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The Budget 2019 has brought various changes in the Income Tax Act, 1961 and insertion of provisions of Section 194M is one of them. The Central Government has introduced provisions of Section 194M with effect from September 1, 2019.

Through the introduction of this section, the central government has brought under obligation for deduction of tax at source by some individuals and HUFs. An individual or HUF paying commission, brokerage, contractual fees or professional fees is required to deduct tax at source from the amount paid or to be paid provided that Individual /HUF is not liable to deduct TDS under Sections 194C, 194H or 194J of the Act,1961. The tax shall be deducted @5% under Section 194M with effect from 1st September,2019, where aggregate of sum credited or paid during financial year exceeds Rs.50.00 Lakhs.

We know that a person carrying on business or profession is required to deduct tax at source if  his business is under audit i.e., Section 44 AB is applicable to it. And on  other hand if is not liable to audit his accounts then he has no obligation to deduct tax (TDS ) from payments made to various persons. This way a big chunk of income tax has been evaded and to plug this Loophole, a new Section 194M is inserted in Finance Act, 2019 through which any Individual/ HUF shall deduct TDS at the rate of five per cent on the sum, or the aggregate of sums, paid or credited to a resident person in a year on account of commission (not being insurance commission), brokerage, contractual fee, professional fee, not liable for Tax Deduction at Source under section 194C, section 194H or section 194J, if such sum or aggregate of Such sum exceeds Fifty lakh rupees annually.

Liability Of Individual / HUF To Deduct Tax At Source - Section 194M

LET'S CONSIDER PROVISIONS

WHO IS DEDUCTOR

An Individual/HUF (who are not required to deduct TDS under Sections 194C,194H & 194J) is required to deduct tax under Section 194M from; 

i) Payment/credit to a resident contractor or resident professional, when such payment is for personal use;

ii) Payment /Credit to a resident contractor or resident professional or to a resident by way of commission (other than insurance commission) or brokerage (note that on an Individual/HUF carrying on business /profession and liable to audit under section 44AB of the Income Tax Act,1961, provisions of this Section is not applicable).

THRESHOLD LIMIT

Tax is not deductible if aggregate amount paid or payable during the financial year to a resident does not exceed Rs. 50.00 Lakhs.

 

PAYMENTS COVERED

The provisions will be applicable to amount paid /payable to a 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 an insurance commission) or by way of brokerage or fees payable to professionals for professional services.

TIME OF DEDUCTION

Tax is deductible at the time of credit of aforesaid sum or at the time of payment of the aforesaid sum in case or by issue of a cheque or draft or by any other mode, whichever is earlier.

RATES OF TDS

The TDS will be deducted @5% of the aforesaid payment or amount credited.

LOWER TDS CERTIFICATE

The recipient shall apply for Lower TDS Certificate with the Authority under Section 197 of the Act, 1961.

TAN NUMBER

An Individual/HUF is not required to apply for TAN, he/she can deposit TDS using his PAN.

 

LET'S CONSIDER AN EXAMPLE

Mr. A is an individual and he has made below mentioned payment during Financial Year 2020-21 to a resident contractor

  • Rs. 27,00,000/- on 10th August,2020
  • Rs. 26,00,000/- on 30th October,2020
  • Rs. 28,00,000/- on 31st March,2021.

Situation I: Suppose books of accounts of Mr. A is liable to audit u/s. 44 AB in this case provisions of Section 194M are not applicable. Because Mr. A is liable to deduct TDS from payment made during year under various provisions of Income Tax Act, 1961.

Situation II: Books of accounts of Mr. A is not liable to audit under section 44AB and hence provisions of Sections 194C,194H or 194J are not applicable. In this case provisions of Section 194M are applicable and TDS will be deducted as follows;

i) TDS will not be deducted from payment made on 10th August,2019 i.e., on Rs. 27,00,000/- since it was paid before insertion of provisions i.e., before 1st September, 2019.

ii) TDS @5% will be deducted from Rs. 26,00,000/- i.e., Rs. 1,30,000/-.

PLEASE NOTE THAT

  • Provisions of Section 194M are applicable to Mr. A if he is a NRI and he has no income in India. He is liable to deduct TDS same as applicable to a resident Indian.
  • Even if Mr. A all income is exempt from tax or his income is only from farming or agricultural income.  It means he is liable to deduct TDS from above payments.

DISCLAIMER: The article produced here is only for information or knowledge of readers. It is advisable to take professional advise before acting on any part of article.

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Category Income Tax, Other Articles by - FCS Deepak Pratap Singh 



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