30. TDS on Payments by Individuals/HUF to Contractors or Professionals — Section 194M

30. TDS on Payments by Individuals/HUF to Contractors or Professionals — Section 194M




1. Introduction

Section 194M was introduced to widen the scope of TDS by bringing high-value payments made by individuals and HUFs into the tax net. Earlier, individuals and HUFs not covered under tax audit were not required to deduct TDS on payments to contractors or professionals. This resulted in large payments escaping tax reporting.
To address this gap, Section 194M mandates TDS deduction where such payments exceed a specified threshold. This provision ensures better tracking of high-value transactions and improves tax compliance.
Under Section 194M, any individual or HUF (not liable for tax audit) who makes payments to a resident contractor or professional exceeding the prescribed threshold must deduct TDS. The deduction is made at the time of payment or credit, whichever is earlier.
This provision applies to payments that would otherwise fall under Sections 194C (contractors) or 194J (professionals), but where the payer is not required to deduct TDS under those sections.
Even non-business individuals making large payments are now brought under TDS compliance.

2. Applicability of Section 194M

2.1 Who is Covered?

Section 194M applies specifically to individuals and HUFs who are not subject to tax audit. This makes it particularly relevant for non-business taxpayers who make large payments.
Covered persons include:
  • Salaried individuals
  • Small taxpayers
  • Individuals undertaking high-value personal transactions

2.2 Nature of Payments Covered

This section applies to specific categories of payments made to residents. It is important to identify whether the payment qualifies under this section.
Covered payments include:
  • Payments to contractors (e.g., construction work)
  • Payments for professional services
  • Commission or brokerage payments
These payments must be made to residents and exceed the prescribed threshold.

3. Rate of TDS

The rate of TDS under Section 194M is uniform and applies to the total payment.
  • 5%
If PAN is not provided, higher TDS rates apply as per law.

4. Threshold Limit

TDS under Section 194M is applicable only when the aggregate payments during the financial year exceed:
  • ₹50,00,000
If the payments do not exceed this threshold, no TDS is required to be deducted.
Impact Insight: This section targets high-value transactions, making it highly relevant for large personal expenditures.

5. Timing and Mode of Deduction

5.1 When to Deduct TDS?

TDS must be deducted at the time of payment or credit, whichever is earlier. Unlike some other provisions, there is no requirement to deduct TDS monthly—deduction can be made when the threshold is crossed.
This simplifies compliance for individuals who may not have regular TDS obligations.

5.2 Mode of Deposit

The deducted TDS must be deposited using Form 26QD, which is a challan-cum-statement. This eliminates the need for separate TDS return filing.
No TAN is required under this section, making compliance easier.

6. TDS Certificate

After depositing TDS, the deductor must issue Form 16D to the payee. This certificate acts as proof of tax deduction and allows the recipient to claim credit.

7. Practical Examples

Example 1: Contractor Payment
An individual pays ₹60,00,000 to a contractor for construction of a house.
Backhand Index Pointing Right TDS = ₹60,00,000 × 5% = ₹3,00,000
Since the payment exceeds ₹50 lakh, TDS is applicable.
Example 2: Below Threshold
Payment to contractor = ₹40,00,000
Backhand Index Pointing Right No TDS (below ₹50 lakh)
Example 3: Professional Fees
An individual pays ₹55,00,000 to a consultant.
Backhand Index Pointing Right TDS = ₹55,00,000 × 5% = ₹2,75,000
Example 4: Aggregate Payments
Multiple payments during the year:
  • ₹20,00,000 + ₹20,00,000 + ₹15,00,000 = ₹55,00,000
Backhand Index Pointing Right TDS applicable as total exceeds ₹50 lakh
Example 5: No PAN Case
Payment = ₹60,00,000PAN not provided
Backhand Index Pointing Right TDS @ 20% = ₹12,00,000

8. Compliance Requirements

The deductor must comply with all procedural requirements under Section 194M.
Key responsibilities include:
  • Deduct TDS at correct rate
  • Deposit using Form 26QD
  • Issue TDS certificate (Form 16D)
  • Ensure timely compliance

9. Common Errors in Practice

In practice, individuals often make errors due to lack of awareness.
Common mistakes include:
  • Not tracking aggregate payments
  • Ignoring threshold
  • Not filing Form 26QD
  • Not issuing Form 16D
  • PAN-related errors

10. Consequences of Non-Compliance

Failure to comply with Section 194M can lead to financial and legal consequences.
These include:
  • Interest under Section 201
  • Late fee under Section 234E
  • Penalties
  • Notices from tax authorities
High-value personal transactions are increasingly monitored through TDS provisions.

11. Practical Compliance Tips

To ensure smooth compliance:
  • Track total payments during the year
  • Verify PAN of payee
  • Deduct TDS once threshold is crossed
  • File Form 26QD on time
  • Issue Form 16D promptly

12. CABTA Insight

From a professional perspective, Section 194M is a significant compliance provision for individuals making large payments. Awareness and timely action are essential to avoid penalties and ensure proper tax reporting.

13. Conclusion

Section 194M ensures taxation of high-value payments made by individuals and HUFs through a structured TDS mechanism. Proper understanding and compliance are essential to avoid financial and legal consequences.

14. What Comes Next?

In the next article, we will cover:
Backhand Index Pointing Right TDS on Cash Withdrawal from Banks — Section 194N
This will explain TDS applicability on cash withdrawals exceeding prescribed limits.