are the types of payment covered under the scope of Section 194M?

5. Rate of deduction under Section 194M

6. Verbatim of Section 194M of Income Tax Act, 1961

Introduction to Section 194M of Income Tax Act

The existing provisions of Section 194C, Section 194H and Section 194J of the Income Tax Act, 1961, had provided exemptions to an Individual or HUF who are not liable to a tax audit under Section 44AB(a)/ 44AB(b). Such persons  were not required to deduct TDS under the Income Tax Act. As a result, many substantial payments made in respect of contractual work, commission or for any professional service, fell outside the scope of the Income Tax Act, thus providing loopholes for possible cases of tax evasions. To counter this effect the Central Government inserted Section 194M of Income Tax Act, 1961 (hereinafter referred to as the Act). Let’s understand the various aspects of this provision below.

Who is liable to deduct TDS under Section 194M?

Every person who has been exempted under Section 194C, Section 194H and Section 194J of the Act shall be required to deduct income tax under this provision i.e.:

  • An individual or HUF whose gross receipts or turnover in the financial year immediately preceding the financial year, in which amount is paid or credited, does not exceed the threshold limit of Rs. 1 Crore (Rs.1,00,00,00,000) in case of a business and Rs. 50 Lakhs (Rs.50,00,000) in case of a profession; or
  • An individual or HUF making payment to a contractor, commission agent or broker or professional for personal use.

It must be noted that income tax shall be deducted under this provision even if the individual is not engaged in any business or profession or if he is just earning a salary or has any other income.

Who is liable for deduction under Section 194M of Income Tax Act?

Income tax is to be deducted under Section 194M of the Act only when sum is payable to person who is a Resident in India. If such sum is payable to a Non-Resident, then income tax shall be deducted under Section 195 of the Act.

TDS is to be deducted either at the time of payment or the credit of such sum, whichever is earlier. Furthermore, the individual or HUF do not need to produce their TAN (Tax Deduction or Collection Number) for deducting income tax under this provision. They can use their PAN for this purpose.

As per Section 196 of the Act no income tax shall be deducted if such sum is payable to the Government, RBI, Mutual Fund or any Corporation established under the Act which is exempt from the payment of such tax.

What are the types of payment covered under the scope of Section 194M?

The following are the payments that are covered by Section 194M:

  • Any sum paid or payable in pursuance of a contract or sub-contract for carrying out any work including supply of labour for carrying out any work; or
  • Any sum paid or payable by way of commission (not being insurance commission) or brokerage; or
  • Any sum paid or payable by way fee for professional services

Defining certain terms

1. Work

“Work” shall include:

  1. Advertising
  2. Broadcasting or telecasting including production of programs for such broadcasting or telecasting
  3. Carriage of goods or passengers by any mode of transport other than by railways
  4. Catering
  5. Manufacturing or supplying a product as per requirement or specification of a customer by using material purchased from such customer (i.e., job-work), or its associate, being a relative as defined under Section 40A(2)(b).
    It does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer or associate of such customer.
  6. Supply of labour for carrying out any work

2. Professional Services

“Professional Services” refers to services rendered by a person in the course of carrying on legal, medical, engineering, or architectural profession or accountancy or technical consultancy or interior decoration or advertising or such other profession as may be notified by the Central Board of Direct Taxes (hereinafter referred to as the “CBDT”) under Section 44AA.

Furthermore the CBDT has notified the below mentioned persons with respect to the sports industry as providing “professional services”:

  1. Sports Persons
  2. Umpires and Referees
  3. Coaches and Trainers
  4. Team Physicians and Physiotherapists
  5. Event Managers
  6. Commentators
  7. Anchors
  8. Sports Columnists

3. Commission or Brokerage

It shall include within its definition any payment received, directly or indirectly, by a person acting on behalf of another, for services rendered (not professional services) or for any services rendered in the course of buying or selling of goods or any transactions dealing with assets, valuable article, which are not securities.

Rate of Deduction under Section 194M

The rate at which income tax is to be deducted is 5%. The rate shall not be increased by Surcharge or Health and Education Cess.

If the recipient fails to furnish his PAN to the deductor, tax shall be deducted at the rate as mentioned under Section 206AA.

The provisions of Section 206AB are not applicable if income tax is required to be deducted under Section 194M. Section 206AB provides a higher tax deduction rate if the deductee has not furnished the return of income for a specified period.

NIL or Lower Rate of Deduction

Where estimated tax liability of the recipient justifies lower deduction of tax, he can apply to the Assessing Officer for issue of lower deduction certificate under Section 197. However, the recipient cannot file a declaration for NIL deduction of tax under Section 197A for the purposes of Section 194M of the Act.

Verbatim of Section 194M of Income Tax Act, 1961

For the verbatim of Section 194M of Income Tax Act, find the link attached below;

Click here for the Verbatim of Section 194M

TDS Sections

Arinjay Jain

Bio of author

Arinjay is a Chartered Accountant with more than 20 years of post-qualification experience. He worked as Director, in the M&A Tax Division at KPMG in India. Presently, he is advising several MNCs in UAE on Economic Substance Regulations and impact of the UAE Corporate Tax Law on their business and clients across globe on International Tax issues . He is a well recognised Trainer of International Tax and UAE Corporate Tax. The areas of service include the following : - Advise and Compliance relating to International Tax Issues; Advise relating to UAE Corporate Tax Issues; Advise and Compliance relating to UAE Economic Substance Regulations; Advise and Compliance relating to Indian Income Tax Issues; Other connected matters from a Regulatory perspective.

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