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Published on:

January 11, 2025

Udeetta Sarma

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Section 194H Of Income Tax - TDS on Commission and Brokerage

Statutory compliance is the bedrock of the Indian taxation system—such compliance is ensured by various provisions, one being section 194H of the Income Tax Act relating to Tax Deducted at Source (TDS) on commission and brokerage. It is a vital part of making sure that taxes are collected right at the source of income generation, which simplifies tax collection and reduces tax evasion. This portion is crucial for profession, business, and shell from derivatives understandings.

Understanding Commission and Brokerage

So before discussing Section 194H, let's understand the meaning of commission and brokerage:

Commission

Commission is any payment made to a person for services such as you provide on helping sales or businesses secure an act. For example, commission income refers to the income earned by a real estate agent — a percentage of a property’s sale price.

Brokerage

Fees earned by intermediaries that facilitate deals between parties, excluding trading in securities. A travel agent who charges a commission for booking an airfare ticket is a broker.

Such income comes under the ambit of Section 194H and thus attracted to TDS.

Applicability of Section 194H

TDS Under Section 194H This section does not apply to an individual or HUF, but it requires any person (other than an individual or HUF) who pays a resident a commission or brokerage to deduct TDS. However, individuals and HUFs are also required to deduct TDS if their turnover/gross receipts exceed the monetary limit prescribed under Section 44AB, i.e., ₹1 crore in the case of business and ₹50 lakh in the case of professions.

The key points to note are:

A resident of Payee: TDS under Sec 194 applies only to payments made to residents of India

Timing of deduction: TDS on such receipts is required to be deducted at the time of credit of such income to the account of the payee or payment, whichever is earlier.

Payment Type: Services covered can be for sales, procurement, or acting as an intermediary, but not for securities.

TDS Rate under Section 194H

The TDS rate applicable under Section 194H is five per cent. However, in the event that the payee does not submit their Permanent Account Number (PAN), then as per the provisions of Section 206AA of the Income Tax Act, the applicable rate is 20%.

Moreover, a surcharge or education cess is not charged at this rate either.

To learn more about how to record TDS refer to How to record TDS on the web.

Threshold Limit for TDS Deduction

The benefit of the Threshold Limit In withholding tax under section 194H also makes sure that the small-scale earnings are free from heavy compliance work. There is no need to deduct TDS if the total commission or brokerage payments in a financial year do not exceed ₹15,000 to a payee. However, once you cross this limit, TDS is levied on the entire amount and not just the excess.

Example: No TDS applicable if you pay ₹14,000 as commission to the agent. But if ₹20,000 is the payment, then TDS at 5% will be applicable on the whole ₹20,000.

Time of Deduction and Payment of TDS

1. When to Deduct:

TDS on salary is to be deducted at the time of crediting to the payee’s account or at the time of payment, whichever is earlier.

2. Deposit Deadlines:

The tax withheld (TDS) for a particular month needs to be remitted to the government on or before the 7th day of the following month. The deadline for deductions in March to April 30.

Not depositing TDS within the deadline leads to interest and penalties.

Exemptions Under Section 194H

Not all payments under the scope of commission or brokerage are liable to TDS under Section 194H and some of them are exempt as listed below:

Payment made by an individual or HUF whose turnover or gross receipts are below the limit as prescribed under section 44 AB.
The commission payments related to insurance policies come under the purview of Section 194D.
Total commission or brokerage does not exceed ₹15,000 in a financial year.

Securities transactions, including stockbroking. As these transactions are governed by other provisions of the Income Tax Act, such as stockbroking, they are excluded.

Filing and Compliance

Deductor’s Responsibilities

File quarterly TDS returns using Form 26Q.
Provide the deductee with a TDS Certificate (Form 16A) within the stipulated timeframe.

Deductee’s Responsibilities

Ensure that the correct TDS amount is deducted and reflected in Form 26AS.
Claim the TDS credit while filing income tax returns.

