The 26AS haircut: why the builder deducted 1% on your 10% fee

The July surprise

It is July. You open your Annual Information Statement and Form 26AS before filing the return. The builder paid ₹40 lakh in architectural fees, but the tax credit against the payment is only ₹40,000. The entry has been reported under section 194C—the contractor provision—at 1%, even though architectural services fall under section 194J and ordinarily require tax deduction at 10% (sections 194J and 44AA).

Your books show professional receipts. The builder’s TDS statement describes substantially the same payment as a contract receipt. That description and the resulting credit flow into AIS/Form 26AS under section 285BB read with Rule 114-I (section 285BB).

The missing ₹3.60 lakh is not merely a reporting blemish. It can become an advance-tax shortfall carrying interest under sections 234B and 234C, while the inconsistent reporting can invite reconciliation questions when the return is processed under section 143(1).

Section 194C and section 194J are not interchangeable

What section 194C covers

Section 194C applies to a resident contractor carrying out “work”, including supplying labour for carrying out work, under a contract with a specified payer. Its basic rates are:

• 1% when the payee is an individual or Hindu undivided family.
• 2% when the payee is any other person, such as a partnership firm or company.

These rates come directly from section 194C(1) (section 194C).

Construction companies process thousands of vendor bills. Their accounting systems commonly classify civil contractors, fabricators, consultants, surveyors and architects within one vendor workflow. When every purchase order is treated as a “contract”, the accountant may choose section 194C without examining whether the underlying engagement is actually for a specified profession.

The existence of an agreement, purchase order, deliverable or project does not by itself turn professional services into “work” under section 194C. Professional engagements are also contracts in the ordinary legal sense; the TDS section depends on the nature of the payment described in sections 194C and 194J.

Why architectural fees belong under section 194J

Section 194J expressly covers fees for professional services. Its Explanation includes services rendered in the course of legal, medical, engineering or architectural professions, accountancy, technical consultancy, interior decoration and other professions notified for section 44AA. The rate for professional services is 10% under section 194J(1) (section 194J).

Architecture is separately named as a specified profession in section 44AA(1). An architect providing design, planning, drawings, coordination, certification or professional consultancy is therefore not transformed into a section 194C contractor merely because the client happens to be a builder (section 44AA).

The same distinction matters for engineers, accountants, technical consultants, interior designers and other specified professionals covered by section 44AA and the Explanation to section 194J.

What the 1% deduction can cost you

Assume the following simplified facts:

This illustration assumes that the final income-tax liability is sufficient to absorb the entire ₹4 lakh credit, no other tax credits cover the difference, and the ₹3.60 lakh remains payable. Actual advance tax must be computed from estimated taxable income—not merely gross fees—under sections 208 to 210.

Advance tax becomes payable when the calculated amount is ₹10,000 or more under section 208. The assessee must estimate current income and pay the resulting advance tax under sections 209 and 210 by the instalment dates prescribed in section 211 (sections 208 and 210).

Section 234C: instalment-by-instalment damage

For a professional following the ordinary advance-tax schedule under section 211, the cumulative targets are 15% by 15 June, 45% by 15 September, 75% by 15 December and 100% by 15 March. Section 234C ordinarily charges simple interest at 1% per month on the relevant instalment shortfall—three months for the first three instalments and one month for the March instalment (section 234C).

If the entire ₹3.60 lakh gap remained unpaid:

An eligible professional declaring income under section 44ADA follows a different schedule: the whole advance-tax amount is payable by 15 March under section 211(1)(b). On the isolated ₹3.60 lakh gap, one month’s section 234C interest would be ₹3,600, subject to the actual return computation (sections 44ADA, 211 and 234C).

Section 234B: the cost after 31 March

Section 234B applies where advance tax paid is less than 90% of assessed tax. Interest runs at 1% for every month or part of a month from 1 April until payment or the applicable assessment event (section 234B).

If the ₹3.60 lakh gap is paid on 31 July, four months or parts thereof have elapsed—April through July:

₹3,60,000 × 1% × 4 = ₹14,400 under section 234B.

For the ordinary instalment example, the combined illustrative cost is ₹18,180 under section 234C plus ₹14,400 under section 234B: ₹32,580, apart from the underlying ₹3.60 lakh tax payment. The exact computation changes with income, deductions, tax regime, other TDS credits and the dates on which advance or self-assessment tax is paid under sections 209, 211, 234B and 234C.

