Section 194M:TDS Guide for High-Value Payments by Individuals and HUFs
What is Section 194M?
Section 194M was introduced in the 2019 Union Budget to make sure that individuals and Hindu Undivided Families (HUFs), who are not usually required to get their accounts audited, also deduct tax when making certain large payments to others. This applies to payments made for contract work or professional services like hiring a contractor, interior designer, or lawyer. If the total amount paid exceeds ₹50 lakh in a financial year, the individual or HUF must deduct tax at source (TDS).
Who Needs to Deduct TDS Under Section 194M?
If you’re an individual or a member of a HUF and you pay someone more than ₹50 lakh in a financial year for services such as:
• Contract work (e.g., construction)
• Professional services (e.g., legal, design, or architectural services)
• Brokerage fees
• Commissions (except insurance commissions)
You are required to deduct TDS at 5%. This is important because it helps the government track income and ensure taxes are paid on large sums of money.
Before this section was introduced, individuals and HUFs not audited by tax authorities didn’t have to deduct TDS when making payments for services, even if they were large payments. Section 194M changed that.
When Do You Need to Deduct TDS?
You must deduct TDS when you make the payment or when the payment is credited to the service provider’s account—whichever comes first. This applies to payments made in cash, by cheque, draft, or any other method.
What is the TDS Rate Under Section 194M?
• Regular Rate: The TDS rate is 5% if the total payment in a financial year exceeds ₹50 lakh.
• If PAN is not Provided: If the person you’re paying does not provide their PAN (Permanent Account Number), the TDS rate goes up to 20%.
• COVID-19 Rate Reduction: During the pandemic, from May 14, 2020, to March 31, 2021, the TDS rate was temporarily reduced to 3.75% to help reduce financial strain on taxpayers.
Example of How TDS Under Section 194M Works
Let’s say Mr. Yogesh, a salaried employee, decides to build a house. In the financial year 2020-2021, he makes the following payments:
• ₹60 lakh for land acquisition – This falls under Section 194-IA (which covers property purchases), so the TDS rate here is 1%, and Mr. Yogesh will have to deduct ₹60,000 as TDS.
• ₹75 lakh to a contractor for construction work – Since this is contract work, and it exceeds the ₹50 lakh limit, Mr. Yogesh must deduct TDS at 5% under Section 194M, amounting to ₹3,75,000.
• ₹65 lakh to an interior decorator – Similarly, this payment exceeds ₹50 lakh, so he will deduct 5% TDS under Section 194M, which amounts to ₹3,25,000.
• ₹40 lakh for painting – Since this payment does not exceed ₹50 lakh, no TDS is required for this payment.
Simplified Process for Deducting TDS
To make things easier, individuals and HUFs don’t need a TAN (Tax Deduction Account Number) to deduct and deposit TDS under this section. They can use their PAN (Permanent Account Number) instead. The TDS deducted must be deposited using a special form called Form 26QD, within 30 days after the end of the month in which the TDS was deducted. Additionally, a TDS certificate (Form 16D) must be provided to the person being paid within 15 days of filing the TDS return.
Why Was Section 194M Introduced?
Before this section came into effect, individuals and HUFs who were not audited didn’t have to deduct TDS even when making significant payments for professional services or contracts. This led to a gap in tax collection on large payments. Section 194M was introduced to ensure that tax is collected at the source for such transactions, helping prevent tax evasion and increasing transparency in high-value payments.
Conclusion
Section 194M helps ensure that individuals and HUFs who are not audited also contribute to tax collection when making large payments for services. It applies to personal as well as business-related payments exceeding ₹50 lakh in a financial year. By deducting TDS, the government ensures that taxes are being paid on high-value transactions, making the tax system fairer for everyone.
If you are paying someone more than ₹50 lakh for services, make sure you deduct TDS and file the necessary paperwork on time to avoid penalties. Understanding the rules of TDS under Section 194M can save you from complications with the tax authorities and keep you compliant with the law.
