Jul 182019

Tax Deduction at Source (TDS) on payment by Individual/HUF to contractors and professionals

Proposals under Finance Bills 2019:

Clause 46. After section 194LD of the Income-tax Act, the following sections shall be inserted with effect from the 1st day of September, 2019, namely:–– ‘

194M. (1) Any person, being an individual or a Hindu undivided family (other than those who are required to deduct income-tax as per the provisions of section 194C or section 194J) responsible for paying any sum to any resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract or by way of fees for professional services during the financial year, shall, at the time of credit of such sum or at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to five per cent. of such sum as income -tax thereon:

Provided that no such deduction under this section shall be made if such sum or, as the case may be, aggregate of such sums, credited or paid to a resident during a financial year does not exceed fifty lakh rupees.

(2) The provisions of section 203A shall not apply to a person required to deduct tax in accordance with the provisions of this section.


For the purposes of this section,––

(a) “contract” shall have the meaning assigned to it in clause (iii) of the Explanation to section 194C;

(b) “professional services” shall have the meaning assigned to it in clause (a) of the Explanation to section 194J;

(c) “work” shall have the meaning assigned to it in clause (iv) of the Explanation to section 194C

At present there is no liability on an individual or Hindu undivided family (HUF) to deduct tax at source on any payment made to a resident contractor or professional when it is for personal use. Further, if the individual or HUF is carrying on business or profession which is not subjected to audit, there is no obligation to deduct tax at source on such payment to a resident, even if the payment is for the purpose of business or profession.

Due to this exemption, substantial amount by way of payments made by individuals or HUFs in respect of contractual work or for professional service is escaping the levy of TDS, leaving a loophole for possible tax evasion.

To plug this loophole, it is proposed to insert a new section 194M in the Act to provide for levy of TDS at the rate of five per cent. on the sum, or the aggregate of sums, paid or credited in a year on account of contractual work or professional fees by an individual or a Hindu undivided family, not required to deduct tax at source under section 194C and 194J of the Act, if such sum, or aggregate of such sums, exceeds fifty lakh rupees in a year.

However, in order to reduce the compliance burden, it is proposed that such individuals or HUFs shall be able to deposit the tax deducted using their Permanent Account Number (PAN) and shall not be required to obtain Tax deduction Account Number (TAN).

This amendment will take effect from 1st September, 2019. [Clause 46]

Effect of proposal:

Thus, from Sept 2019 onwards departments have widen to scope of TDS deduction and included the personal expenses of individual and HUFs under the ambit of TDS deduction. Thus, there are less chances of hiding of income on the part of contractors and professionals.