Section 194H of the Income Tax Act, 1961, is about deducting taxes from commission or brokerage payments. It helps the government collect taxes on these payments and makes the payer responsible for deducting and paying 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 rule in the Income Tax Act, 1961, which deals with deducting Tax Deducted at Source (TDS) from income earned as commission or brokerage. This section applies to anyone who has to make such payments to someone living in India.
The main goal of Section 194H is to ensure that the government collects the right 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 send it to the 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 also need to deduct TDS under Section 194H. Furthermore, from the financial year 2020-21 onwards, there’s an amendment that requires individual and HUF taxpayers with a business turnover exceeding Rs 1 crore or gross receipts from a profession exceeding Rs 50 lakh to deduct TDS under Section 194H. It’s worth noting that Section 194H doesn’t 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: Commission refers to 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. Commissions 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: Brokerage refers to 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 extra charges like surcharge, education cess, or SHEC are added to these rates. Basically, the tax is deducted at the basic rate. However, if the deductee doesn’t 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 needs to be deducted under the following circumstances:
- At the time of crediting the income: TDS should 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 should also be deducted when the payment of such income is made, whether it is in cash or through the issuance of a cheque, draft, or any other mode. The deduction should occur at the time of payment, whichever is earlier.
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 is paying a commission to the employee, which is covered under Section 192 of the IT Act.
- Individuals with a NIL TDS certificate from an authorized body will get a TDS exemption for all services.
- Payments are made by the Reserve Bank of India (RBI) to any bank.
- Interest from the NRI account.
- Income generated from interest on savings with the bank and post office.
- Charges imposed for warehouse services.
- Commissions imposed on transactions by using a credit or debit card between an acquirer bank and a merchant organization.
- Commissions and brokerages are exempt from TDS deduction when the brokerage or commission is less than or equal to 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 falling under the range of central finance.
- Any payment of commission or brokerage payable by Bharat Sanchar Nigam Limited or Mahanagar Telephone Nigam Limited to their public call office franchisees.
- Interest accrued from the 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 primary value excluding the GST component.
- Threshold for TDS: TDS is deducted when the total earnings exceed 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 on behalf of or by the government, it must be deposited on the same day.
Conditions to Consider for Availing a Lower Rate of Tax Deduction at Source (TDS)
If you want to apply for a lower or NIL rate of TDS, there are certain conditions to keep in mind. Here’s what you need to know:
- PAN Validation: The deductor (the person deducting TDS) must verify the PAN of the individual by submitting 197 certificates.
- Valid Certificate: The certificate submitted should be valid, covering the applicable rate, financial year, PAN, and relevant sections.
- Threshold Limit: The specified threshold limit mentioned in the certificate should not be exceeded in any quarter.
- Accurate Certificate Number: The certificate number provided should be accurate and correctly quoted.
Once these conditions are met and verified, the assessing officer can approve the deductee’s application for a lower or NIL rate of TDS.
What Information is Required to Avail a Lower TDS Rate or Exemption?
By fulfilling the given requirements, you can avail the benefit of a lower rate of TDS or even 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 needs to be deposited by the 7th of the following month. However, if the tax is deducted in the month of March, it should be deposited by 30th April.
For example, if tax is deducted on the 10th of July, it should be deposited on or before the 7th of August. Similarly, if tax is deducted on the 25th of February, it should 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.