Who has to deduct TDS under Section 194M of the Income Tax Act?

TDS under Section 194M has to be deducted by individuals or Hindu Undivided Families (HUFs) who are not covered under tax audit. It applies when they make payments to a resident for contract work, professional services, or commission or brokerage exceeding ₹50 lakh in a financial year.

Who is responsible to deduct tax under Section 194M?

The responsibility to deduct tax lies with the individual or HUF making the payment, provided they are not required to deduct TDS under Sections 194C, 194H, or 194J. This includes payments made for both personal and non-audit business purposes once the threshold limit is crossed.

What is the TDS rate under Section 194M?

The TDS rate under Section 194M is 2% on the total payment made to a resident contractor, professional, or agent. This rate applies once the payment exceeds ₹50 lakh in a financial year and is applicable for FY 2025–26.

What is the rate at which tax should be deducted under Section 194M?

Tax should be deducted at 2% under Section 194M when the payee provides a valid PAN. If PAN is not provided, TDS is deducted at a higher rate of 20. No surcharge or health and education cess is added to this deduction.

When to fill Form 26QD?

Form 26QD must be filed within 30 days from the end of the month in which the payment is made or credited. This form is used to deposit the deducted TDS and report the transaction under Section 194M.

Section 194M of Income Tax Act

Section 194M of the Income Tax Act was introduced to bring certain high-value payments made by individuals and Hindu Undivided Families (HUFs) under the TDS framework. It applies to individuals who make payments to resident contractors, professionals, or for commission. However, they are not required to deduct TDS under sections like 194C, 194H, or 194J. The provision was added to close a compliance gap and ensure tax deduction on large personal or non-audit transactions.

Key Takeaways

TDS is deducted at a flat rate of 2% on the entire payment once the threshold is crossed, with no surcharge or cess applicable.

Tax Deduction and Collection Account Number (TAN) is not required.

You can use PAN via Form 26QD (due 30 days from the month-end of deduction) and Form 16D (issued within 15 days of the due date).

Timely deduction, payment, and filing are important, as delays can lead to interest, late fees, and penalties.

What Is Section 194M of the Income Tax Act?

Section 194M of the Income Tax Act deals with tax deduction at source (TDS) on certain payments made by individuals and Hindu Undivided Families (HUFs). It applies when an individual or HUF makes payments to a resident for contract work, professional services, or commission or brokerage, and the total payment to a person exceeds ₹50 lakh in a financial year.

This section is meant for individuals and HUFs who are not required to deduct TDS under other provisions, such as Sections 194C, 194H, or 194J. The intent behind Section 194M is to ensure that high-value payments do not remain outside the TDS system, even when the payer is not subject to tax audit. It simplifies compliance by allowing TDS deduction using PAN, without requiring a TAN.

Who Is Required to Deduct TDS Under Section 194M?

This section explains which individuals and Hindu Undivided Families (HUFs) are required to deduct tax at source under Section 194M. It mainly applies to cases where large payments are made, but regular TDS provisions do not apply.

Applicability to individuals and HUFs

Section 194M of the Income Tax Act applies to individuals and HUFs who are not required to deduct TDS under sections such as 194C, 194H, or 194J. These are generally persons who are not covered under the tax audit provisions of Section 44AB.

When TDS deduction becomes mandatory

TDS must be deducted when payment is made to a resident contractor, professional, or for commission or brokerage, and the total payment to one person exceeds ₹50 lakh in a financial year. This rule applies even if the payment is for personal purposes.

Cases where Section 194M does not apply

If an individual or HUF is already required to deduct TDS under other applicable sections due to audit requirements, Section 194M will not apply to those payments.

Payments Covered Under Section 194M

This section outlines the types of payments on which tax must be deducted under Section 194M. It covers specific payments made by individuals and Hindu Undivided Families (HUFs) when the prescribed conditions are met.

Contractual work - Payments made for carrying out any work under a contract are covered under Section 194M. This includes payments for construction, repair work, labour supply, catering, and similar contractual arrangements where a service or task is executed.

Professional services - Section 194M also applies to payments made for professional services such as legal, accountancy, architectural, engineering, consultancy, and interior decoration services. These services are generally provided by persons with specialised knowledge or professional qualifications.

Commission or brokerage - Payments made in the nature of commission or brokerage to a resident are also covered under this section. This includes payments made to agents or intermediaries for services rendered, other than insurance commission.

All these payments fall under Section 194M only when the total amount paid to a single person exceeds ₹50 lakh in a financial year.

Threshold Limit Under Section 194M

The threshold limit under Section 194M plays a key role in deciding when tax deduction at source becomes mandatory. TDS is required to be deducted only when the total payments made to a single resident for contractual work, professional services, or commission or brokerage exceed ₹50 lakh in a financial year.

If the aggregate amount paid during the year does not cross this limit, there is no obligation to deduct TDS under this section. Once the ₹50 lakh threshold is crossed, TDS is deducted on the entire payment amount, not just on the portion exceeding the limit. This threshold helps reduce compliance for smaller transactions while ensuring that large-value payments are brought within the TDS framework.

TDS Rate Under Section 194M

This section explains the rate of tax deduction under Section 194M and related conditions in a simple manner.

TDS under Section 194M is deducted at a flat rate of 2% on payments made to a resident contractor, professional, or for commission or brokerage, once the ₹50 lakh threshold is crossed in a financial year (as applicable for FY 2025–26). This rate change from 5% to 2% does not change the threshold or coverage criteria, and they remain the same.

