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TDS on commission and brokerage: Section 194H Explained

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Section 194H of the Income Tax Act explains the rules for deducting tax on commission or brokerage payments. Anyone paying commission or brokerage to residents must deduct tax, except for individuals and Hindu Undivided Families (HUFs).

The tax rate is 5% if the total commission exceeds ₹15,000 in a year.

Individuals and HUFs required to have their accounts audited (under Section 44AB) must also deduct TDS. Those with a turnover over ₹1 crore or professional income over ₹50 lakhs are also responsible for deducting TDS.

Insurance commission is covered by a different rule (Section 194D) and is not included under Section 194H.

What Do Commission and Brokerage Mean?

To grasp Section 194H of the Income Tax Act, it’s important to know what commission and brokerage are. They refer to any payment received by someone who acts on behalf of another person. This can include:

  • Services Provided: Payments for various services, excluding professional services.
  • Buying or Selling Goods: Commissions earned during the process of selling or purchasing items.
  • Transactions Involving Assets: Any payment related to the sale or exchange of valuable items or assets.

What Services Are Included in TDS on Commission or Brokerage?

When it comes to TDS on commission or brokerage, several types of services are included. Here’s what falls under this category:

  • General Services: Payments for various services, except those classified as professional services.
  • Buying and Selling: Commissions earned during the buying or selling of goods.
  • Transactions Involving Assets: Payments related to transactions involving valuable items or assets, but not including securities.

What Commissions or Brokerage Are Exempt from TDS?

Certain types of commissions or brokerage do not require TDS deductions under Section 194H. Here’s a list of those exemptions:

  • Insurance and Loan Underwriters: Commissions paid to these professionals.
  • Public Securities Issues: Brokerage fees related to public offerings of securities.
  • Listed Securities Transactions: Brokerage for buying or selling securities on stock exchanges.
  • RBI Payments: Payments made by the Reserve Bank of India to banks.
  • Tax Refunds: Any payments received as income tax refunds.
  • Financial Corporations: Payments under the central finance bill to financial corporations.
  • LIC and Cooperative Investments: Payments related to Life Insurance Corporation policies or investments in cooperative societies.
  • Direct Taxes: Payments of direct taxes are exempt.
  • Interest Income: Interest from savings accounts, recurring deposits, Indira Vikas Patra, National Savings Certificates (NSC), or Kisan Vikas Patra.
  • NRE Account Interest: Interest earned from Non-Resident External (NRE) accounts.
  • BSNL and MTNL Payments: Commissions paid by Bharat Sanchar Nigam Limited or Mahanagar Telephone Nigam Limited to public call office franchisees.
  • NIL TDS Organizations: Income from institutions recognized as NIL TDS entities.
  • Motor Vehicle Claims Tribunal: Interest income related to compensation from the Motor Vehicles Claims Tribunal.

When Should TDS Under Section 194H Be Deducted?

TDS under Section 194H should be deducted in the following situations:

  • Credit to the Payee’s Account: When any commission or brokerage income is credited to the account of the person receiving the payment, TDS must be deducted.
  • Suspense Accounts or Other Names: It applies even if the income is recorded in suspense accounts or under different names.
  • Payment Methods: TDS must be deducted regardless of whether the payment is made in cash, by cheque, or by draft.

What Is the Time Limit for Depositing TDS?

TDS deductors must deposit the deducted amount with the Income Tax Department by specific deadlines:

  • Monthly Deposits: Generally, the TDS amount must be deposited by the 7th day of the month following the month in which the deduction occurred. For example, if TDS is deducted in June, it should be deposited by July 7th.
  • March Deposits: For TDS deducted in March, the deadline is extended to April 30th for deposit.

What Is the TDS Rate Under Section 194H?

The TDS rate under Section 194H is set at 5%. However, during a temporary period from May 14, 2020, to March 31, 2021, this rate was reduced to 3.75% due to COVID-19 relief measures.

If the person receiving the payment (deductee) does not provide their Permanent Account Number (PAN), the TDS rate increases to 20%. This rate includes all taxes, and there’s no need to add a separate health and education cess.

If managing taxes feels overwhelming, consider getting help from experts.

When Is TDS Not Deductible Under Section 194H?

TDS is not required under Section 194H in the following cases:

  • Income Limit: If the total income from brokerage or commission is ₹15,000 or less in a financial year, no TDS will be deducted.
  • NIL or Lower Rate Application: Individuals can apply to the assessing officer to deduct TDS at a NIL rate or a lower rate under Section 197.

How to Deposit Tax Deductions at Source (TDS)

Here’s how to deposit TDS:

  • For TDS deducted from April to February, you must deposit the tax by the 7th of the following month. For example, If TDS is deducted on April 20th, it must be deposited by May 7th.
  • For TDS deducted in March, the deadline is April 30th. For example, If TDS is deducted on March 20th, it should be deposited by April 30th.

