Section 194M

2019 Union Budget includes number of proposed changes as well as introduction of new section, Section 194M of income tax act, which deals with total amount paid to resident individual in financial year that exceeds ₹ 50,00,000 for performing any contractual work or rendering any professional service. 

What Is Section 194M?

If Individual or HUF pays more than ₹ 50,00,000 in total to resident individual, they are required under Section 194M to deduct tax at source.
 Income Tax Act's Section 194m of income tax act addresses number of payments made by individual or HUF that is exempt from tax audits to resident person, including commission (not insurance commission), brokerage, contractual fees, & professional fees.
In addition, TDS must be deducted under section 194m of income tax act for individuals & HUFs that are not required to do so under sections 194C, 194H, or 194J.
 

Who Is Responsible To Deduct TDS?

When paying resident for finished contract work, commissions or brokerage fees (apart from insurance commissions), or any other professional services, individual or HUF is required by 194M to deduct tax at source.
According to Union Budget 2019, if individual or HUF pays resident more than ₹ 50,00,000 in single financial year for professional services delivered during fiscal year, or for performing any activity (including labour supply) under contract, TDS must be deducted at rate of 5%. 
This clause will go into effect on September 1st, 2019. Even if contract was signed before this date, TDS amount will be withheld from all payments received after this date as long as total payment exceeds Rs 50,000,000.
 

When To Deduct TDS Under Section 194M?

Section 194M, which allows for tax deduction at source from any money paid by individual or HUF to resident contractor where services are rendered for personal use, was introduced by budget bill of 2019. Consequently, payments pertaining to both personal & business use are covered under this clause.
Prior to creation of this provision, neither individual nor HUF was required to withhold taxes at source in aforementioned circumstances.
TDS will be withheld when amount is credited, when it is paid in cash, when check or draft is issued, or in any other way, depending on whatever occurs first.
 

Rate Of TDS Under Section 194M

Additionally, even when payment was made for purpose of business or profession, individuals or HUFs carrying business or profession were not deducting any tax at source as long as they did not exceed turnover level.
If total amount paid to resident in given financial year exceeds INR 50,00,000, rate of TDS u/s 194M will be 5%. TDS rate will be 20% if deductee fails to provide their PAN.
 

Threshold Limit Of Tds Under Section 194M

Only when such amount, or total of such amounts, surpasses fifty lakh rupees in given year would TDS be withheld. To lessen burden of compliance, it is suggested that these individuals or HUFs deposit tax deducted using their PAN & not need to obtain TANs; TDS Certificate in Form No. 16D should be given to deductee within 15 days, & Challan-cum statement in Form No. 26QD should be filed within 30 days of end of month in which TDS is deducted.
Example: If individual or HUF pays Rs. 50 lakh or more to works contractor (with or without material) for building construction or residential housing & is exempt from TDS u/s. 194C because his business turnover does not exceed ₹ 1 crore or professional fees do not exceed ₹ 50 lakh, then he will be liable to deduct TDS u/s. 194M @5% (3.75% w.e.f. 14.05.2020 to 31.03.2021) TDS on entire payment as per Sec. 194M. For example, if Works Contractor is paid ₹ 60 Lakhs for construction of building or residential home, then ₹ 2,25,000/-(or 3.75% of total amount payable) will be withheld as TDS.

ILLUSTRATION: On June 1, 2020, Mr. Yogesh, salaried employee, paid ₹ 60 lakhs for piece of land. He paid contractor ₹ 75 lakhs on December 10, 2020, interior decorator ₹ 65 lakhs on January 2, 2021, & second contractor ₹ 40 lakhs on March 15, 2021, for painting building on that land. table below lists taxes that Mr. Yogesh will be deducting.
 

Conclusion

TDS rates for contractors are crucial for ensuring Income Tax Act compliance, especially when contractor payment thresholds are met. Understanding contractor taxation rules are essential for correctly applying TDS on contract payments. Tax withholding for contractors must be managed effectively, particularly for resident contractor payments. It's important to be aware of TDS threshold for contractors to avoid issues.