If the payee does not provide a valid PAN, TDS is required to be deducted at a higher rate of 20%, as per the applicable provisions.

No surcharge or health and education cess is added to the TDS amount deducted under Section 194M.

When Should TDS Be Deducted Under Section 194M?

This section explains the timing for deducting tax under Section 194M and how it works in practical situations.

TDS under Section 194M must be deducted at the earlier of the two events: when the amount is credited to the payee’s account or when the payment is actually made, whether in cash, by cheque, draft, or any other mode.

If the amount is credited first and paid later, TDS should be deducted at the time of credit. On the other hand, if payment is made without any prior credit entry, TDS must be deducted at the time of payment itself.

For example, if a contractor’s bill is recorded in the books in March but payment is made in April, TDS should be deducted in March. Similarly, if payment is made directly without booking an expense earlier, TDS applies at the time of payment.

Is TAN Required for Section 194M?

Under Section 194M of the Income Tax Act, individuals and Hindu Undivided Families (HUFs) are not required to obtain a Tax Deduction and Collection Account Number (TAN) for deducting TDS. This relaxation was provided to make compliance easier for persons who do not regularly deal with TDS obligations. Instead of TAN, the deductor can complete the TDS process by quoting their Permanent Account Number (PAN).

After deducting TDS, the individual or HUF must deposit the tax and file Form 26QD, which acts as a challan-cum-statement. This form must be filed within 30 days from the end of the month in which the payment is made. Filing Form 26QD ensures that the deducted tax is properly reported and credited to the payee.

Note: 26QD filed online via TIN-NSDL, and there is no physical challan. Add to "TDS Payment" and file electronically.

TDS Payment & Compliance Process

Step 1: Deduct TDS

Deduct tax at the applicable rate at the time of credit or payment, whichever is earlier.

Step 2: File Form 26QD

After deduction, file Form 26QD, which works as a challan-cum-statement for Section 194M.

Step 3: Pay the TDS amount

The deducted tax must be paid to the government while filing Form 26QD.

Step 4: Follow the due date

Form 26QD must be filed within 30 days from the end of the month in which the payment is made.

This step-wise process completes the TDS compliance under Section 194M.

TDS Certificate Under Section 194M (Form 16D)

Form 16D is the TDS certificate that must be issued to the payee after tax is deducted under Section 194M. Once the deductor files Form 26QD and deposits the TDS, Form 16D has to be generated and shared with the payee as proof of tax deduction.

The certificate must be issued within 15 days of the due date of filing Form 26QD. This timeline is important, as delays can lead to compliance issues for the deductor and difficulties for the payee while claiming credit.

Form 16D can be downloaded from the TRACES portal. The deductor needs to log in using PAN details, select the relevant assessment year, and download the certificate after it is made available. Once downloaded, Form 16D should be provided to the payee for their records and tax filing purposes.

Penalty & Consequences of Non-Compliance

Non-compliance with Section 194M can lead to interest, fees, and penalties, even if the default is unintentional.

Late or non-deduction of TDS: If TDS is not deducted, interest is payable at 1% per month from the date the tax was deductible until the date it is actually deducted.

Late payment of deducted TDS: If TDS is deducted but not deposited on time, interest at 1.5% per month applies from the date of deduction till the date of payment.

Late filing of Form 26QD: A late fee of ₹200 per day may be levied, subject to the TDS amount.

Penalty exposure: Additional penalties may apply for persistent non-compliance, and in some cases, the related expense may face disallowance under income tax provisions.

Practical Examples of Section 194M

The following examples help explain how Section 194M works in real-life situations.

Example 1: Professional services

An individual pays ₹62 lakh to a resident architect for designing and supervising a house project during FY 2025–26. Since the payment exceeds ₹50 lakh and the individual is not liable to tax audit, TDS at 2% must be deducted on the entire ₹62 lakh under Section 194M.

Example 2: Contractor payment

A HUF pays ₹48 lakh to a contractor for renovation work during the year. As the total payment does not cross the ₹50 lakh threshold, no TDS is required under Section 194M.

Example 3: Commission payment

An individual pays ₹55 lakh as commission to a resident agent in a financial year. TDS at 2% must be deducted on the full amount, as the threshold limit is exceeded.

These examples show that the threshold amount and nature of payment are key factors in applying Section 194M.

Section 194M vs Section 194C & Section 194J

The table below highlights the key differences between Section 194M and Sections 194C and 194J to help understand when each provision applies.

Particulars	Section 194M	Section 194C	Section 194J
Applicable to	Individuals & HUFs not liable to tax audit	Persons, including individuals/HUF,s liable to audit	Persons, including individuals/HUFs, are liable to audit
Nature of payment	Contract work, professional services, commission/brokerage	Contract work	Professional or technical services
Threshold limit	₹50 lakh per payee per financial year	Lower transaction-based limits	₹50,000 per payee per year
TDS rate	2%	1% (HUF/Individuals) 2% (others)	2% and 10% (based on certain factors)
TAN requirement	Not required	Mandatory	Mandatory

In simple terms, Section 194M applies where Sections 194C or 194J do not, mainly to cover high-value payments made by non-audit individuals and HUFs.

Conclusion

Section 194M of the Income Tax Act brings certain high-value payments made by individuals and Hindu Undivided Families (HUFs) within the TDS framework. It applies to payments for contractual work, professional services, and commission or brokerage when the ₹50 lakh threshold is crossed in a financial year.

By removing the requirement of a TAN and simplifying compliance through Form 26QD, the provision makes TDS obligations easier to follow while ensuring better tax reporting and compliance.