TDS on Customisation & upgradation of software and Purchase of Software after FY2020

This query is : Resolved

Deepak Jha (Querist)
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25 January 2023 Dear expert please guide what rate of tds will apply on:

1)Cusomisation of software with the help of outsider
2)upgradation of existing software with the help of outsider
3)on purchase/installation of software already existing in market like Tally,Busy,excelsoft etc

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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11 July 2024 Certainly! The rates of TDS (Tax Deducted at Source) applicable on different types of payments related to software services are governed by various sections of the Income Tax Act, 1961. Here’s a general guideline based on the typical scenarios you've mentioned:

### 1. Customization of Software with the Help of Outsider

When you pay for customization of software by an outsider, it typically falls under **Section 194J** of the Income Tax Act, which covers fees for professional or technical services. The applicable TDS rate under Section 194J is usually **10%** for payments made to a resident individual or Hindu Undivided Family (HUF). For payments to any other resident entity, the rate is **2%**.

- **Section 194J**: TDS at 10% (if payment exceeds threshold limits) or 2% (if payment exceeds specified limits but does not exceed the prescribed limits)

### 2. Upgradation of Existing Software with the Help of Outsider

Similar to customization, payments for upgradation of existing software also typically fall under **Section 194J** for professional or technical services. The TDS rates mentioned earlier (10% for individuals/HUFs and 2% for other residents) would apply based on the nature of the payment and the residency status of the recipient.

- **Section 194J**: TDS at 10% (if payment exceeds specified threshold limits) or 2% (if payment does not exceed specified limits)

### 3. Purchase/Installation of Software Already Existing in the Market (e.g., Tally, Busy, Excelsoft, etc.)

For payments related to purchase or installation of software licenses that do not involve customization or upgradation services, TDS is typically covered under **Section 194C** of the Income Tax Act. Section 194C deals with payments to contractors and subcontractors for any work, including supply of goods and provision of services.

- **Section 194C**: TDS at 2% for payments made to an individual or HUF, and 1% for payments made to any other resident entity.

It's important to note that these rates and sections are subject to any amendments or changes made by the government through Finance Acts or notifications. Additionally, specific circumstances or contractual arrangements may influence the application of TDS rates. Therefore, it is recommended to consult with a tax advisor or chartered accountant to ensure compliance with the latest tax regulations applicable to your specific situation.