Section 194 of the Income Tax Act is an important provision that deals with the deduction of tax at source on the payment of certain types of income. This section mandates that the person making the payment has to deduct tax at the source before making the payment to the recipient. The rate of deduction, as specified under this section, varies depending on the nature of the payment.
Let’s take a closer look at Section 194 and its provisions.
Applicability of Section 194 Section 194 applies to the following types of payments made to a resident person:
- Interest (other than interest on securities)
- Dividends
- Rent
- Commission or brokerage
- Professional fees
- Royalty or technical fees
- Any sum paid to a contractor or sub-contractor for carrying out any work (including the supply of labor for carrying out any work) as per specified thresholds.
Threshold Limits for Deduction of TDS The threshold limits for the deduction of TDS under Section 194 are as follows:
- Interest (other than interest on securities): Rs. 5,000
- Dividends: Rs. 5,000
- Rent: Rs. 2,40,000
- Commission or brokerage: Rs. 15,000
- Professional fees: Rs. 30,000
- Royalty or technical fees: Rs. 30,000
- Any sum paid to a contractor or sub-contractor for carrying out any work (including the supply of labor for carrying out any work): Rs. 30,000
Rate of Deduction of TDS The rate of deduction of TDS under Section 194 is as follows:
- Interest (other than interest on securities): 10%
- Dividends: 10%
- Rent: 10%
- Commission or brokerage: 5%
- Professional fees: 10%
- Royalty or technical fees: 10%
- Any sum paid to a contractor or sub-contractor for carrying out any work (including the supply of labor for carrying out any work): 1% or 2%, depending on the type of contract
Procedure for Deduction and Payment of TDS
The person making the payment is required to deduct TDS at the specified rate before making the payment to the recipient. The TDS so deducted must be deposited with the government within the specified time limit. The recipient can claim credit for the TDS deducted while filing their income tax return.
Types of Payments Covered Under Section 194
As mentioned earlier, Section 194 covers various types of payments made to a resident person. Let’s look at some of these payments in more detail.
- Interest (other than interest on securities): This refers to interest paid on loans, deposits, or any other type of borrowing. However, interest paid on securities such as bonds and debentures is not covered under this section. The threshold limit for the deduction of TDS on interest is Rs. 5,000.
- Dividends: Dividends are payments made by a company to its shareholders out of its profits. The threshold limit for the deduction of TDS on dividends is also Rs. 5,000.
- Rent: This refers to rent paid for the use of land, a building, or equipment. The threshold limit for the deduction of TDS on rent is Rs. 2,40,000.
- Commission or Brokerage: Commission or brokerage refers to any payment made to a person for bringing in business or for any services rendered. The threshold limit for deduction of TDS on commission or brokerage is Rs. 15,000.
- Professional Fees: Professional fees refer to any payment made to a professional such as a lawyer, doctor, engineer, or architect for their services. The threshold limit for the deduction of TDS on professional fees is Rs. 30,000.
- Royalty or Technical Fees: Royalty or technical fees refer to any payment made for the use of intellectual property such as patents, copyrights, and trademarks. The threshold limit for deduction of TDS on royalty or technical fees is also Rs. 30,000.
- Any sum paid to a contractor or sub-contractor for carrying out any work: This refers to any payment made to a contractor or sub-contractor for carrying out any work, including the supply of labor. The threshold limit for the deduction of TDS on such payments is Rs. 30,000. However, if the contractor or sub-contractor has a Permanent Account Number (PAN), the TDS rate is 1%. If the contractor or sub-contractor does not have a PAN, the TDS rate is 2%.
Consequences of Non-Compliance
Non-compliance with the provisions of Section 194 can lead to penalties and interest. If the person making the payment fails to deduct TDS, they may be liable to pay interest at the rate of 1% per month or part of a month. Additionally, if the TDS is not deposited within the specified time limit, a penalty may be imposed on the person making the payment.
In conclusion
Section 194 is an important provision of the Income Tax Act that requires the deduction of tax at source on certain types of payments. Taxpayers need to be aware of the threshold limits and the rates of TDS applicable to different types of payments to avoid penalties for non-compliance. It is always advisable to seek professional advice to ensure compliance with the provisions of the Income Tax Act.
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Frequently Asked Questions (FAQs)
Q: What is Section 194 of the Income Tax Act?
A: Section 194 of the Income Tax Act mandates the deduction of tax at source (TDS) on certain types of payments made to a resident person.
Q: What types of payments are covered under Section 194?
A: Section 194 covers various types of payments, such as interest, dividends, rent, commission or brokerage, professional fees, royalty, or technical fees, and any sum paid to a contractor or sub-contractor for carrying out any work.
Q: What is the threshold limit for the deduction of TDS on interest?
A: The threshold limit for deduction of TDS on interest is Rs. 5,000.
Q: What is the threshold limit for the deduction of TDS on dividends?
A: The threshold limit for the deduction of TDS on dividends is also Rs. 5,000.
Q: What is the threshold limit for the deduction of TDS on rent?
A: The threshold limit for deduction of TDS on rent is Rs. 2,40,000.
Q: What is the threshold limit for the deduction of TDS on commission or brokerage?
A: The threshold limit for deduction of TDS on commission or brokerage is Rs. 15,000.
Q: What is the threshold limit for the deduction of TDS on professional fees?
A: The threshold limit for deduction of TDS on professional fees is Rs. 30,000.
Q: What is the threshold limit for the deduction of TDS on royalty or technical fees?
A: The threshold limit for deduction of TDS on royalty or technical fees is also Rs. 30,000.
Q: What is the TDS rate applicable to payments made to a contractor or sub-contractor for carrying out any work?
A: The TDS rate applicable to payments made to a contractor or sub-contractor for carrying out any work is 1% if they have a PAN. If they do not have a PAN, the TDS rate is 2%.
Q: What are the consequences of non-compliance with the provisions of Section 194?
A: Non-compliance with the provisions of Section 194 can lead to penalties and interest. If the person making the payment fails to deduct TDS, they may be liable to pay interest at the rate of 1% per month or part of a month. Additionally, if the TDS is not deposited within the specified time limit, a penalty may be imposed on the person making the payment.
Q: Is it necessary to deduct TDS on payments made to non-resident persons?
A: Yes, it is necessary to deduct TDS on payments made to non-resident persons under Section 195 of the Income Tax Act.