The builder is liable—but you still feel the pain

The legal failure to deduct the full section 194J amount belongs to the deductor. Under section 201(1), a payer that fails to deduct the whole or any part of tax required by the Act can be treated as an assessee in default for the short deduction (section 201).

Section 201(1A) also charges the deductor interest, generally at 1% per month or part of a month from the date tax was deductible until it is deducted. If tax is deducted but not deposited, the applicable interest is generally 1.5% per month or part thereof until payment under section 201(1A).

The builder may avoid being treated as an assessee in default if the architect has filed the return under section 139, included the receipt, paid the tax due and the builder furnishes the prescribed accountant’s certificate under the first proviso to section 201(1). That relief does not erase the deductor’s section 201(1A) interest for the prescribed period.

None of this automatically puts ₹3.60 lakh into the architect’s Form 26AS. Until the payer deposits and correctly reports the short deduction, the architect has only the credit appearing against the PAN under section 285BB. The architect must therefore manage the return and advance-tax position under sections 139, 208, 209, 234B and 234C while pursuing correction from the builder.

Make reconciliation a quarterly habit

Do not wait until July. After every TDS-statement quarter, compare the following under section 285BB and Rule 114-I:

• Fees in the professional ledger.
• Amounts credited or paid by each client.
• TDS actually withheld.
• TDS appearing in AIS/Form 26AS.
• The section code—194J, not 194C—for professional fees.
• The payer’s TAN and the relevant quarter.
• Form 16A issued under section 203 read with Rule 31.

A quarterly review leaves time to correct the payer’s statement and adjust the remaining advance-tax instalments under sections 210 and 211. It also reduces the risk that professional receipts declared under section 44ADA or in ITR-3 appear inconsistent with contract receipts reported by the payer when the return is processed under section 143(1).

The exact request to send the builder’s accountant

Our invoice relates to architectural/professional services covered by section 194J read with section 44AA. TDS should be reported under section 194J at 10%, not under section 194C at 1%/2%. Please deposit the short-deducted tax with applicable interest under section 201(1A), file a correction to the relevant quarterly Form 26Q under section 200(3) read with Rule 31A, change the section code from 194C to 194J, and issue a corrected Form 16A under section 203. Please share the correction-statement acknowledgement and confirm after the revised credit appears against my PAN in Form 26AS.

Keep the engagement letter, accepted proposal, invoices, scope of services, correspondence, Form 16A and quarterly reconciliation. The engagement letter should use accurate expressions such as “architectural professional services”, “design consultancy” and “professional fees”, consistent with sections 44AA and 194J.

Frequently asked questions

1. Can I claim 10% TDS merely because the builder should have deducted it?

No. Tax credit ordinarily depends on tax actually deducted, deposited and reported against your PAN in the TDS statement; Form 26AS/AIS reflects information uploaded under section 285BB read with Rule 114-I. Ask for a Form 26Q correction under section 200(3) and monitor the revised credit before claiming it.

2. Does reporting under section 194C force me to treat the receipt as contract income?

No. The character of income follows the services actually rendered and the applicable computation provisions. Architectural services are expressly recognised under sections 44AA and 194J. Nevertheless, the incorrect section code should be corrected because inconsistent third-party information can require reconciliation during processing or verification under sections 143(1) and 142(1).

3. Can an architect still use section 44ADA when the builder reported section 194C?

Eligibility under section 44ADA depends on the assessee, the specified profession, the applicable gross-receipts limit and the other statutory conditions—not solely on the payer’s TDS code. Architecture is a profession specified in section 44AA, but the section 194C entry should still be corrected to align the payer’s reporting with sections 44AA, 44ADA and 194J.

4. If I pay the tax myself, is the builder completely protected?

No. The builder may obtain relief from assessee-in-default status only after satisfying the first proviso to section 201(1), including the payee’s return, inclusion of the income, payment of tax and the prescribed accountant’s certificate. Interest can remain payable by the builder under section 201(1A), even where the section 201(1) proviso is satisfied.

Harun Raaj & Associates, Visakhapatnam, assists professionals with section 194J TDS reconciliation, Form 26AS review and advance-tax compliance.

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