Concept of Section 194H

Any income that is made by the way of brokerage or commission is liable to deduct tax in the form of Tax Deduction at Source (TDS) by a resident individual. All the individuals and HUFs( Hindu Undivided Family) under section 44AB are also liable to deduct Tax Deduction at Source(TDS). These entities should have annual income that is exceeding Rs. 25 Lakh and goes up to Rs. 1 crore. This section does not include the commission from insurance. The tax deduction at source under this section is charged at a flat rate of 5% inclusive of all services. Thus, no other surcharge or education cess is levied over TDS. The amount of tax deduction at source is to be deposited to the government prior to the due date of the payment made by the firm or individual. The two documents that are majorly required at the time of tax deduction at source are PAN and TAN of both the entities involved.


Meaning of commission and brokerage

To understand the section 194H, you have to understand the basics of commission and brokerage. Any payment that is received or receivable, directly or indirectly by any person acting on behalf of another person is said to be commission or brokerage. This even includes any transaction done for valuable assets or articles.

Inclusions of TDS on commission or brokerage

Tax deduction at source on brokerage or commission includes various services. These are as follows:

  • Any service rendered except professional services
  • Any service rendered in the process of selling or buying of goods
  • Any service that is given during any transaction related to any asset or any valuable thing excluding securities.

Exclusions of TDS on commission or brokerage

There are few exceptions of these sort of commissions or brokerage on which no tax deduction at source is done under this section. They are:

  • Commission paid to insurance or loan underwriters
  • Any brokerage paid for public issue of securities
  • Any sort of brokerage paid on the transactions of securities that are listed in the stock exchange
  • Payment done by RBI to banking companies
  • Payment as income tax refund
  • Payments towards Financial Corporations under central finance bill
  • Any payments towards LIC policies or other investments i any co-operative societies
  • Payment of direct taxes
  • Income from interest from savings bank account, recurring deposits, Indra vikas patra, NSC or Kisan vikas patra
  • Interest from NRE account
  • Any income from public or private institution which is notified as NIL TDs organization.
  • Any income from interest for the compensation in respect to Motor Vehicles Claims Tribunal

When is the tax deduction at source deducted ?

Whenever there is a credit of incomes related to brokerage or commission to the account of the payee or any other account tax deduction at source will be done under the section of 194H of income tax act 1961. Even if these incomes are accounted in suspense account or by other name at the time of payment that is made in cash or by cheque or draft, tax deduction at source (TDS) is done under section 194H.

Rate of Tax Deduction at Source under this section

The rate of tax deduction at source is fixed at the rate of 5% in income tax act. No other charge as surcharge or education cess shall be added with the above rates. If in case the PAN is not quoted by the deductee, the rate of tax deduction at source (TDS) will be charged at 20%.

Cases in which TDS is not deductible

There are various conditions in which the Tax deduction at source is not applicable under section 194H. They are:

  • If the amount or aggregate amount of any income from brokerage or commission does not exceed the limit of RS. 15,000 during the payment in the financial year, no deduction will be made under this section.
  • The Individual can apply to the assessing officer for deduction at NIL rate or lower rate tax under section 197.

Deposition of Tax deduction at Source

The tax amount that is deducted in the month of April to February is to be deposited before the 7th of the next month. For the month of March, it is to be deposited by 30th of april.

Example:
  • If tax is deducted on 20th of April, it is to be deposited by the individual before or on 7th of May.
  • If tax is deducted on 20th March, it is to be deposited on or before 30th April.

Conditions for Tax Deduction at Source at a Lower Rate

As discussed above the deductee can apply for a lower rate or NIL rate of TDS to the assessing officer. For this various actions are to be taken by the assessing officer.

  • The deductor has to validate the PAN of the individual with the submission of 197 certificate.
  • The certificate submitted should be valid for rate, financial year, PAN, sections and so on for which it is filed.
  • The threshold limit that is specified in the certificate should not exceed i any quarters.
  • The certificate number should be correctly quoted.

After validating with all these actions,the assessing officer can agree to the application of the deductee.

Some of the details that are required to be given at the time of filing this application of lower or NIL rate of Tax Deduction at Source are:

  • Name and address of the assessee
  • PAN details
  • Purpose for which payment has been received
  • Details of the income in the last three years
  • Projected income in present financial year
  • Any tax payment done in the last three years
  • Tax payment done for present financial year

Important points to be noted

  • The tax deduction at source(TDS) can only be deducted at the rate fixed by the government in the annual budget.
  • The tax deduction at source(TDS) has to be submitted to the government under section 194H
  • The details of PAN and TAn has to be submitted while depositing the tax deduction at source(TDS).

Exemptions under section 194H

Few cases are there in which the Tax Deduction at Source(TDS) is exempted under section 194H. They are:

  • If the brokerage or commission does not exceed Rs. 5000 i a financial year
  • If the deductee obtained NIL or lower Tax Deduction at Source(TDS) certificate by the assessing officer
  • Income made in terms of brokerage or commission by BSNL or MTNL towards public call franchisees
  • Idf any company pays commission to their workers, TDS will be applicable under section 192 and not under section 194H
  • Any insurance commission under section 192, ( this falls under section 194D)
  • Income from service tax payment.

Conclusion

You can sum up that if you earn any income from brokerage or commission, you are liable to pay tax deduction at source(TDS) under the Income Tax Act ,1961. All the provisions regarding this Tax Deduction at Source (TDS) is made under section 194H. However there are few exceptions of commission or brokerage such as commission on Insurance sales and so on that are exempted from TDS under section 194H. Under this the tax is deducted at the time of payment of commission or brokerage is done.

Frequently Asked Questions

Q- Who is liable for Tax Deduction At source under Section 194H?

Ans- The individuals who earn income from any sort of commission or brokerage are liable to deduct tax at source


Q- What is the rate at which TDS is deducted under this section?

Ans- The rate at which the tax is deducted at source is 5%. However, if the details of PAN is not given, this rate increased to 20%.


Q- When is Tax Deduction at Source (TDS) is done?

Ans- TDS is deducted at the time of payment of any commission is made in cash, by cheque or draft as applicable.


Q- What is TDS limit on Commission or Brokerage for F.Y. 2018-19 onwards?

Ans- TDS limit on Commission and brokerage(Section 194H) for F.Y. 2018-19 is Rs. 15000/-


Q- What happens if TDS is deducted but not deposited?

Ans- Ans.Interest @1.5% per month or part of a month on the amount of TDS is leviable from the date of tax was deductible till the date of tax actually deducted.


Q- What happens if TDS is not deducted on rent?

Ans- TDS @ 10% is required to be deducted if the Total Rent to be paid exceeds Rs. 1,80,000.If it is not deducted interest @1% per month or part of month is leviable on the amount of TDS is leviable from the date on which tax was deducted till date on which tax is actually paid.


Q- Which ITR should be filed for income received from commission 194H?

Ans- ITR-4 is required to be filed if the commission income is the main source of your income.


Q- How do I show a commission income under Section 194H along with a salary income? Which ITR should I file?

Ans- And If the commision income is more than salary income than ITR4 is required to be filed otherwise ITR-1 can be filed and commission income can be shown under other sources.


Q- Which ITR I have to fill in for 2 incomes (commissions -194H and Salary)?

Ans- Ans If the amount of commission is small then fill ITR-1 and if the amount of commission is Substantial then go for ITR-4.


Q- Can we claim expenses against commission income?

Ans- Yes all expenses against commission income is deductible while filing your income tax return.


CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.