Section 194M, introduced in the Budget of 2019, specifically targets individuals and Hindu Undivided Families (HUFs) who were previously exempt from TDS obligations. This section mandates TDS deductions on payments made to resident contractors or professionals exceeding Rs. 50 lakhs in a financial year.
What is Section 194M?
Section 194M was introduced to plug a loophole in the tax system. Before its introduction, individuals and HUFs were not required to deduct TDS on payments made to contractors or professionals for personal or business use (unless otherwise mandated). This exemption led to a significant amount of payments escaping the TDS net.
To address this, Section 194M was introduced, requiring individuals and HUFs (not already covered under Sections 194C or 194J) to deduct TDS on payments exceeding Rs. 50 lakhs in a financial year to resident contractors or professionals.
Key Features of Section 194M
Applicability:
- Payer: Individuals or HUFs not covered under Sections 194C or 194J.
- Recipient: Resident contractors or professionals.
Nature of Payments Covered:
- Payments for contractual work (as defined under Section 194C).
- Payments for professional services (as defined under Section 194J).
Threshold Limit:
TDS is applicable only if the aggregate payments to a single recipient exceed Rs. 50 lakhs in a financial year.
Time of Deduction:
TDS must be deducted at the time of crediting the amount or making the payment, whichever is earlier.
TDS Deduction Rate: A New Update
The Budget 2024 has brought a significant update to Section 194M. Effective from 1st October 2024, the TDS deduction rate has been reduced from 5% to 2%. This reduction aims to ease the compliance burden on individuals and HUFs while ensuring continued tax collection.
| TDS Rate | Condition |
|---|---|
| 5% (Before 1st Oct 2024) | Payments exceeding Rs. 50 lakhs |
| 2% (On or after 1st Oct 2024) | Payments exceeding Rs. 50 lakhs |
| 20% | If PAN is not provided by the recipient |
Why Was Section 194M Introduced?
The introduction of Section 194M was driven by the need to bring transparency and accountability to payments made by individuals and HUFs. Before this provision, a significant portion of payments to contractors and professionals remained outside the TDS framework, leading to potential tax evasion.
By mandating TDS on such payments, the government ensured that a larger portion of income is reported and taxed appropriately. This move also aligns with the broader objective of widening the tax base and reducing the tax gap.