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August 28, 2020

Not liable for TAN still you need to deduct TDS on payment of Commission, brokerage, contractual and professional fee as per Section 194M

Not liable for TAN still you need to deduct TDS on payment of Commission, brokerage, contractual and professional fee as per Section 194M

Tax deduction at source is a means of collecting tax on income, dividends or asset sales, by requiring the payer to deduct tax due before paying the balance to the payee. In India, under the Indian Income Tax Act of 1961, income tax must be deducted at source as per the provisions of the Income Tax Act, 1961. In this article we will discuss Tax deducted at source on payment of Commission, brokerage, contractual fee, professional fee as per Section 194M.

As per amendment made by Fianance act, 2020 a person is required to deduct TDS if the Turnover or Gross receipts exceeds Rs. 1 Crore in case of Business and Rs. 50 Lakhs in case of Profession. As per section 194M a person is required to deduct TDS even if Turnover or Gross receipts is less than Rs. 1 Crore in case of Business and Rs. 50 Lakhs in case of Profession.

When does section 194M applies?

Section 194M, was introduced with effect from 01st September 2019, which provides for deduction of tax at source by an individual or a HUF who are responsible for paying Rs 50,00,000 in a particular financial year to any resident–

  • For carrying  out  any  work (including supply  of  labour for carrying  out any work) in pursuance of a contract; or
  • By way of commission (not being insurance commission referred to in section 194D) or brokerage; or
  • By way of fees for professional services.

It may be noted that only individuals and HUFs (other than those who are required to deduct income-tax as per the provisions of section 194C or 194H or 194J) are required to deduct tax in respect of the above sums payable during the financial year to a resident.

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When does section 194M does not applies?

An individual or a Hindu undivided family is not liable to deduct tax at source under section194M, if –

  1. They are required to deduct tax at source under section 194C for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract i.e., an individual or a HUF who is subject to tax audit under section 44AB (a)/(b) in the immediately preceding financial year and such amount is not exclusively credited or paid for personal purposes of such individual or HUF.
  2. They are required to deduct tax at source under section 194H on commission (not being insurance commission referred to in section 194D) or brokerage i.e., an individual or a HUF whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits of Rs. 1 crore and Rs. 50 lakhs, respectively, specified under section 44AB during the immediately preceding financial year.
  3. They are required to deduct tax at source under section 194J on fees for professional services i.e., an individual or a HUF whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits of Rs. 1 crore and Rs. 50 lakhs, respectively, specified under section 44AB during the immediately preceding financial year and such amount is not exclusively credited or paid for personal purposes of such individual or HUF.

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What are the manner and rate of deduction of TDS under section 194M?

A. Manner of deduction of TDS:

The tax should be deducted at the time of credit of such sum or at the time of payment of such sum, whichever is earlier. No tax is required to be deducted where such sum or, as the case may be, aggregate amount of such sums credited or paid to a resident during the financial year does not exceed Rs. 50,00,000.

The provisions of section 203A containing the requirement of obtaining Tax deduction account number (TAN) shall not apply to the person required to deduct tax in accordance with the provisions of section 194M.

B. Rate of TDS:

Any individual or a HUF responsible for paying any sum during the financial year to any resident–

  • For carrying  out  any  work (including supply  of  labour for carrying  out any work) in pursuance of a contract; or
  • By way of commission (not being insurance commission referred to in section 194D) or brokerage; or
  • By way of fees for professional services.

Payee shall deduct tax at source at the rate of 5%.

After 14th May 2020, TDS under section 194M shall be deducted at 3.75% till 31st March 2021.

Understanding with examples:

Sr. noParticulars of the payerNature of paymentAggregate of payments in theF.Y.2020-21Whether TDS provisions attracted?
1Mr. X, an individual carrying on retail business with turnover of Rs. 2.5 crores in the P.Y.2019-20Contract Payment for repair    of residential houseRs. 5,00,000No, TDS u/s 194C is not attracted since the payment is for personal purpose and TDS u/s 194M is not attracted as aggregate of contract payment to the payee in the F.Y 2020-21 does not exceed Rs. 50lakh.
2.Mr. C, a salaried individualPayment of brokerage for buying a residential houseRs. 51,00,000Yes, under section 194M, since the payment of Rs. 51 lakhs made in March 2020 exceeds the threshold of Rs. 50 lakhs. Since Mr. C is a salaried individual, the provisions of section 194H are not applicable in this case.
3.Mr. D, a pensionerContract payment for reconstruction of residential houseRs. 48,00,000TDS provisions u/s 194C are not attracted since Mr. D is a pensioner and hence, not subject to tax audit. TDS provisions u/s 194M are also not applicable in this case, since the payment of Rs. 48 lakhs, even though made after 1.9.2019, does not exceed the threshold of Rs. 50 lakhs

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