7 changes in TDS provisions in Budget 2019 with Examples

1.      Deduction of TDS by Resident Individual and HUF (even though they may not be carrying on any business or profession) from payments to contractors and professionals [Sec. 194M]

[Applicable from September 1, 2019]

According to the current provisions of Section 194C and Section 194J, an individual or HUF, who is not liable to tax audit under Section 44AB, shall not be required to deduct tax under these provisions. Thus, no tax is required to be deducted by an individual or HUF from payment made to contractor or professional in the following cases:

1.  Payment made for services received for personal use

2.  Payment made for services received for business or profession if payer is not subjected to tax audit.

Due to this exemption, substantial amount by way of payments made by individuals or HUFs in respect of contractual work or for professional service were escaping the levy of TDS.

Thus, a new Section 194M has been proposed to be inserted in the Act to provide for levy of TDS at the rate of 5% on the sum paid or credited in a year on account of contractual work or professional fees by an individual or a HUF, if aggregate of such sums exceeds Rs. 50 lakhs in a year. However, in order to reduce the compliance burden, it is proposed that such individuals or HUFs can deposit the tax deducted using their PAN and shall not be required to obtain TAN.

This would mean that if the total of payments to any single contractor for wedding functions, house renovation or to a single professional during a filing year exceeds Rs. 50 Lakh then TDS @5% would be deductible by the payer.  

If estimated tax liability of the deductee justifies no deduction of tax or deduction of tax at lower rate, he can apply to the Assessing Officer under Section 197 to issue a nil or lower TDS certificate. The scope of Section 197 has been extended to this provision. Thus, payee can apply to the Assessing Officer to obtain such certificate in respect of sum paid or payable which are subject to TDS under Section 194M.

Example, Mr. A acquired a plot of land on June 1, 2019 for Rs. 50 lakhs. For construction of a building on such land he paid Rs. 65 lakhs to a contractor on December 10, 2019, Rs. 70 lakhs to interior decorator on January 2, 2020 and Rs. 10 lakhs to another contractor for painting on March 15, 2020.

The tax be deducted by Mr. A has been enumerated in below table.

ParticularAmount paidSectionRate of DeductionAmount of TDSDue date for deposit
Acquisition of land50,00,000194-IA1%50,000July 30, 2019
Construction65,00,000194M5%3,25,000January 30,2020*
Interior Decoration70,00,000194M5%3,50,000March 1, 2020*
Painting (see note)10,00,000

* Since amount paid is less than Rs. 50 lakhs no tax is required to be deducted

Note 1: No due date has been prescribed for deposit of tax deducted under section 194M. As two similar provisions are already there in Chapter XVII (Section 194-IA and 194-IB), it is possible that the due dates for deposit of tax under the new provisions of Section 194M shall be same, i.e., within 30 days from the end of the month in which tax is deducted.

2.     Term ‘consideration’ for immovable property is expained for the purposes of Section 194-IA

[Applicable from September 1, 2019]

As per Section 194-IA, any person (buyer) who is responsible for making payment of sales consideration in respect of purchasing an immovable property shall deduct tax therefrom. Tax is deductible under this provision if amount of ‘consideration’ paid or payable for transfer of immovable property is Rs. 50 lakhs or more.

The term ‘consideration’ for immovable property is presently not defined for the purposes of this section. In a transaction involving purchase of immovable property, there are other types of payments made besides the sales consideration and the buyer is contractually bound to make such payments to the builder/seller, either under the same agreement or under a different agreement. Accordingly, an Explanation has been proposed to be inserted in Section 194-IA to provide that the term ‘consideration for immovable property’ shall include all charges of the nature of club membership fee, car parking fee, electricity and water facility fees, maintenance fee, advance fee or any other charges of similar nature, which are incidental to transfer of the immovable property.

