Understanding Section 194 of Income Tax Act, 1961
Taxation is an essential aspect of every country’s economy. It is the means of generating revenue for the government to carry out its functions. The Income Tax Act, 1961, governs the taxation of individuals and businesses in India. Among the many sections of the act, Section 194 deals with the tax deducted at source (TDS) on payments other than salaries. In this blog post, we will delve deeper into Section 194 of the Income Tax Act, its applicability, and its provisions.
Overview of Section 194
Section 194 of the Income Tax Act states that any person (other than an individual or a Hindu Undivided Family) who makes a payment of the following nature to a resident, shall deduct tax at source at the rate of:
- 2% on the payment of interest, royalty, fees for technical services, or any other sum payable to a resident for carrying out any work (excluding any fees paid for services rendered by a practicing lawyer);
- 10% on the payment of commission or brokerage.
Applicability of Section 194
Section 194 applies to payments made by the following entities:
- A company (including a foreign company)
- A partnership firm
- An association of persons (AOP)
- A body of individuals (BOI)
- A trust
However, if the payer is an individual or a Hindu Undivided Family (HUF), then TDS under Section 194 is not applicable.
Provisions of Section 194
- Rate of TDS: As mentioned earlier, TDS must be deducted at the rate of 2% on payments made towards interest, royalty, fees for technical services, or any other sum payable to a resident for carrying out any work (excluding any fees paid for services rendered by a practicing lawyer), and 10% on the payment of commission or brokerage.
- Time of deduction: The payer must deduct the TDS at the time of credit of such sum to the account of the payee or at the time of payment, whichever is earlier. This means that if the payment is made in advance, TDS must be deducted at the time of advance payment.
- Time of depositing TDS: The TDS deducted under Section 194 must be deposited with the government within 30 days from the end of the month in which the deduction was made. For example, if TDS is deducted on 10th June, it must be deposited with the government by 30th July.
- Issuing TDS certificate: The payer must issue a TDS certificate (Form 16A) to the payee within 15 days from the due date for furnishing the statement of TDS under Rule 31A. The certificate must contain details such as the amount of TDS, nature of payment, and the TDS rate.
Exemptions under Section 194
- TDS is not applicable if the payment made does not exceed Rs. 30,000/- or the prescribed limit, whichever is higher.
- TDS is not applicable on interest paid on compensation or enhanced compensation.
- TDS is not applicable on payments made to the Reserve Bank of India, the State Bank of India, or any other scheduled bank for the purposes of collecting tax.
Importance of Complying with Section 194
Complying with Section 194 of the Income Tax Act is essential to avoid any legal consequences, including penalties, interest, and prosecution. Non-compliance with the provisions of Section 194 can result in a penalty of up to the amount of TDS not deducted or paid, along with an interest of 1.5% per month or part thereof from the date on which the TDS was deducted till the date of payment.
Moreover, non-compliance can also lead to prosecution under Section 276B of the Income Tax Act, which can result in imprisonment for a term ranging from 3 months to 7 years, along with a fine. Therefore, it is crucial to comply with the provisions of Section 194 to avoid any legal consequences.
Implications of Non-Compliance with Section 194
Non-compliance with the provisions of Section 194 can have various implications, such as:
- Penalties: The tax department can impose penalties for non-compliance with the provisions of Section 194, which can be up to the amount of TDS not deducted or paid.
- Interest: The taxpayer may be liable to pay interest at the rate of 1.5% per month or part thereof from the date on which the TDS was deducted till the date of payment.
- Prosecution: Non-compliance with the provisions of Section 194 can lead to prosecution under Section 276B of the Income Tax Act, which can result in imprisonment and a fine.
- Loss of Reputation: Non-compliance with the provisions of Section 194 can lead to a loss of reputation for the taxpayer, affecting their business relationships and goodwill.
Conclusion
Section 194 of the Income Tax Act is an important provision that governs the deduction of tax at source on payments other than salaries. The section lays down the rate of TDS, the time of deduction, depositing TDS, and issuing TDS certificates. The provision applies to various entities, including companies, partnership firms, and trusts, and exempts certain payments from TDS. As a taxpayer, it is essential to understand about the importance and implications of complying with Section 194 of the Income Tax Act.
Read more useful content:
- section 145 of income tax act
- section 10e of income tax act
- section 9 of the income tax act
- section 94b of income tax act
- section 206aa of income tax act
Frequently Asked Questions (FAQs)
What is Section 194 of the Income Tax Act?
Section 194 of the Income Tax Act deals with the deduction of tax at source (TDS) on payments other than salaries.
Who is responsible for deducting TDS under Section 194?
The person making the payment is responsible for deducting TDS under Section 194.
What payments are covered under Section 194?
Payments such as interest, rent, professional fees, commission, brokerage, royalty, and other sums paid to residents are covered under Section 194.
What is the rate of TDS under Section 194?
The rate of TDS under Section 194 varies depending on the nature of the payment. The current rates of TDS under Section 194 are as follows:
Interest: 10%
Rent: 7.5%
Professional fees: 10%
Commission and brokerage: 5%
Royalty: 10%
Is there any threshold limit for TDS under Section 194?
Yes, there is a threshold limit for TDS under Section 194. TDS is only required to be deducted if the payment exceeds a specified amount. The current threshold limit for TDS under Section 194 is as follows:
Interest: Rs. 5,000
Rent: Rs. 2,40,000
Professional fees: Rs. 50,000
Commission and brokerage: Rs. 15,000
Royalty: Rs. 50,000
Is it mandatory to obtain a Tax Deduction Account Number (TAN) for deducting TDS under Section 194?
Yes, it is mandatory to obtain a Tax Deduction Account Number (TAN) for deducting TDS under Section 194.
When should TDS be deposited under Section 194?
TDS deducted under Section 194 should be deposited to the government account by the 7th of the following month in which the TDS was deducted.
Can the payee claim a refund of TDS under Section 194?
Yes, the payee can claim a refund of TDS under Section 194 if their total income is less than the taxable limit.
Is it mandatory to file TDS returns under Section 194?
Yes, it is mandatory to file TDS returns under Section 194. TDS returns should be filed quarterly on Form 26Q.
What are the consequences of non-compliance with Section 194?
Non-compliance with Section 194 can lead to penalties, interest, and prosecution under the Income Tax Act. The taxpayer may be liable to pay a penalty of up to the amount of TDS not deducted or paid, along with interest at the rate of 1.5% per month or part thereof. Prosecution can also result in imprisonment and a fine.
