TDS on Royalty and Fees for Technical Services
Introduction
As per section 194J, TDS must be deducted on payments made to residents for royalty, fees for technical or professional services, director’s fees, and non-compete fees.
Key Provisions
- Deductor:
o Any person other than an individual or HUF.
o Individuals or HUFs must deduct TDS if their turnover in the preceding financial year exceeds Rs. 1 crore (business) or Rs. 50 lakh (profession).
- Deductee:TDS applies only if the recipient is a resident. For non-residents, tax is deducted under Section 195.
- Threshold:
o TDS applies if the total payment in a financial year exceeds Rs. 50,000 for each category (royalty, professional/technical services, etc.).
o No threshold for director’s fees—TDS is deducted even if the amount is below Rs. 50,000.
- Rate of TDS:
o 2% – Fees for technical services, royalty for sale/distribution/exhibition of cinematographic films.
o 2% – If the payee is engaged in the business of operating of call centre only
o 10% – Other royalties, fees for professional services, non-compete fees, and director’s fees.
o Higher rates apply if PAN is not provided (Section 206AA)
- Time of Deduction:At the time of payment or credit, whichever is earlier, including when credited to a suspense account.
Exemptions from TDS
- Government, RBI, and Tax-Exempt Entities:No TDS as per Section 196.
- GST Component:TDS is deducted on the amount excluding GST, if shown separately in the invoice. [Circular No. 23/2017, dated July 19, 2017]
- Personal Payments:TDS is not required on professional fees paid by individuals or HUFs for personal purposes.
- Foreign Payments:No TDS if a foreign company pays fees to an Indian professional without a business connection in India. [Circular No. 726, dated October 18, 1995]
- IFSC Units:Specified payments to IFSC entities are exempt, subject to Form 1 compliance. [Notification No. 28/2024, dated 07-03-2024, and Notification No. 67/2025, dated 20-06-2025]
Compliance Requirements
- Lower/Nil Deduction Certificate:Can be obtained under Section 197 but not through a self-declaration under Section 197A.
- Deposit of TDS:
o Payable via Challan ITNS 281 within 7 days from the end of the deduction month.
o For March deductions, deposit by 30th April.
o Government offices depositing TDS without a challan must deposit the TDS on the same day on which the tax was deducted.
- TDS Statement Filing:Quarterly submission in Form 26Q.
- TDS Certificate:Form 16A must be issued within 15 days from the due date of TDS statement filing.
Consequences of Non-Compliance
- Failure to Deduct or Deposit TDS:
o Liable for interest under Section 201.
o Penalty under Section 271C, up to the non-deducted amount.
o Prosecution under Section 276B.
- Failure to Furnish TDS Statement:
o Liable for a penalty of Rs. 200 per day (limited to the TDS amount) under Section 234E.
o Additional penalties under Sections 271H and 272A.
- Failure to Issue TDS Certificate:Liable for a penalty under Section 272A.