Understanding Section 194M of the Income Tax Act 1961: Applicability, Rates, and Compliance

Introduction

Section 194M of the Income Tax Act, 1961 was introduced in Budget 2019 and came into effect from September 1, 2019. This section requires individuals or Hindu Undivided Families (HUFs) who are not subject to tax audit, to deduct TDS on certain payments made to a resident contractor or professional. In this blog, we will discuss the provisions of section 194M in detail.

1. Applicability of Section 194M

Section 194M applies to individuals and HUFs who are not required to undergo tax audit under Section 44AB of the Income Tax Act, 1961. This section is not applicable to companies, firms, or any other entity that is subject to tax audit. Section 194M applies to payments made to a resident contractor or professional for services rendered or work done, exceeding Rs. 50 lakh in a financial year.

2. Rate of TDS

The rate of TDS under Section 194M is 5% on the total payment made to the contractor or professional. However, if the contractor or professional has not provided their PAN, the TDS rate will be 20%.

3. Threshold Limit

The threshold limit for deduction of TDS under Section 194M is Rs. 50 lakh in a financial year. If the payment made to a contractor or professional is less than Rs. 50 lakh, TDS under this section is not required to be deducted.

4. Non-Applicability

Section 194M is not applicable in the following cases:

• If the individual or HUF is required to undergo tax audit under Section 44AB of the Income Tax Act, 1961.
• If the payment is made to a non-resident contractor or professional.
• If the payment is made for personal purposes and not for business or profession.

5. Consequences of Non-Compliance

If an individual or HUF fails to deduct TDS under Section 194M or deducts TDS but fails to deposit it with the government, they may be liable to pay interest and penalty. The interest rate is 1% per month or part of the month on the amount of TDS that was not deducted or deposited. In addition, a penalty of up to Rs. 10,000 may be levied under Section 271C of the Income Tax Act, 1961.

6. Exemption

There are certain exemptions to the applicability of TDS under Section 194M. If the individual or HUF has already deducted TDS under any other provision of the Income Tax Act, 1961, on the same payment made to the contractor or professional, then TDS under Section 194M is not required to be deducted. Additionally, if the payment is made to a government or a specified entity, such as a corporation established by the government, TDS under Section 194M is also not applicable.

7. Computation of Payment

The payment for the purpose of TDS under Section 194M is the total amount paid or credited to the contractor or professional. This includes the value of goods and services supplied and taxes, if any, charged on such goods or services.

8. Time Limit for Deposit of TDS

The TDS deducted under Section 194M must be deposited with the government within 30 days from the end of the month in which the deduction was made. Failure to deposit TDS within the prescribed time limit will result in interest and penalties.

9. Importance of Compliance

Compliance with the provisions of Section 194M is important as non-compliance can result in interest and penalties. Additionally, non-compliance may attract scrutiny by the income tax department and may result in further inquiries and assessments.

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10. Filing of TDS Returns

Individuals and HUFs who are required to deduct TDS under Section 194M must file TDS returns. The due date for filing TDS returns is as follows:

• For Q1 (April to June): 31st July
• For Q2 (July to September): 31st October
• For Q3 (October to December): 31st January
• For Q4 (January to March): 31st May

11. Penalties for Late Filing of TDS Returns

If an individual or HUF fails to file TDS returns within the due date, they may be liable to pay a penalty. The penalty for late filing of TDS returns is Rs. 200 per day, subject to a maximum of the TDS amount.

12. Consequences of Non-Deduction of TDS

If an individual or HUF fails to deduct TDS under Section 194M, they may be liable to pay a penalty under Section 271C of the Income Tax Act, 1961. The penalty for non-deduction of TDS is equal to the amount of TDS that was not deducted.

13. Importance of Accurate Reporting

It is important for individuals and HUFs to accurately report the details of TDS deductions and payments made to contractors or professionals in their TDS returns. Inaccurate reporting may attract scrutiny by the income tax department and may result in further inquiries and assessments.

Conclusion

Section 194M of the Income Tax Act, 1961 is a new provision introduced by the government to widen the tax net and ensure compliance by individuals and HUFs. It is important for individuals and HUFs to understand the provisions of this section and comply with them to avoid penalties and interest.

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)

1. Who is required to deduct TDS under Section 194M?

Individuals and HUFs who are not subject to tax audit are required to deduct TDS under Section 194M if they make payments to contractors or professionals that exceed Rs. 50 lakhs in a financial year.

2. What is the rate of TDS under Section 194M?
The rate of TDS under Section 194M is 5%.

3. What is the threshold limit for deducting TDS under Section 194M?
The threshold limit for deducting TDS under Section 194M is Rs. 50 lakhs in a financial year.

4. Are there any exemptions to the applicability of TDS under Section 194M?
Yes, TDS under Section 194M is not applicable if the individual or HUF has already deducted TDS under any other provision of the Income Tax Act, 1961, on the same payment made to the contractor or professional. Additionally, if the payment is made to a government or a specified entity, such as a corporation established by the government, TDS under Section 194M is also not applicable.

5. What is the time limit for depositing TDS under Section 194M?
The TDS deducted under Section 194M must be deposited with the government within 30 days from the end of the month in which the deduction was made.

6. What is the penalty for late filing of TDS returns under Section 194M?
The penalty for late filing of TDS returns under Section 194M is Rs. 200 per day, subject to a maximum of the TDS amount.

7. What is the penalty for non-deduction of TDS under Section 194M?
The penalty for non-deduction of TDS under Section 194M is equal to the amount of TDS that was not deducted.

8. Can individuals and HUFs file TDS returns online under Section 194M?
Yes, individuals and HUFs can file TDS returns online under Section 194M using the government’s online facility.

9. Is it mandatory to file TDS returns under Section 194M?
Yes, it is mandatory for individuals and HUFs to file TDS returns under Section 194M.

10. Can individuals and HUFs claim a refund of TDS deducted under Section 194M?
Yes, individuals and HUFs can claim a refund of TDS deducted under Section 194M if the TDS deducted is more than the tax liability for the financial year.