Conditions for Applying for TDS at a Lower or NIL Rate

To apply for a lower or NIL rate of TDS, the deductee must follow these conditions:

  • PAN Validation: The deductor must verify the PAN of the individual using the submission of a 197 certificate.
  • Certificate Requirements: The 197 certificate must include:
    • A valid tax rate.
    • The relevant financial year.
    • The PAN of the deductee.
    • The applicable sections of the tax law.
  • Threshold Limit: The income specified in the certificate must not exceed the set limit for any quarter.
  • Correct Certificate Number: The certificate number must be quoted accurately.
  • Once these conditions are met, the assessing officer can consider the deductee’s application.

Information Needed for the Application

When filing for a lower or NIL TDS rate, the following details must be provided:

  • Name and Address: Personal details of the deductee.
  • PAN Details: The deductee’s Permanent Account Number.
  • Payment Purpose: The reason for receiving the payment.
  • Income History: Details of income for the last three years.
  • Projected Income: Expected income for the current financial year.
  • Past Tax Payments: Information on any taxes paid in the last three years.
  • Current Year Payments: Tax payments made for the current financial year.

Exemptions Under Section 194H

There are specific situations where TDS is exempt under Section 194H. These include:

  • Income Limit: If the total brokerage or commission is ₹15,000 or less in a financial year.
  • NIL or Lower TDS Certificate: If the deductee has obtained a NIL or lower TDS certificate from the assessing officer.
  • Public Call Franchisees: Income from brokerage or commission earned by BSNL or MTNL related to public call franchisees.
  • Commission to Company Employees: If a company pays commission to its employees, TDS is governed by Section 192, not Section 194H.
  • Insurance and Loan Commissions: Commissions related to insurance or loan underwriting.

Key Points to Consider in Section 194H

Section 194H of the Income Tax Act in India outlines the rules for deducting tax at source (TDS) on commission or brokerage payments. Here are the important points to keep in mind:

  • Who It Applies To: The TDS provisions apply to all individuals, partnership firms, companies, and other entities making commission or brokerage payments to residents.
  • Type of Payment: TDS is applicable specifically to payments made as commission or brokerage.
  • Threshold Limit: TDS only applies if the total commission or brokerage paid exceeds ₹15,000 during the financial year. If the amount is lower, no TDS needs to be deducted.
  • TDS Rate: The standard TDS rate is 5% of the commission or brokerage amount. This rate may change according to tax laws.
  • Timing of Deduction and Deposit: TDS must be deducted when the commission amount is credited to the payee’s account or when the payment is made, whichever happens first. The deducted amount must be deposited with the government by the due dates.
  • TDS Certificate: The payer must issue a TDS certificate (Form 16A) to the payee, detailing the TDS deducted. This certificate is important for the payee’s income tax return.
  • Filing TDS Returns: The payer must file TDS returns (Form 26Q) quarterly, providing information about TDS deducted and deposited.
  • Forms 15G/15H: If the payee believes their income is below the taxable limit, they can submit Form 15G (for individuals) or Form 15H (for senior citizens) to avoid TDS deductions, provided they meet the criteria.
  • Valid PAN: It’s essential to obtain and correctly quote the payee’s Permanent Account Number (PAN). Failure to do so may result in higher TDS deductions.
  • Timely Compliance: Following TDS deduction and deposit deadlines is important to avoid penalties or interest for late payments.

Given the complexities involved in filing income tax returns, seeking help from a tax expert can be beneficial to ensure accuracy and compliance.

Frequently Asked Questions (FAQs)

Who is responsible for TDS under Section 194H?

Individuals earning income from any form of commission or brokerage are required to deduct TDS.

What is the TDS rate under this section?

The TDS rate is 5%. If the payee does not provide their PAN, the rate increases to 20%.

When is TDS deducted?

TDS is deducted at the time of payment for any commission made in cash, by cheque, or by draft.

What is the TDS limit for commission or brokerage for FY 2023-24 and onwards?

The TDS limit is ₹15,000 for commission or brokerage payments during the financial year.

What if TDS is deducted but not deposited?

Interest at 1.5% per month is charged on the amount of TDS from the date it should have been deducted until it is actually deposited.

What happens if TDS is not deducted on rent?

If the total rent exceeds ₹2,40,200, TDS at 10% must be deducted. If it is not deducted, interest at 1% per month is charged on the TDS amount from when it should have been deducted until it is paid.

Which ITR should be filed for income from commission under Section 194H?

If commission income is your main source of income, you should file ITR-3.

How do I report commission income along with salary income? Which ITR should I file?

If commission income is more than salary income, file ITR-3. If it’s less, you can file ITR-1 and report the commission under “Other Sources.”

Which ITR should I use for commission and salary income?

Use ITR-1 if the commission is small; if it’s substantial, go for ITR-3.

Can I claim expenses against commission income?

Yes, you can deduct expenses related to commission income when filing your income tax return.