Yes, Tax Deducted at Source (TDS) is applicable on legal fees in India under Section 194J of the Income Tax Act, 1961.This provision mandates the deduction of TDS on payments made for professional services, which explicitly includes legal services.
What is Section 194J?
Section 194J of the Income Tax Act requires any person (excluding individuals or Hindu Undivided Families not liable for tax audit under Section 44AB) to deduct TDS when making payments to a resident for:
- Professional services (including legal services)
- Technical services
- Royalty
- Non-compete fees
- Remuneration to directors (excluding salary)
Legal services are explicitly covered under “professional services” as defined in this section.
Applicability of TDS on Legal Fees
TDS is applicable on payments made to lawyers, law firms, or legal consultants for services such as legal advice, drafting agreements, or court representation. If the payment amount exceeds ₹30,000 in a financial year, TDS must be deducted.
TDS Rates on Legal Fees
These rates are applicable when the payment exceeds the ₹30,000 threshold in a financial year.
Who is Required to Deduct TDS?
The obligation to deduct TDS under Section 194J falls on:
- Companies
- Partnership firms
- Individuals or HUFs liable for tax audit under Section 44AB in the preceding financial year
However, individuals or HUFs not subject to tax audit are generally exempt from this requirement.
Exceptions and Exemptions
- Threshold Limit: No TDS is required if the payment does not exceed ₹30,000 in a financial year.
- Personal Payments: Individuals or HUFs making payments for personal purposes are not required to deduct TDS, regardless of the amount.
Consequences of Non-Compliance
Failure to deduct or deposit TDS can lead to:
- Disallowance of Expense: 30% of the legal fee may be disallowed as a business expense.
- Interest Penalty: Interest at 1% per month for non-deduction and 1.5% per month for non-payment of deducted TDS.
How to Calculate TDS on Professional Fees in India
Calculating TDS on professional fees involves understanding the applicable rates, thresholds, and the correct method of deduction as per the Income Tax Act.
1. Determine Applicability of TDS
TDS under Section 194J applies when payments are made to a resident for:
- Professional services (e.g., legal, medical, engineering, architectural, accountancy)
- Technical services
- Royalty
- Non-compete fees
- Remuneration to directors (excluding salary)
TDS is required to be deducted if the total payment in a financial year exceeds ₹30,000.
2. Identify the Applicable TDS Rate
- Professional Services: 10%
- Technical Services: 2%
- Without PAN: 20% (if the payee does not furnish their PAN)
3. Calculate TDS Amount
Formula:
TDS Amount = Invoice Amount × Applicable TDS Rate
Example:
- Invoice Amount: ₹50,000
- Applicable TDS Rate: 10%
TDS Amount = ₹50,000 × 10% = ₹5,000
Therefore, the payer should deduct ₹5,000 as TDS and pay ₹45,000 to the professional.
4. Deposit TDS and File Returns
- Deposit Timeline: TDS must be deposited to the government by the 7th of the following month.
- TDS Returns: File quarterly TDS returns in Form 26Q.
- TDS Certificate: Issue Form 16A to the payee within 15 days from the due date of filing the TDS return.
5. Use Online TDS Calculators
For ease, you can use online TDS calculators provided by the Income Tax Department or financial institutions to compute the exact TDS amount.