Example 1, Mr. A booked a flat on 01-06-2019 for Rs. 45 lakhs. He paid the entire amount on the date of booking. One month before handing over the possession, the seller asked the buyer for additional payment of Rs. 6 lakhs for car parking, water and electricity charges. Mr. A paid the said amount on November 01, 2019. At the time of booking, Mr. A was not liable to deduct tax at source as the purchase price was below the threshold limit. However, after the amendment proposed by the Finance Bill, 2019 the payment of charges towards car parking etc. shall be included in the ‘consideration for immovable property’ and after its inclusion the amount of consideration exceeds Rs. 50 lakhs. Thus Mr. A shall deduct tax from total amount (i.e. Rs. 51 lakhs) at 1% (Rs. 51,000) and deposit the same by December 30, 2019.

Example 2, Mr. A Purchased a residential house property for Rs. 2 crores, which comprised of following consideration:

1.  Towards purchase of immovable property: Rs. 160 lakhs

2.  Towards car parking: Rs. 20 lakhs

3.  Towards water and electricity facility: Rs. 20 lakhs

If payment is made on or before June 30, 2019, Mr. X shall deduct tax at the rate of 1% on Rs. 160 lakhs i.e. Rs. 1,60,000. If payment is made on or after September 1, 2019, the tax shall deducted on total consideration of Rs. 200 lakhs, i.e. Rs. 2,00,000.

3.     Banks and Post Offices to deduct tax from cash withdrawals exceeding Rs. 1 crore [Sec. 194N)

[Applicable from September 1, 2019]

In order to discourage cash transactions and move towards less cash economy, a new Section 194N has been proposed to be inserted in the Income-tax Act. As per this new provision, tax shall be deducted by a banking company or co-op. bank or post office at the rate of 2% from the amount withdrawn in cash from any account (saving or current account) if the amount of withdrawal exceeds Rs. 1 crore during the year.

However, no tax shall be deducted if amount is withdrawn from the bank or post office by following recipients:

1.  Central or State Government

2.  Banks

3.  Co-op. Banks

4.  Post Office

5.  Banking correspondents

6.  White label ATM operators

7.  Other persons notified by the Govt. in consultation with the RBI.

4.     TDS @5% on net Income portion from Payment in respect of Life Insurance Policy [Sec. 194DA]

[Applicable from September 1, 2019]

As per current provisions, any payment in respect of life insurance policy to a resident person shall be subject to TDS at the rate of 1% under Section 194DA. The tax shall be deducted under this provision at the time of payment, if sum payable exceeds Rs. 1 lakh. Tax is not required to be deducted if amount payable under an insurance policy is exempt from tax under Section 10(10D) or the sum is received on the occasion of death of the insured person.

An amendment has been proposed to this section as taxpayers were facing hardships due to deduction of tax from the gross amount whereas they were liable to pay tax only on net income. Generally, in Chapter XVII tax is required to be deducted on the amount paid or payable and not on the income component except in Section 192 and Section 195. The Finance Bill has proposed an amendment to Section 194DA which require the deductor to deduct tax only the income component comprised in the insurance pay-out. This amendment has been proposed so that the income as per TDS return of the deductor can be matched automatically with the return of income filed by the assessee. The tax shall be deducted at the rate of 5% computed on the income component (in contrast to 1% on the gross amount).

The provisions of Section 194DA does not prescribe any mechanism for computation of taxable income in case of insurance proceeds. When an insurer takes the insurance policy, he gets the right to receive sum due against his insurance policy either on maturity or on its surrender. Therefore, right to receive sum from insurance policy is a capital asset within the meaning of section 2(14) and any income or losses arising on its transfer shall be chargeable to tax under the head ‘Capital Gains’. If an insurance policy has been held for more than 36 months, it shall be considered as long-term capital assets, accordingly the benefit of cost inflation index shall be given while computing the amount of capital gains.

Example, In Financial Year 2013-14, Mr. A buys an insurance policy of Rs. 50 lakhs (for a term of 20 years) by paying the premium of Rs. 10 lakhs. He surrenders the policy for Rs. 15 lakhs on 01-10-2019. Prior to the Finance Bill, 2019, the payer insurance co. was required to deduct tax at the rate of 1% on total sum paid (i.e., Rs. 15 lakhs) to Mr. A. However, after the proposed amendment, tax shall be deducted at the rate of 5% on the net income and not on the gross amount paid to insured (Mr. A).

