Understanding Section 194H: TDS on Commission and Brokerage Explained

Section 194H of the Income Tax Act, 1961, deals with the deduction of tax from commission or brokerage payments. Its purpose is to facilitate the government’s collection of taxes on such payments by making the payer responsible for deducting and remitting the taxes.

This article will explain Section 194H in simple terms, covering what it applies to, when it is applicable, the tax rates involved, and what needs to be done to comply with it.

What is Section 194H?

Section 194H is a provision in the Income Tax Act, 1961, which mandates the deduction of Tax Deducted at Source (TDS) from income earned as commission or brokerage. This section applies to anyone who is required to make such payments to a resident in India.

The main goal of Section 194H is to ensure that the government collects the due amount of taxes on commission and brokerage income. It makes it the responsibility of the payer to deduct the appropriate taxes from the payment and remit it to the tax authorities. It’s important for both the payer and the recipient to comply with this section to meet their tax obligations as outlined in the Income Tax Act.

In addition, individuals and Hindu Undivided Families (HUF) covered under section 44AB are also required to deduct TDS under Section 194H. Furthermore, from the financial year 2020-21 onwards, an amendment mandates that individual and HUF taxpayers with a business turnover exceeding Rs 1 crore or gross receipts from a profession exceeding Rs 50 lakh must deduct TDS under Section 194H. It is important to note that Section 194H does not apply to insurance commission, which is covered separately under Section 194D.

What Is the Meaning of Commission and Brokerage?

Commission and brokerage are terms commonly used in financial and business contexts. Here are their meanings:

• Commission: A fee or compensation received by a person or entity for facilitating a specific transaction or providing a service. It is typically a percentage of the value of the transaction or sale. They are commonly earned in sales, real estate transactions, financial investments, and other business activities where an intermediary or agent assists in completing a deal or transaction.
• Brokerage: The fee or compensation earned by a broker for facilitating transactions between buyers and sellers. Brokers act as intermediaries, connecting buyers and sellers in various industries such as real estate, stock market, insurance, or commodities. They earn a brokerage fee or commission for their services, which may be based on a percentage of the transaction value or a fixed amount.

What is the TDS rate? 

The TDS rate is 5%. From 14 May 2020 to 31 March 2021, the rate was 3.75%. No additional charges, such as surcharge, education cess, or SHEC, are applied to these rates. The tax is thus deducted at the basic rate. However, if the deductee does not provide a PAN (Permanent Account Number), the TDS rate will be 20% in all cases.

When Does TDS Under Section 194H Need to Be Deducted?

TDS under Section 194H is required to be deducted under the following circumstances:

• At the time of crediting the income: TDS is to be deducted when the income by way of commission or brokerage is credited to the account of the payee or any other account.
• At the time of payment: TDS is also to be deducted when the payment of such income is made, whether in cash or through the issuance of a cheque, draft, or any other mode. The deduction is required at the earlier of these two events (crediting or payment).

Can TDS Deduction on Commissions and Brokerages Be Exempted?

There are certain cases where an exemption applies to the deduction of TDS on commissions and brokerages:

• The employer pays a commission to the employee, which is covered under Section 192 of the IT Act.
• Individuals holding a NIL TDS certificate from an authorized body are exempt from TDS for all services.
• Payments made by the Reserve Bank of India (RBI) to any bank.
• Interest credited to an NRI account.
• Interest income from savings accounts with banks and post offices.
• Payments for warehouse services.
• Commissions on transactions made using a credit or debit card between an acquirer bank and a merchant organization.
• Commissions and brokerages are exempt from TDS deduction when the aggregate amount of such payments does not exceed Rs. 15,000 in a financial year.
• Commissions earned from insurance and loan underwriting.
• Brokerage or commission for providing securities to the public.
• Payments made to financial corporations under the purview of central finance.
• Any payment of commission or brokerage made by Bharat Sanchar Nigam Limited or Mahanagar Telephone Nigam Limited to their public call office franchisees.
• Interest accrued on an NRE account.

Key Considerations Regarding TDS on Commission and Brokerage

• TDS Deduction and GST: In the case of commission or brokerage subject to GST, TDS is deducted from the value excluding the GST component.
• Threshold for TDS: TDS is deducted when the total amount payable exceeds Rs 15,000.
• TDS Deposit: Even if the agent retains the commission amount during payment settlement, the corresponding TDS must be deposited to the government.
• TDS on Government Transactions: When TDS is deducted by or on behalf of the government, it must be deposited on the same day.

Conditions to Consider for Availing a Lower Rate of Tax Deduction at Source (TDS)

To apply for a lower or NIL rate of TDS, certain conditions must be met:

• PAN Validation: The deductor (the person deducting TDS) must verify the individual’s PAN and ensure the validity of any certificate issued under Section 197.
• Valid Certificate: The submitted certificate must be valid, clearly stating the applicable rate, financial year, PAN, and relevant sections.
• Threshold Limit: The specified threshold limit mentioned in the certificate must not be exceeded in any quarter.
• Accurate Certificate Number: The provided certificate number must be accurate and correctly quoted.

Once these conditions are met and verified, the assessing officer may approve the deductee&#8217s application for a lower or NIL rate of TDS.

What Information is Required to Avail a Lower TDS Rate or Exemption?

Fulfilling these requirements enables you to avail the benefit of a lower TDS rate or a complete exemption from TDS deductions.

• Name and address of the assessee (the person on whom TDS is applicable)
• PAN details
• Purpose for which the payment has been received
• Income details for the past three years
• Projected income for the current financial year
• Information about tax payments made in the past three years
• Details of tax payments made in the current financial year

Also Read: How to Make TDS Payment Online?

What Is the Deadline for Depositing TDS?

The time limit for depositing TDS depends on the month in which the tax is deducted. If the tax is deducted between April and February, it must be deposited by the 7th of the following month. However, if the tax is deducted in the month of March, it must be deposited by 30th April.

For example, if tax is deducted on the 10th of July, it must be deposited on or before the 7th of August. Similarly, if tax is deducted on the 25th of February, it must be deposited on or before the 30th of April.

Understanding the provisions of Section 194H is crucial for both payers and recipients of commission and brokerage income. This section of the Income Tax Act outlines the responsibilities for deducting and remitting TDS on such payments. It is important to adhere to the applicable TDS rate, comply with the deposit deadlines, and fulfill the necessary requirements for availing a lower TDS rate or exemption.

Also Read: How to Check Income Tax Refund Status Online?