TDS is applicable on almost every service that you use. It is applicable on transportation, freight, courier services and even on the labour charges that you are paying. The professional and the technical services are not exempted either. The TDS is applicable on the consultancy charges as the consultancy also falls under the professional and technical assistance. The TDS helps the government in avoiding any kind of tax evasion as the tax deduction acts as an advance tax. It also eases off the tax burden for the taxpayer. In this article, we are going to talk about the TDS applicable to the consultancy charges. So, if you are availing any consultancy services, then you will be able to figure out the TDS that you should deduct during the payment.
TDS on Consultancy Charges
In this TDS deductions, there are several different categories covered. Any fee paid towards the professional fee, consultancy charges, technical services, royalty or non-compete fee should be considered for the TDS deductions. Below is more information about the same.
How much TDS should be deducted on Consultancy Charges?
The TDS should be deducted in the cases when the consultancy charges for the year are greater than Rs 30,000. There are certain exceptions in the given case, but we are going to talk about that in the later stages.
- The TDS deduction rate for the consultancy charges is 10%. However, the government reduced it for the technical service provides from 1st April 2020 onwards. The new rates are capped at 2% of the invoice amount.
- The TDS deductions for the operators of the call centres are also capped at 2%.
If in case you do not deduct the TDS, there can be two-fold consequences. The first problem can be that you may be disallowed of 30% of the expenditure while generating the P&L statement. You would need to submit the TDS to get this 30% back on your P&L Statement. Secondly, the late submission will also attract a penal interest of 1.5% per month.
What happens if I do not have a PAN Number?
Ideally, the consultancy service provider must share the PAN Details with you so that you can share it with the income tax authority while depositing the TDS on their behalf. If in any situation, the service provider is not able to share the PAN Details, you are liable to deduct 20% of the invoice amount as TDS. This is what the thumb rule states.
How can I calculate the TDS on Consultancy Charges?
The TDS on the consultancy charges are calculated on the Pre-Tax Amount. The invoice should give you a break-up of pre-tax and the post-tax amount. You can calculate the applicable amount on the pre-tax amount. In case, the tax bifurcation is absent; you can calculate the TDS on the total invoice amount. It is the standard practice across the industry.
Are there any exemptions on TDS deductions on Consultancy Charges?
There are many exemptions on the TDS deductions on consultancy charges. Check out the points below to understand more about it.
- If you are dealing with individual or HUF Business where the turnover is less than Rs 1 Crore, you must not deduct any TDS.
- If you are dealing with an individual or HUF professional where the turnover is less than Rs 50 Lakh, you must not deduct any TDS.
When do I need to deposit the TDS after making the deductions?
There are specific deadlines set up by the government for depositing the TDS to the income tax department. Below are more details about the same.
- If you are paying before March, then you need to pay TDS before 7th day from the end of the month in which the TDS is deducted.
- If you are depositing the TDS for March, then you can deposit the TDS by 30th April of the same calendar year.
It should be noted that as per the Income Tax Act, the TDS should be deducted at the time of payment. In the cash of the digital payment, the service provider must be paid after the deduction of the TDS amount. In case of payment via Cheque or Draft, the instrument should be issued after making TDS deductions.
Can a service provider claim refund of TDS on Consultancy Charges?
If you are a service provider and if the TDS deposited on your behalf is more than the tax liability, then you will be able to claim a refund of the excess tax paid. For this, you would need your Form 16, and you will need to wait till the end of the financial year. After the financial year ends, you can use for Form 16 to claim the refund on excess tax paid.
The Best Approach
We always recommend using professional services for any tax-related work. The nature of these tasks can be complicated, and that leaves a lot of scope for error. When you are using professional services, you are eliminating that scope of error. Many online and offline service providers can help you in calculating & depositing TDS to the income tax department. You can reach out to them for your queries.