Thus, the insurance company will be required to compute the taxable amount in hands of Mr. A. In this case, long term capital gains will arise in the hands of Mr. A as period of holding is more than 36 months. Let’s assume the cost inflation index for the financial year 2019-20 is 289, the indexed cost of acquisition of such insurance policy shall be Rs. 13,13,636 lakhs (Rs. 10 lakhs * 289 (CII for FY 2019-20)/220 (CII for FY 2013-14). Thus, the long-term capital gains in such case shall be Rs. 1,86,364 lakhs (i.e. Rs. 15,00,000 less Rs. 13,13,636 lakhs). Insurance company shall deduct tax under Section 194DA at the rate of 5% on the taxable income only – Rs. 9,350 (5% of Rs. 1,86,364 lakhs).

As section 194DA does not prescribe any mechanism for computation of Income, the income from surrender or maturity of insurance policy shall be computed in the manner as presented above.

5.     Relaxing the provisions of sections 201 in case of payments to non-residents

[Applicable from September 1, 2019]

If any person, responsible for deduction of tax at source, fails to deduct the whole or any part of the tax or after deduction fails to deposit the same to the credit of the Central Government, then he shall be deemed to be an assessee-in-default. However, he will not be treated as an assessee-in-default if payment is made to a resident person, who has paid tax on such income and has included such income in the return submitted under Section 139. The payer will have to obtain a certificate to this effect from a Chartered Accountant in Form No. 26A and submit it electronically. Currently, this concession is available only for the payment made to a resident person.

In case of similar failure on payments made to a non-resident, such relief is not available to the deductor. To remove this anomaly, it is proposed to amend to extend the benefit of this proviso to a deductor, even in respect of failure to deduct tax on payment to non-resident.

Consequential amendment has been made in the provision for computation of interest. Thus, where deductors fails to deduct the tax from the amount paid or payable to payee (resident or non-resident) but he is not deemed to be assessee-in-default, he shall continue to be liable to pay the interest from the date on which tax was required to be deducted to the date of furnishing of return of income by the payee.

6.     Quarterly return by banks to report interest payment

[Applicable from September 1, 2019]

Section 206A of the Act requires furnishing of statement in respect of payment of certain income by way of interest to residents where no tax has been deducted at source. Thus, a banking company, etc. is required to prepare and file quarterly returns to report the interest, other than on securities, paid or payable to a resident person on which tax is not deductible. Such quarterly returns has to be submitted in Form No. 26QAA within one month from the end of first, second and third quarter and by June 30 in the case of last quarter. Such returns should be delivered on floppy, diskette, magnetic cartridge tape, CD-ROM or any other computer readable media to the prescribed Income-tax authority or to the person authorized by such authority.

The Finance Bill, 2019 proposed that such statement can be filed in electronic mode as well. Further, the bill proposed that such statement can also be filed for correction, rectification of any mistake or to add, delete or update the information furnished.

7.     Facility to be provided for filing of online application to obtain certificate for lower or nil rate of TDS in case of sum paid to non-resident

[Applicable from November 1, 2019]

As per Section 195, every payer (resident or non-resident) shall be responsible for deduction of tax at source under this provision from payment of any sum which is chargeable to tax. The tax shall be deducted under this provision only if income of non-resident is taxable in India.

If sum payable to a non-resident is taxable in India but the person responsible for making the payment believes that the entire sum shall not be taxable but only a portion thereof shall be taxable in India, he may make an application to the Assessing Officer to determine the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted only on that proportion of the sum which is so chargeable.

Currently, no form has been prescribed by the Dept. for filing of an application by the payer to obtain a certificate for deduction of tax at lower amount. Thus, the payer has to follow the manual process by approaching the Assessing Officer with an application to require him to issue an order under section 195(2).

In order to streamline the process and to enable tax administration in monitoring such payments, it is proposed to amend the provisions of Section 195(2) to allow for prescribing the form and manner of application to the Assessing Officer and also for the manner of determination of appropriate portion of sum chargeable to tax by the Assessing Officer. Thus, the CBDT shall prescribe the form and electronic process through which the payer can file an application to obtain the certificate for lower or nil rate of TDS. Similar amendment has also been proposed to be made in Section 195(7) which are applicable to specified class of persons or cases.