Consequences of Non-Compliance

The consequences of failure to comply with the provisions of Section 194H are:

Disallowance of Expenses

Moreover, if TDS is not deducted or TDS is not deposited, then the respective commission or brokerage expense will become disallowed as per the provisions of Section 40 (a)(a) of the Income Tax Act. This makes the deductor income taxable.

Interest Liability

For the non-deduction of TDS, interest is charged at 1% per month and, for the non-deposit of TDS deducted, it is 1.5% per month.

Penalties

A penalty equal to the TDS not deducted or deposited can be levied under Section 271C.

You might also be interested in learning about the Difference Between TDS and TCS.

Real-World Scenarios

Let us understand the practical implications of Section 194H by taking a few examples:

Retail Business

A retail company employs marketing men to increase sales and pays them a commission on sales If the annual commission per agent is more than ₹15,000, then TDS must be deducted at 5% by the chain.

Real Estate Agency

If a real estate company paying brokerage to agents for the sale of the property pays an amount over ₹15,000 in a financial year it is required to deduct TDS. It guarantees seamless financial reporting and compliance.

Online Platforms

If e-commerce platforms are making payments to affiliates or influencers for fielding traffic or sales, they will need to comply with Section 194H, as they are required to deduct tax from these payments if they exceed the threshold.

Key Considerations

Attention to these few points for sectional compliance under Section 194H:

Keep detailed records of all commission and brokerage payments.
You will be charged a higher rate for a TDS deduction if you do not verify the PAN details of the payees.
Comply with TDS Deduction, Deposit & Return filing deadlines.
You can refer to Form 26 as a TDS reconciliation regularly.

Conclusion

To address the challenge of timely collection of revenue and the avoidance of tax, section 194H of the Income Tax Act provides for the withholding of taxes at the source of the income earned by way of commission or brokerage. The compliance parts are simple, but noncompliance may have financial and legal ramifications.

For the individual or business involved in commission or brokerage payment, it is very important to know the TDS rate, threshold limits, exemptions and deadlines. Being updated with these provisions ensures seamless transactions and also renders compliance with the taxation system of India.

If you are not sure that Section 194H applies to you, you may want to seek advice from an income tax expert or check the related information on the Income Tax Department website.

Streamlines Your TDS Compliance Procedure with Swipe

TDS on commission and brokerage under section 194H can be a hassle, but Swipe makes it easy for you! With our user-friendly platform, you can track all your commission payments, make timely TDS deductions and generate TDS reports in no time. For a small business or a growing enterprise, Swipe puts the tool in your hands to keep up statutory compliance to escape penalty.

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Strap yourself in and buckle up, because the adventure is about to begin.

FAQ

1. What is Section 194H of the Income Tax Act?

However, this section deals with the succumbing tax deduction at the source (TDS) on commission and brokerage payments. It requires the payer to reduce TDS by 5% (or 20% if PAN is not available) if such payments exceed ₹15,000 in a fiscal year.

2. Who needs to deduct TDS under Section 194H?

TDS deduction is required by every person (other than individual or HUF) who pays any person a commission or brokerage to a resident. Individuals and HUFs, however, need to deduct TDS if turnover under Section 44AB exceeds ₹1 crore if engaged in business and ₹50 lakh if engaged in profession.

3. What is the threshold limit for TDS under Section 194H?

The threshold limit is ₹15,000 per financial year, per payee. TDS is levied only when the total payment of commission or brokerage to a payee is above this threshold.

4. Consequences of non-deduction or non-payment of TDS under Section 194H?

Non-adherence would lead to disallowance of expenses u/s 40(a)(a), interest (which would be charged at 1%-1.5% per month) and penalty equal to TDS amount u/s 271C which would suggest timely deduction and deposit u/s 192.

5. Does Section 194H provide any exemptions?

So payments by individuals or HUF below the Section 44AB threshold, commission concerning insurance policies (considered under Section 194D) and payment not exceeding ₹15,000 in a financial year are exempt from TDS Section 194H.