Section 194J and TDS for professional fees

The growth of the Indian financial and stockbroking sector has resulted in a significant increase in professional engagements. Stockbroking firms and financial intermediaries frequently engage legal advisors, auditors, compliance specialists, consultants, and technology providers. In such scenarios, Section 194J of the Income Tax Act plays a vital role in regulating tax collection at the source.

Section 194J mandates the deduction of tax at source (TDS) on specific professional and technical service payments. Its objective is twofold: to ensure timely tax collection and to reduce instances of tax evasion. For stockbroking entities, correct application of this provision is more than just a statutory formality. It is a matter of fostering credibility with regulators, investors, and professional partners while avoiding avoidable financial penalties.

This article provides a comprehensive explanation of Section 194J, covering its scope, applicability, the 194J TDS rate, the 194J limit, compliance procedures, and practical examples to support understanding.

What is Section 194J of the Income Tax Act?

Section 194J relates specifically to TDS for professional fees, technical services, royalty payments, director’s fees (other than salary), and non-compete agreements. It applies where a resident entity makes a payment to another resident professional or service provider.

In the context of the stockbroking industry, this means payments to auditors, compliance consultants, law firms, financial advisors, IT developers, and even directors for professional duties will fall within its ambit. It is therefore an indispensable section for entities engaged in regulated financial services.

Nature of payments covered under Section 194J

The scope of Section 194J is broad. It covers the following categories of payments:

1. Professional services – Services in the legal, medical, engineering, architectural, accountancy, technical consultancy, management, interior decoration, advertising, and auditing fields.
2. Technical services – Services requiring specialised technical expertise, such as IT infrastructure management, data analytics, or software development for broking platforms.
3. Directors’ remuneration – Any fee, commission, or payment made to directors other than those classified as salary.
4. Royalty payments – Payments for the use of patents, copyrights, trademarks, software, or similar intellectual property.
5. Non-compete fees – Payments made to restrict a person from carrying on competing business activities.

In stockbroking, activities like compliance audits, risk management software licensing, advisory services, and director’s commission squarely fall within Section 194J.

Who is responsible for deducting TDS under Section 194J?

The obligation to deduct TDS for professional fees under Section 194J rests on:

• Companies, partnerships, trusts, or other entities making qualifying payments.
• Individuals and Hindu Undivided Families (HUFs) only if their gross business receipts exceed ₹1 crore or their professional income exceeds ₹50 lakh in the preceding financial year.

In stockbroking firms, the compliance or finance team usually manages this responsibility. Timely deduction and deposit of TDS are critical, as lapses can invite interest and penalties.

194J TDS rate applicable for FY 2025-26

The rates under Section 194J differ depending on the nature of payment and whether the recipient has provided a valid PAN.

• For call centres and certain specified services, a concessional rate of 2% applies.
• If the recipient fails to furnish a PAN, the deduction increases sharply to 20%, irrespective of the service.

194J limit for TDS deduction

The 194J limit, or threshold, defines the minimum annual payment beyond which TDS becomes applicable.

• For FY 2025-26, the threshold is ₹50,000 per financial year per payee.
• No TDS is required if the total annual payment does not exceed this amount.
• However, director’s remuneration has no threshold exemption, meaning TDS must be deducted on all payments.

Earlier, the limit was ₹30,000, but the Finance Act 2025 raised it to ₹50,000 with effect from April 1, 2025.

Due dates for depositing TDS and filing returns

Compliance is not limited to deduction alone. Timely deposit and accurate filing are equally important.

1. Deposit of TDS – Deducted TDS must be deposited by the 7th of the following month. For March, the deadline is April 30.
2. Quarterly TDS returns (Form 26Q) – Must be filed on or before:
   

   • July 31 for April to June
   • October 31 for July to September
   • January 31 for October to December
   • May 31 for January to March
     TDS certificate (Form 16A) – Issued to the payee after filing returns.

For stockbroking entities, where multiple professional payments occur each quarter, these deadlines form the backbone of financial compliance.

Consequences of non-deduction or late deduction

Failure to comply with Section 194J requirements can have serious repercussions:

• Interest under Section 201(1A) – 1% per month for late deduction, and 1.5% per month for late deposit, calculated until the date of actual payment.
• Disallowance of expenses – Under Section 40(a)(ia), 30% of the expense may be disallowed when computing taxable profits.
• Penalty under Section 271C – A penalty equal to the amount of TDS not deducted or not deposited may be levied.

Thus, strict compliance is not only a statutory obligation but also an effective safeguard against unnecessary financial exposure.

Exemptions under Section 194J

There are specific cases where Section 194J does not apply:

• Payments of a personal nature made by individuals.
• Payments to non-residents, which fall under Section 195.
• Individuals and HUFs with turnover below the prescribed threshold.

Difference between Section 194J and other TDS provisions

Confusion often arises between Section 194J, Section 194C, and Section 195.

This distinction is particularly relevant in stockbroking where payments may fall under different sections based on the type of contract.

Compliance checklist for deductors

To simplify adherence, deductors should maintain a structured checklist:

1. Evaluate the nature of each payment.
2. Verify whether the 194J limit of ₹50,000 is breached.
3. Collect and verify the recipient’s PAN to avoid the higher 20% rate.
4. Deduct TDS at the correct 194J TDS rate.
5. Deposit TDS before the statutory deadline.
6. File quarterly Form 26Q returns.
7. Issue Form 16A to payees.
8. Maintain records and documentation for audit purposes.Recent amendments and updates

• Threshold revision – From April 1, 2025, the 194J limit has been increased to ₹50,000 per payee per year.
• Clarification on IT-enabled services – Judicial rulings and circulars have clarified that services such as software development and IT infrastructure management may qualify as technical services under Section 194J.
• Segregation from Section 194C – Since October 2024, “work” contracts specifically fall under Section 194C, excluding them from the ambit of Section 194J.

Practical examples and case studies

Example 1: Broking audit engagement
ABC Stock Broking Pvt Ltd pays ₹60,000 to an audit firm in June 2025. As the payment exceeds the 194J limit of ₹50,000, the firm must deduct TDS at 10% (₹6,000) and deposit it by July 7.

Example 2: Software licensing fees
XYZ Broking House pays ₹40,000 in FY 2025-26 for a software licence. Since the total annual payment does not exceed ₹50,000, no TDS deduction is required.

Example 3: Director’s commission
PQR Securities pays its director a commission of ₹20,000 monthly. This totals ₹2,40,000 annually. TDS at 10% applies to every payment, as director’s remuneration has no threshold exemption.

Process flow for TDS under Section 194J

1. Payment for professional services exceeds ₹50,000.
2. Deductor evaluates applicability of Section 194J.
3. Verify PAN details of the recipient.

   • If PAN is provided – Deduct at 10% (or 2% for technical services).
   • If PAN is not provided – Deduct at 20%.

4. Deposit TDS by the 7th of the following month.
5. File quarterly Form 26Q returns.
6. Issue Form 16A certificate to the payee.

Conclusion

Section 194J serves as a cornerstone of India’s TDS framework, particularly relevant for stockbroking entities and allied businesses. It ensures transparency, accountability, and consistent revenue collection for the exchequer.

For deductors, mastery over its provisions is non-negotiable. Understanding the scope of professional services, applying the correct 194J TDS rate, observing the 194J limit, and adhering to deadlines form the basis of sound compliance. In an environment of growing regulatory oversight, attention to detail in Section 194J compliance not only prevents penalties but also strengthens the organisation’s credibility with stakeholders